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IT Under the Spotlight as Adviser Migration Builds

The continued migration among wirehouse advisers is creating tremendous operational pressures on asset management, brokerage and operations companies. Top producers expect to get up and running without a hitch. Consequently, non-wirehouse firms are scrambling to implement the necessary infrastructures to support expat advisers with the same or better technical resources they left behind.

Research firm Discovery tracked record movement of registered representatives, including financial advisers, from the bulge-bracket firms this past year. Migrations eased somewhat overall at the beginning of 2010, but in January, more than 350 wirehouse brokers moved to another wirehouse, a regional firm, an independent or a bank.

Meanwhile, last year's mergers and acquisitions activity in the wirehouse channel served as a catalyst for financial advisers who may have been on the fence about moving. While a number of these financial advisers are simply moving within the wirehouse channel, a significant number are seriously considering other channels, including independent firms.

According to Financial Research Corp. Analyst Christopher Yeomans, one of the reasons for this is the hybrid model that these advisers use. "We are seeing significant trends in the way that advisers are compensated for providing advice. While the commission model is still alive and well, a large number of advisers are evaluating the move to more of a fee-based model, which some argue is more objective."

FRC is planning to release a comprehensive report on adviser movement as part of its 2010 study, "A Look at Adviser Migration," the second volume of the 2010 Adviser Insight Series.

The "Big Four" wirehouses, Morgan Stanley Smith Barney, Bank of America's Merrill Lynch, Wells Fargo Advisers and UBS Wealth Management distribute the vast majority of managed accounts. Hence, these and other powerhouse firms are already equipped with online tools to handle everything from account setup and distributions to cash management and confirmations among advisers and investment managers.

One of the greatest challenges for the non-wirehouse broker/dealers, as well as the emerging crop of independents and so-called turnkey asset management platforms (TAMPs), is figuring out how to quickly and cost-effectively offer resources comparable to those of traditional wirehouses.

One gap is a safe and robust online portal for communicating with advisers' preferred money managers. Emerging sponsors additionally face new legal and compliance requirements, which their wirehouse counterparts have long addressed. For example, wirehouses got a lot of mileage moving many key functions online, including forging agreements in which clients sign one piece of paperwork while sponsors present only a client profile to the investment manager. In these arrangements, KYC (know your client) liability generally rests with the sponsor, not the manager.

As today's compliance environment has come under increasing scrutiny, sponsors and investment managers are encumbered to know a lot more detail about their clients, including adherence to account restrictions and fee structures among service providers. Newer firms setting up shop need to pick up where the adviser left off in managing a morass of data to appropriately service their newly acquired business.

The alternative for non-wirehouses is communicating with counterparties by old fashioned phone and fax. For many advisers, especially those with millions or even billions of client dollars on the line, a lack of robust, secure and auditable online communications introduces an unacceptable level of risk and inefficiency in account management.

With the number of dual contract accounts continuing to grow at a rapid pace, the industry is, surprisingly, becoming alarmingly paper-centric. In fact, one senior operations executive at an investment management firm said the managed accounts industry is moving backwards in time.

Managers who experience advisers transitioning from one firm to another often see a greater proportion of faxes compared to the online communication with sponsors in the past. Especially between non-wirehouse sponsors and managers, this state of nascent connectivity is surprisingly common given how quickly many of the newer hybrid firms are setting up shop.

This lack of online capabilities is particularly a choke point in the adviser migration process, making it harder for newer hybrid sponsors to grow, and for the investment manager to do business with them. Certainly, firms have traditional adviser-facing desktop tools. But they often lack the time, expertise or resources to build the online communications network needed to support complex dual contract relationships advisers bring on board with an expanding group of investment managers.

FRC's Yeomans agrees that there has been a dramatic increase in the number of manager relationships non-wirehouse sponsors have to service, without the corresponding technology necessary to support it. Independent firms are looking to ramp up their infrastructure to support the resources advisers in the wirehouse channel have come to expect.

Independent firms looking to lure advisers from other firms are looking to make the move as seamless as possible, often "ramping up the technology available on platforms and increasing the number of relationships with between sponsors and managers," Yeomans explained.

Some firms are turning to new technology tools that are specifically geared to automating managed accounts communications and client service. These innovative online products accommodate dual contract relationships, with bundled document management that distributes documents online between advisers and their investment managers.

Moreover, these web-based tools integrate with a firm's existing infrastructure for efficient straight-through managed accounts processing and communications. Many firms are finding this to be the fastest and most affordable way to offer high-quality communications and client service.

Successful firms navigating the shift in the marketplace will be the ones that quickly and cost-effectively replicate a comprehensive platform for conducting business that advisers expect and demand when they move to a new environment.

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