Beyond the Style Box: SMAs and Model Portfolios

This is a summary of a panel discussion from the MMI 2013 Spring Convention held in NYC on April 22-24.

Moderator: Mark Thomas, SVP, Head of Managed Accounts, PIMCO


How have advisor solutions changed over the past few years?

There’s been an overall shift from advisors being individual product practitioners to the Rep as PM (RPM) model, Tipper stated.  This is primarily due to RPM being better at addressing client demands for more flexibility.  As a result of the Financial Crisis, clients now want absolute return on their portfolios, but advisors would serve them better if they focused on providing customized advice solutions and RPM facilitates this, he recommended.

According to Gaskin, advisors have been migrating away from comparing performance of their client’s accounts against a benchmark, to having more  solutions-based conversations.  To support this, he explained, J. P. Morgan manages money in three ways:

  1. Blended benchmark-based portfolios: where they are trying to achieve a similar return with less risk, or a greater return with equal risk;
  2. Risk-based portfolios: which match a given level of risk that the client is comfortable with;
  3. Outcome-based portfolios: which has been generating the most client interest recently, where they’re trying to solve for challenging problems such as finding income, which is difficult in the current low interest rate environment. Continue reading

Operational Hurdles for Advisory Solutions – Part 1

How does the regulatory environment look from a technology and operations perspective?  Recently, there was a surprise SEC ruling on uniform fiduciary standards that’s caused a lot of concern on the broker-dealer side about what it means for their reps to be fiduciaries. Also, RIAs will have some of the same requirements for data retention and collection as broker-dealers. What do regulatory standards mean for us as an industry? 

This post is a summary of a session from the MMI 2011 Fall Solutions Conference that was held in NYC.  It is part 1 of a 2 part series.

Heeren Pathak – CTO, Vestmark, Inc. Responsible for continued development and direction for the wealth management platform.

John Ashefski – Senior VP & Managing Director, Investment Management Services, SEI Investments. John is responsible for SEI global outsourcing services.
Cheryl Nash – President, Investment Services, Fiserv. Cheryl is responsible for driving strategic vision and direction for Fiserv’s managed accounts platform solution.
Chandresh Iyer – Managing Director, Head of Global Custody & Investment, Citi Global Transaction Services. Chandresh is responsible for P&L, including product strategy, business management and client franchise development across investor client segments including fund managers, hedge funds, banks, insurance, wealth managers.
Roger Paradiso – President and Chief Investment Officer, Private Portfolio Group, Morgan Stanley Smith Barney. Roger was the originator of the unified managed account and is responsible for the UMA platform at MSSB, driving technology direction, product development and investment policy.

What can firms do now to prepare for upcoming SEC regulation changes, even though theyhaven’t been finalized?

Cheryl was at the Tiburon conference last week and there was lots of discussion around the SEC ruling.  The consensus was that the Uniform Fiduciary Standards won’t be implemented until after the election.  From Fiserv’s perspective, a lot has to do with transparency, understanding what’s in your investment models and how visible it is to the end investor.

Fiserv has invested a lot to ensure transparency in their solutions, Cheryl noted. Starting with important front office functions such as planning and investment policy statements and making sure they translate through to trading and reporting to support execution of an investor’s household plan.

Continue reading

Why Bother Using an SMA Outsourcer?

This post is a summary of a session from the FRA’s 8th Annual Managed Accounts Summit.

According to a recent report by the Tower Group, the use of “cloud services” will become mainstream by 2015, stated Seth Johnson, CEO & Co-Founder, Redi2 Technologies. They will slowly evolve into public utilities that integrate traditional licensed software, augmented by vendor domain expertise. Cloud services currently represent just 1% ($4 bil) of total IT spending, but are projected to grow to almost 5% ($22 bil) by the end of 2012.  Now, I’m not sure if Seth was referring to total IT spending by Wall Street or overall IT spending.  I found an article referencing a report by IDC that estimates that 15% of IT budgets will be tied to cloud computing in some way by the end of 2011!  This is a big difference but still makes Seth’s point that cloud computing is something you shouldn’t ignore.

What are you seeing by way of industry developments in outsourcing?

SEI has seen more RFPs for SMA outsourcing services in the past 6-8 months than in the previous four or five years, according to Carmine Remo, Managing Director, Head of SMA, SEI.  Specifically, as it relates to the wrap business, he said that models only trends have really cut the number of accounts that investment managers have to take care in their back office.  The trend around models only has really shrunk the manager’s back office and forced them to focus on their core business.  This hasn’t done much to reduce manager’s fixed costs, but has reduced their variable costs a bit, Carmine noted.  One of the key things to look for in outsourcing is the ability to scale both up and down as needed, he advised.

Speaking of scalability, SEI just announced that it has extended its relationship with RiverFront Investment Group, LLC to provide operations outsourcing services for the firm’s separate account business for an additional three years. Riverfront cited the scalability of the SEI platform as one of their deciding factors.

Why Outsource?

Most firms use outsourcing to get access to an expertise that is hard or expensive to maintain on their own, Carmine observed.  For example, fixed income strategies are getting more shelf space and firms lacking fixed income expertise can connect with an outsourcer to provide it for them.  SEI is helping PIMCO launch a municipal bond ladder strategy. (see press release here) “Who’d have thought we’d be seeing a muni bond ladder strategy in an SMA WRAP space?”, Carmine asked.

How can you help investment managers deal with the competitive pressure to reduce their fees?

Joseph DiTalia, Director at Citigroup, questioned whether outsourcing is an efficient, cost-cutting measure?  At Citi, cost is just one component and they don’t focus on it.  “We see it as a way to create value for our clients”, he emphasized.

It’s critical to have a predictive cost model whether your growth is up or down.  And according to recent research, managers consider accuracy as well as cost when looking at an outsourcing provider, Joseph countered.

What are some of the ways that an outsourcer can improve operational efficiencies?

Whether a manager is looking at Citi for outsourcing services in the retail SMA space, wealth management solutions on the distributor side, or institutional middle office services, the bottom line is that they’re really looking for a partnership.  They want to integrate their business with the broader services that an outsourcer can support for them, Joseph asserted.

When you think about some of the things that have been discussed in earlier sessions about data integration, one question keeps coming up, Joseph noted.  What do you do with that data?  How do you provide data in a meaningful way to management and stakeholders?  An outsourcer can provide a suite of services that would normally require a manager to partner with a number of firms and put them together, he said.  The outsourcer handles the integration, the vendor management and the ongoing development of the platform to take more off of the asset manager’s plate.

Long term from a quantitative perspective, one area where Citi is creating value for  managers is the concept of alpha, Joseph explained.  There are different sources of alpha, it’s not solely an aspect of performance.  One additional source of alpha is operational alpha.  Citi will be publishing a white paper that details how efficiencies in investment operations from outsourcing can help managers “capture 150 to 200 basis points in performance improvement for the end client.”  Not only by allowing managers to focus on their core competencies, but by driving areas of enhancement and development that come from using more integrated platform, he argued.