Finding the Keys into Sponsor Platforms (2/2)

This is a summary of a session from the Money Management Institute’s 2012 Fall Solution Conference. This is part two of a two-part series.  You can read part one here.


What is the makeup of your analyst team?

Raimer’s due diligence team is comprised of six people, all with very different backgrounds.  Some are CFAs, some are MBAs, there’s a former wholesaler, a former relationship manager, and a former product manager.  They play off each other’s strengths and also do a lot of cross training, he said.

Managing a portfolio manager’s time is always a challenge, Raimer observed.  If an analyst insists on meeting with the portfolio manager, Raimer first tries to deflect, by reminding them that they would rather the portfolio managers spend their time researching future trades.  Everyone on the team can deliver the introductory discussion around every investment strategy that they offer and this takes some of the workload off the portfolio managers.  They also have portfolio specialists and product managers and try to do everything they can to only take the PMs away from their desk when they really need to, he insisted.

Finding the Keys into Sponsor Platforms (1/2)

This is a summary of a session from the Money Management Institute’s 2012 Fall Solution Conference. This is part one of a two-part series.


Bill Broderick, Principal, Investment Advisory, Edward Jones.  They launched their SMA program back in 1993 ($2.5 bil AUM), Mutual Fund Advisory (MFA) was launched 4 yrs ago and now has over $83 billion in assets, last year launched UMA ($1.2 billion AUM).  All programs are home office-driven with very limited investment lists.  There are no Rep as PM programs.  Research team consists of 20 analysts based in St. Louis, MO who build the fifty supported models.  All of their models are GIPS-compliant.


Steve Raimer, Partner, Director of Due Diligence, Lord Abbett & Co.  They are an independent money management firm based in Jersey City, NJ.  $127 billion in AUM.

Jeff Holland, Executive VP, Head of Capital Markets, Cole Real Estate Investments.  Cole has been in business over 30 years and has $12 billion in real assets.  They focus on long-term, high-quality,  income-producing real estate.  Jeff has been with the firm for two years and is the gatekeeper for their platform and is responsible for driving advisor adoption of new products.  Prior to Cole he was COO of Equity Trading at BlackRock.

Anthony Ciccarone, Managing Director, Head of National Accounts Business Development, Nuveen Investments.  Nuveen has around $210 billion in AUM.  Ciccarone has been at Nuveen since 2005 and in National Accounts for three years.  Prior to that he was in Nuveen’s Product Development Group for four years.

What is some initial advice for getting onto your platform?

Holland proposed that the industry is coalescing towards a 2×2 matrix; advisory vs commission and discretionary vs non-discretionary.  When moving into discretionary platforms and home office models there is a higher level of due diligence, he warned.  Does your firm have the rigor to get on these platforms?  Even in discretionary products, some firms require client approval before investing in alternatives such as REITs, he advised.

How can managers better position themselves versus their competition?

According to Raimer, there are three things that are critical for a manager: 1) know your products; 2) know the sponsor landscape; 3) know the competitive landscape.  Are you a better or complimentary solution?  Unless you are contacted as part of an active search by the sponsor, then being a complimentary solution is better.  A manager should be able to demonstrate to the analyst how they can improve their recommended list, he said.

For small managers, such as Coles, who are focusing on alternatives to the standard 40 Act funds, it can be more difficult, Holland described.  Coles has developed what they believe to be an innovative product, which is a managed account wrapper around commercial real estate.  When making the value proposition, you have to make analogies to existing products so they can understand how you fit into their platform.  A big challenge for innovative products can be just finding the right people to talk to at the sponsor, he said.

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Has Rep as PM Growth Peaked? (1/2)

This is a summary of a panel discussion from the Money Management Institute’s 2012 Spring conference held in Chicago, IL.  This is part 1 of 2.  You can read part 2 of 2 here.

Moderator: Jay Link, Managing Director, Merrill Lynch

Lorna Sabbia, Managing Director, Head of Managed Solutions Group, Merrill Lynch
James Walker, Head of Consulting Group, Morgan Stanley Smith Barney
Matthew Witkos, President, Eaton Vance Distributors.  Chairman of MMI.
Has the growth of RPM programs peaked?  According to Dover Research, five years ago, there was $1.2 trillion of client assets in managed solutions and RPM/RAA combined were less than 30% of that total.  Today, total managed assets have grown to $2.4 trillion while rep-driven programs have increased their share to 40% or almost $1 trillion.

How important is RPM to your firm?

RPM is Morgan Stanley’s fastest growing program, Walker reported, with $560 bil in all advisory programs, $150 bil in RPM globally.  Major change in past few year has been change from individual equities (now 34%) to include ETFs, mutual funds, etc.  This is a great solution for Reps that consider themselves to be active allocators.  Trend: move towards discretion, driven by FAs practice management, customers want outcome based investing.  From a regulatory sense, it’s easier to deliver on fiduciary duty.
Sabbia joined the Managed Solutions Group seven months ago.  At Merrill, RPM is called the Personal Investment Advisory (PIA) program and was launched in 1996, now $105 bil AUM.  Approximately 4,500 FAs leverage the program and they’re segmented into three buckets: it’s their fastest growing segment with a $15.7 bil net increase last year and they’re on track to beat that number this year, she said.

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A Manager’s Guide to Breaking into Sponsor Platforms

“Uncovering Managers in Today’s Crowded Market: Accessing the Platform” was one of the sessions from the MMI 2011 Fall Solutions Conference.  This post is a summary of that session.


  • Thomas Latta – Global Head of Traditional Due Diligence, Bank of America Merrill Lynch, leading the traditional asset class due diligence teams (35-40 people), both domestic and international, also serves the entire organization including US Trust, his team provides advice and guidance around the implementation of managers. This doesn’t include portfolio construction.
  • Barnaby Grist – Head of Wealth Management at Cetera Financial Group. Formed 18 months ago after three broker dealers from ING merged. Responsible for support of all advisor platform needs. Formerly with Charles Schwab.
  • Greg Nordmeyer – VP and General Manager, Managed Accounts, Ameriprise Financial. $100 bil in AUM in managed accounts. Has P&L responsibility for product management, product development and research teams.

How do you formalize your expectations with managers?

In order to set expectations and improve communications, Ameriprise created a guide for managers coming into their firm, Nordmeyer explained. However, since every relationship is different, each manager can’t be handled in exactly the same way. They are all unique relationship, from large, established asset managers down to very small boutique firms.

The manager’s guide does help explain how to work with Ameriprise’s platform and includes general information about operations, sales and marketing, points of contacts, as well as answers to specific questions such as “how do the quarterly fact sheets work?”. They update it and distribute it annually, Nordmeyer said.

Latta added that Merrill Lynch has wealth management specialists in the field and their job is to identify needs for particular resources and then communicate them back to the Due Diligence Team.

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Model Delivery is Risky Business, According to Manager Survey

Most investment managers believe that the risks associated with communicating model changes to sponsors are significant and have the potential to result in negative impact to their firms. This was one of the results of a survey done by Dover Research as reported by Jean Sullivan at the Financial Research Association’s 9th Annual Managed Account Summit, which took place in Boston last month.

Jean reported that model managers support an average of 6.5 model platforms each, with some managers supporting as many as 20 different sponsor platforms!

47% of managers surveyed say that they support fewer than 5 platforms, 37% support between 5- and 10 platforms and 17% support more than 10. These additional linkages can lead to elevated risk, Jean warned.

Jean told us that every investment manager that Dover spoke to is concerned that sponsors won’t be able to implement their trade instructions accurately. This is complicated by the numerous proprietary communication infrastructures developed by sponsors with many variations existing on multiple dimensions such as different delivery mechanisms (email, fax, web portals) and different messaging formats.

Sponsor Trading Constraints Are a Concern

A big area of concern for managers is trading constraints, Jean noted, due to the following issues at sponsor firms:

  • limitations in data formats
  • sponsor weight and volume restrictions
  • basis point limits
  • inability to implement price limits
  • inability to put securities on hold for more than 30 days
  • constraints on the number of trades
  • inability to implement international strategies

Three Types of Model Risk

Investment managers in the Dover survey identified three different types of potential risks that arise from model delivery:

  1. Reputational – defined as performance dispersion due to the inability of the sponsor to implement the manager’s model. This could be caused by a manager wanting to make an intra-day model change, but can’t because the sponsor doesn’t support it.
  2. Best Execution – defined as the inability of the sponsor to achieve best execution due to trading restraints. Trade rotation processes influence best execution, because there is no automated feedback regarding trade execution, so the manager doesn’t know when their trades have been executed. It could be due to sponsor firms competing against each other in the market. It could also be due to delays in communicating model changes.
  3. Operational – defined as the increased risk of errors due to the manual nature and inconsistency of the current model update processes. For example, if the manager’s operations staff makes an error in a model change, the manager is then responsible for making sponsors and their clients whole, even if the mistake isn’t discovered until months later. This is an area of significant cost and concern for investment managers.

The managers were then asked to rate which of these risks are “significant”. 50% selected operational, 45% said best execution and 17% chose reputational.

Due to the many issues arising from model communication, many managers are starting to build out their own model validation processes to reduce manual error and monitor best execution at the sponsor, according to Jean. Also, 67% of managers believe that a centralized model service that provides a standardized method to implement and monitor trade rotation would reduce risk.

The Model Management Exchange (MME) from DTCC is such a centralized model service, Jean said. It is secure and redundant communication system with integrated audit trails incorporating validation and confirmation features. It can also facilitate the trade rotation process, but this would require sponsors to send their execution data to DTCC.

The industry should take the opportunity to do something now to address the risks surrounding model delivery, urged Jean. I agree that something should be done, but what exactly?

Before anything can be done, both sponsors and managers should agree that they must work together to solve the problems. The risks expressed by managers are due to a complex mix of factors and cannot be easily mitigated and especially not in isolation.

A centralized model hub, such as the DTCC’s Model Management Exchange (MME) or Fiserv’s Model Information Exchange (MIX), which is planned for 2012 release, could help, but only if they achieve critical mass and then they can only help on the communications side. Risks that are due to specific sponsor’s model policies (i.e. Inability to implement price limits, trading windows) or manager operational issues (manual errors) will still exist no matter how the model information is delivered.

Managed Accounts: Future Trends, Projections and Opportunities

This post is a summary from a panel session at the Financial Research Associates 9th Annual Managed Accounts Summit in Boston, MA.

Moderator: Phil Masterson, Managing Director, Investment Manager Services Division, SEI.

Panelists: Andrew Clipper, Managing Director, Citi Investor Services, Tracy Gallman, SVP, Investment Products & Platform Development, LPL Financial, Paul Oliu, Director of Business Solution Strategy, Fiserv Investment Services, Jeff Strange, VP, Strategic Planning, Cole Capital, Russell W. Tipper, Director, Managed Solutions Group, Merrill Lynch Global Wealth Management, and Chris Wager, DMA Product Manager, Advisory Products Group, Wells Fargo Advisors.

Where are the assets flowing from the standpoint of the managed accounts solutions segment?

We’ve seen a return to outstanding flows for the advisory industry as a whole, with approximately $50-$70 billion of net inflows per quarter across different managed account programs, according to Jeff. We’re almost at the point where we have more assets than before the financial crisis. Separate account programs has been the exception to this, since we’ve just recently started to see net flows turn positive and those are really just going into dual contract programs, he said.

Most of the focus of the industry has been rep-driven programs, which have been pulling in around $20 billion per quarter, Jeff reported. We’ve seen a little bit of a turn towards SMA flows. New sales and asset growth in UMA has been around 35%, while SMAs have been growing at around 2%.

The growth in traditional SMA’s has been more in international equities and municipal bonds, while UMA programs are still mainly concentrated in large cap equities and doesn’t have critical mass to diversify into too many styles, he said.

Similar trends are occurring in Citi’s managed account programs, Andrew reported. They’re seeing large movement into SMA space, less into UMA, with a tremendous movement into dual contract programs and away from single contract programs. On the sponsor/distributor side, they’re seeing growth of over 3,000% into the UMH space.

Where do you think flows will be going from the solution segment perspective as well as the asset cost perspective?

According to Russ, the easy money says that client-directed and RPM are where the flows are going to be. But in this market environment, they’ve been seeing more traditional nine box, asset allocation-driven investments within SMA and UMA.

Merrill’s clients aren’t asking for relative performance anymore, they’re looking for absolute performance due to market volatility, Russ asserted. RPM has more flexibility to look towards absolute performance products, however, over the longer run, we’ll see a return towards more active management outperforming more traditional asset allocation, he believes.

While RPM is the fastest growing product type, there are serious scalability issues with RPM as well as client-directed programs, which have a growing base but absolutely no scalability. Client-directed is largest advisor program at Wells Fargo, but scalability is a real concern, according to Chris.

At LPL Financial, they’re starting to see an increase in the use of ETFs through separate account managers, Tracy announced. This brings more of a tactical approach and provides the ability to go to cash or move into different sectors. Individual equity positions are being replaced with ETFs, which is a trend that’s going to continue, with mutual funds possibly being used more as core with ETFs as satellite, she said.

Could you define UMH and contrast it with UMA from the perspective of an investor, manager and sponsor?

A UMA is an account that is typically invested only in equities, ETFs and mutual funds and is rebalanced by an overlay manager, Andrew suggested. It exists as a separate, siloed product from wrap mutual funds, RPM, RAA, SMA, he added.

UMH is more of a delivery mechanism for the investor, Andrew continued, and allows for the elimination of product silos so that the investor can have a holistic rebalancing across all security types across all of their accounts. Citi has being running UMH in production since 2009, he claimed.

Andrew explained that there are three key components to a UMH: Household-level rebalancing and performance, asset aggregation across multiple books and records platforms and tax and cash flow optimization.

A typical independent financial advisor might have accounts at three or four correspondent clearing firms and broker-dealers and the last thing an advisor wants to do is to tell their client that they have to do is move their accounts and repaper them, Andrew commented.

The ability to aggregate assets across multiple brokerage firms requires a tremendous amount of connectivity, he asserted. More than simple aggregation tools like Yodlee, but actual electronic connectivity to the financial institutions.

But it’s more than just reporting, Andrew warned. You must be able to selectively aggregate at the portfolio level, which could be multiple accounts, but not all accounts, in the same household. While a manager sleeve, such as large cap growth, still exists, sleeve level performance itself doesn’t exist, it’s just part of the overall household performance. Individual manager performance also doesn’t exist on a segregated basis in an UMH account, Andrew contended.

I would disagree with Andrew on this point. I believe that just because a sponsor doesn’t need to report individual performance, there are still important reasons for sleeve-level reporting. Corporate actions, for example. How are they handled when the same security is held by two or more managers in the same UMA? Without sleeve-level identification of tax lots, managing corporate actions is difficult, to say the least. — Craig

For UMA sponsors, what is your focus on client segments?

Merrill Lynch has multiple investment platforms, Russ explained, and they break them out into three legs: FA-directed, client-directed and firm-directed.

UMA is the chassis on which they want to deliver all of their firm-directed advice, he said. What previously required multiple programs containing traditional separate accounts, mutual fund wrap or other programs are now all rolled up into UMA. They have the ability to provide tax optimization, to rebalance across multiple investment vehicles, and sleeves as well as ability to have a stand-alone offering or allow FA’s to build their own offering through our line of all due diligence, covered strategies, Russ offered.

Customized offerings are constrained to those assets in the program and by registration type. But they have a platform that has the ability, through common pricing, common reporting and common rebalancing to deliver a true UMA, he claimed.

Looking ahead over the next few years, Merrill is driving to take the next steps and get closer to UMH, Russ said, confidently. They’re going to be creating a single advisory program that will have RPM, client-directed and firm-directed in a single contract under a single pricing schedule under a single reporting tool. For advisors, it takes the complexity, such as pricing arbitrage and reporting arbitrage, out of delivering advice.

They won’t have a full UMH, in the near future, where they can go across multiple registration types or across different product sets. However, Russ assured us that they’re looking to expand the breadth of investment offerings in their UMA program.

UMA definitely is garnering a lot of attention at WFA, Chris said. From a product-enhancement perspective, that’s where they’re spending most of their time. They’re not pushing one advisory program over another. Overall, UMA is the most immature program and there’s a lot of room for improvement and growth. There’s not been a lot of work being done in the UMH space, he confided.

Because of the independent culture and having financial advisors who want to use their own technologies, LPL has a different approach from these other firms, Tracy told us. They have established unified managed accounts that can handle all investments. Their advisors like to control reporting to clients, so instead of coming up with a single, unified approach, they provide a robust set of tools and allow advisors to take their own approach for their practice. The investing is more centralized, but the management tools and reporting tools can be customized by their advisors, Tracy added.

What is your experience with the willingness of managers to join models-only programs?

Fiserv has 3,500 third party models on their platform, plus maybe double that in internal models, Paul reported. They’ve seen that 85-90% of SMA managers use or manage to models. Fiserv believes this to be a long-term trend, with tremendous efficiencies to be gained, he said.

One of the biggest catalysts for models-only programs is the drive towards UMA, Paul explained. It’s the account structure that Fiserv is advising their clients to implement. From the ability to offer advice and product neutral solutions, the UMA facilitates this.

Paul referenced MMI’s third quarter newsletter (MMI Central), which contains an article titled, “Market Uncertainty Causes Industry to Pause”:

Our interviews with industry leaders indicate that financial advisors and investors are staying the course, at least for now. No significant trends have emerged across the advisory industry such as material shifts to cash or movements between advisory programs or among asset classes. This may be the calm before the storm. Or, it may be that sponsor firms are more prepared to address investor concerns. Enhancements to advisory programs, such as enabling investors to hold up to 35% of advisory assets in cash, the introduction of more tactical managers and better prepared advisors will help to quell investor fears in the short term.

A lot of Fiserv clients want to take a step back and look at model management very broadly, Paul continued. They want to make sure they have an effective model management process that is effective from the idea all the way through to implementation and reporting.

Fiserv is consulting on many levels with their clients, Paul said. Not only about implementing their UMA programs, but also their model management process. “Clients want to implement it right the first time,” he insisted.

Wells Fargo is in the process of moving to a models program and have been doing a lot of due diligence and talking to a lot of managers about providing their models, Chris informed us. Almost all of the managers they’ve spoken to are open to the idea of providing models. 95% already provide models to another sponsor firm. From the Wells perspective, the willingness is definitely there, it all comes down to the specific strategy, he assured us.

Russ told us that Merrill has already migrated their traditional separate accounts program entirely to models only. 99% of their existing managers agreed to participate in the program. It’s a bigger mindshift for larger firms, Russ claimed, since they have to give up trading control and due to the fee impact. They allow some managers to step in and they manage dispersion, he said.

This post is part 1 of a multi-part series. Additional posts are on their way that cover the rest of the panel sessions.

Now that you’ve read the entire article, did you agree with everything written? Did you disagree with anything? Either way, let your feelings be known by posting a comment below!

Current Challenges for UMA Sponsors

This post is a summary of a session from the MMI’s 2011 Annual Convention.

The moderator for this session was Lee Chertavian, Chairman & CEO, Placemark Investments. The panelists were Marilee Ferone, Executive Director, UBS Financial Services, Roger Paradiso, President, Chief Investment Officer, Morgan Stanley Smith Barney and Russell W. Tipper, Director, Third Party Discretionary Programs, Managed Solutions Group Merrill Lynch.

According to Dover Research, UMA asset growth was over 100% last year, yet at $123 billion, it makes up only 6% of
total managed account assets. 88% of sponsors report that UMA will receive the greatest amount of funding next year.

There was a lot of debate in the industry regarding overlay management program types between active, hybrid and passive, Lee commented. Back in 2007, sponsors were evenly distributed between the three, but by 2010, the vast majority (80%) had shifted to active overlay, using model portfolios.

There’s been a tremendous change in manager’s attitudes regarding model-based delivery. Among the top 25 model
managers, over 40% weren’t providing models just five years ago.

82% of respondents said that UMH was important, although the technology is still in its infancy.

UBS Strategic Wealth Portfolios

The UBS program is passive-only, with no models and no active overlay, Marilee informed us. It’s nondiscretionary,
except for the sleeve that the money manager controls. It has $6 billion in AUM, with an average account size of $1.3 million.

UBS provides a lot of flexibility for advisors to select investments from an open architecture with over 200 SMA managers to choose from along with 3,100 mutual funds and 300 ETFs. Hedge funds were available when the program started a few years ago, but demand died off due to their limited liquidity. Asset growth in 2010 was nearly 60%, Marilee reported.

Merrill Lynch

Merrill Lynch launched their UMA in 2007, Russ noted. It now has $22 billion in AUM and 42,000 accounts (average account size = $523,000) and is entirely model-based. They allow managers to retain discretion depending on the market that they’re trading in. Merrill sees UMA as a platform for delivering advice and leveraging their investment partners.

They offer a full spectrum and provide flexibility for advisors where they can implement a stand-alone SMA or a model containing mutual funds, equities and ETFs. Merrill’s core offering is focused on SMA, ETFs and funds with 40% of the business in stand-alone SMA and the other 60% in models. In most cases, they leverage the firm models and don’t allow swapping of strategies. Russ stressed that they want their platform to provide advisors choice and flexibility.

Morgan Stanley Smith Barney

We look at UMA as a solution-based platform, Roger stated. It’s open architecture and designed around the way the advisor and client want to engage. The platform offers over 250 SMA products using model-based delivery, over 300 40 Act vehicles, and over 150 ETFs.

Advisors can create custom asset allocation structures and their own models, which they can use as completion strategies. There are also asset allocations driven by the Global Investment Committee, which created eight models for advisors to choose from. In addition, they can select either strategic or tactical allocations.

Roger listed three client engagement models that are available:

  • Client Discretion (traditional)
  • FA Discretion
  • Consulting Group (CG) Discretion

The CG Discretion uses MSSB asset allocation models and handles manager selection ($25K minimums for all mutual
fund/ETF version and $500K for hybrid version where the firm creates a custom investment selection).  The personal level of the program allows advisors to select from options including tax-managed strategies, restrictions, and transitions.

The one constant, no matter what the engagement model, is the Private Portfolio Group acts as the overlay portfolio manager. A key aspect is the proprietary technology that they’ve built over the past 15 years. There are over 250
people on the team with an average experience of 12 years.

What fixed income options do your programs offer? Do you support muni bond laddering?

The UBS program does not support direct purchase of bonds. They provide the ability for FAs to choose a fixed income allocation that is fulfilled using ETFs or mutual funds. FAs have asked for muni bond laddering, Marilee said, but they haven’t built it out yet.

Merrill advisors have access to top industry fixed income talent, according to Russ. On the taxable side, their overlay manager does the full implementation and in the municipal space, they give managers discretion. Their FA’s have asked for muni bond ladders, but there are issues such as determining the proper minimum account size and the amount of alpha that muni managers can bring.

MSSB offers a dual-discretion model, where they oversee everything, but the fixed income managers do their own trading.

What changes did your firm make to your front-end to add financial planning to your UMA platform?

Merrill has a front-end financial planning engine that’s fully integrated into their advisor desktops, Russ pointed out. However, it doesn’t have the ability to go from idea to execution. In other words, it doesn’t connect to the portfolio
construction or UMA implementation process. Their next generation UMA platform will integrate financial planning
into so it will be an end-to-end process.

Roger confirmed that MSSB is in the same boat. They need to make the connection between the financial plan and
implementation. They should follow through with the plan over the client’s lifetime, but it’s extremely challenging.

How have you changed performance reporting to better support UMA?

UBS provides all standard performance reports, including monthly and quarterly that go down to the sleeve level including attribution analysis. Merrill leverages a single platform across their entire business, so clients receive a similar report whether they’re in an FA-directed, client-directed or discretionary account. They’ve made enhancements to the platform to show sleeve level performance and attribution and historical changes over time.