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Smooth Operators

Q: How do you build an operations department for separate accounts from scratch?

Dreyfus went through start-up mode three years ago, answered Brett Young, EVP with the firm.

The first question, Young said, is whether to build an operations division first, or to wait for assets to build and then develop the department along the way. Dreyfus did a little of both, Young said, starting out with just three individuals: two traders and an administrator.

Today, Dreyfus' separate account business has grown to $3.3 billion, with eight traders and two administrators. It is only now hitting break-even. In the past three years, "the complexity of this business has increased tremendously," Young added.

Jim Horan, moderator of the panel and a senior vice president at DST Systems, said managed accounts versus a mutual funds are geometrically more complex. "With the complexity, you also have a lot less control of the accounting systems. In the mutual fund world, you have one portfolio accounting system, which you picked and you've set all the options and controls on it," Horan said. Not only are the individualistic portfolios in separate accounts more complicated by their very being, but working with multiple sponsors in a typical separate account program also makes them more complex, he said.

All this leads to higher costs, Horan said, also making note of regulatory and compliance issues. "It's just a completely different world from the mutual fund [world]. Traditionally, one way to start is outsourcing," Horan suggested.

Q: In a large organization with multiple distribution channels, what are the obstacles?

Young said that rather than assuming there are obstacles, a fund company should find synergies and efficiencies. "If you're a large multifaceted organization where you have mutual funds, variable annuities [and] now offering separate accounts, you can leverage the distribution expertise [of your] wholesalers in the field. The complexity comes into play with how much can any one of those individuals handle in terms of their responsibilities?"

Young also pointed out that since mutual fund fees are typically three times as high as those in separate accounts, management must figure out how to "create focus [among wholesalers], so they can effectively move each product forward in terms of gathering assets." But this is no easy task, Young acknowledged.

Q: What new streamlining technologies are available to investment managers?

Meg Kelleher, a senior vice president at State Street, said there are a lot of inefficiencies in the business, one being a tendency among investment management firms to lop new systems onto a platform as assets expand.

Another problem is the length of time it takes to open an account, time lost and revenue lost, Kelleher said.

"It's an incredibly paper-intensive environment," she said. "Every time you bring on a new program, you're hiring people to take care of something because the automation isn't there. The communication issue between the managers and the sponsors is significant. The technology, to date, hasn't existed to run the business as efficiently as the managers would like."