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Failure to Communicate Isn't An Option

As the unified managed accounts business grows in size, so do the potential for errors when it comes to communicating information about investment models.

Those errors typically involve mistakes made by an overlay manager, working with an investment advisor, or a plan sponsor interpreting details from an investment manager about an investment model in either e-mail or fax.

The overlay manager could easily buy or sell the wrong security, the wrong number of shares, the wrong value of a security or not make the change in the intended model in a timely fashion. There is also no independent audit trail to keep track of the activities between them.

Depository Trust & Clearing Corp. last year helped create schemas for the content of messages that must be used between the investment manger and overlay manager. DTCC recently agreed to make them public by giving them to the Money Management Institute, which represents the separately managed accounts and wealth management industries. The business rules for the schemas were developed by the DTCC with the MMI and potential users.

The MMI will review those schemas and after making the necessary changes, publish them on its website next year, said Gary Jones, lead technical consultant to the MMI.

Here's the benefit. "Rather than the investment manager sending multiple messages on investment models in multiple formats, the manager can send the information once through DTCC, which will then distribute it to whichever overlay managers and sponsors the investment manager chooses," said Anne Bergin, managing director and general manager of wealth management services for DTCC. "Centralizing and standardizing the process supplies the provider and receiver of the messages with an audit trail, reduces the likelihood of mistakes and brings scalability to the market."

According to MMI and Dover Financial Research, UMAs were the fastest-growing segment of the separately accounts managed market as of June 2011, with about $138.8 billion of the $2.4 trillion in assets-a 72% increase over the previous year.

DTCC estimates that about 1,500 investment models are now being distributed across the UMA market, and the figure could surge to 14,000 by 2017.

DTCC's initiative isn't entirely altruistic. It is testing a communications hub called Model Management Exchange that will serve as the technology platform for model messaging. DTCC will be offering clients the ability to use the Web to send and receive models and transmit the model messages internally for additional middle and back-office processing.

"Giving up the schemas to MMI allows the broader industry to use them to enhance internal systems and integrate the messages into their own business processes," Jones said.

It is to DTCC's advantage to ensure that the model management exchange service has sufficient volume so that users can pay the lowest possible fees. First up to test the approach will be Morgan Stanley Smith Barney operating as an overlay manager and sponsor. Morgan Stanley will initially receive model information from 14 of its own investment managers, according to Bergin. Most large Wall Street wirehouses-such as Morgan Stanley, Bank of America Merrill Lynch and Citi-act as both sponsors and overlay managers.

Among the schemas DTCC will give MMI are messages for the provider of models to send the receivers to establish their initial relationship and about each investment model. The message will indicate what securities are in a model and what percentage each security represents as a percentage of the overall model.

Other messages are about updating the investment model, closing or opening the model to new money, or cancelling the relationship between the investment manager and overlay manager. The model receiver, in turn, can send messages to the model provider acknowledging receipt of an initial investment model or acceptance or rejection of the model and confirmation it was executed.

Each message on average contains about 100 data elements. At a minimum, each message contains a security identifier and an indication of the target holding amount or percentage. Each message must also identify the model provider sending the message, a model identifier and the model recipient.

Unified managed accounts are an extension of separately managed accounts and can include almost every asset in an investor's portfolio-single stocks, separate accounts, mutual funds and even hedge funds. By pulling a client's assets together instead of breaking them up across multiple accounts, UMAs make it easier for the sponsor to keep track of capital gains and losses and improve post-trade tax returns. The account customization for risk and tax management purposes allows financial advisers to better address the needs of their high-net-worth clients.

Technology vendors, such as Peridrome and Vestmark, have developed their own models and data formats, for keeping track of what's going on but don't appear to be concerned about any competition from DTCC. In fact, Vestmark, which heads up MMI's subcommittee for model messages, believes the communications standards are a way to concentrate on more important workflow tools.