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Q&A: Technology Standardization Fueling SMA Evolution

Without question, the separately managed account industry is undergoing an evolution, led in large part by the industry's own initiatives to move toward the standardization of operating technology. But where are we right now, and what challenges lie ahead on that evolutionary track?

Stephen J. DeAngelis, senior vice president and managing director of PFPC Managed Account Services of Wilmington, Del., recently spoke with Money Management Executive Editor-at-Large Lori Pizzani about how technology is impacting the SMA industry.

DeAngelis joined PFPC as part of the firm's 2003 acquisition of ADVISORport, which DeAngelis co-founded. An edited account of their conversation follows.

MME: The managed account industry, led by a committee of the Money Management Institute (MMI), is working toward developing a single operational standard for managed accounts. Realistically, how far out is that goal?

DeAngelis: Like any new concept or idea, it goes through phases of evolution. First, an organization floats a concept, and the people who are involved nod or shake their heads, and there are usually some delays. Then, if it is still a good enough idea, it hits phase two and moves beyond to early adopters and the trendsetters who are willing to give the concept legs.

If all goes well, it moves into phase three, in which you see much more rapid and broad acceptance of the concept. Many think that the process moves from phase one to phase three very quickly, but it doesn't.

We're now in the early phase two stage. The concept was socialized a year or two ago. Now there's some activity and some good hard work taking place. This is not a light undertaking. It takes a lot of commitment, personnel and dollar capital to implement a new way of doing business. It just needs more time.

The MMI has a great committee helping us to understand what the issues are from the sponsors' and money managers' perspective and laying the groundwork for standards.

It is not that we suddenly have open standards; it will be evolutionary. After a slow start, companies will begin to adopt and, over time, evolve.

MME: Will there be challenges toward developing that standard?

DeAngelis: Yes, it will be challenging. It will take people capital and money capital to adopt these systems if it is going to be done right and allow for new standards of communicating among all sides.

MME: Do you see this as similar to the evolution that the mutual fund industry underwent in the 1980s when it transformed its transactional operations from paper-based to automated through National Securities Clearing Corporation?

DeAngelis: That's a great analogy. The first mutual fund started in 1929 but didn't become common until the 1980s when strides were first made to automate operations. That journey took 60 years!

The assets in mutual funds were able to surpass $10 trillion because the industry evolved from paper-based solutions to automated solutions. But great technology, in and of itself, doesn't predict great success in the marketplace.

The growth of the managed accounts industry will be facilitated by improvements in operations and communications, but it's not the reason assets will grow from the current $1.5 trillion to the $5 trillion some estimate the market will reach in a few years. It's huge demographic trends and the wealth management needs of the Baby Boomers who are taking over more of their retirement planning. That megatrend is the reason managed accounts are growing.

MME: How will small, niche money managers, many of which have patched together systems internally, adapt to the new operational standards being developed?

DeAngelis: Smaller managers fit in with a trend we're seeing of outsourcing operations. To participate in this space, you have to do it cost efficiently, and you need to be competent at running portfolios, as well as be good at sales, marketing, operations and the efficient handling of transactions. Many managers are recognizing that their real value is running good portfolios for clients and that they can cost effectively outsource functions to others with experience.

If you're a small firm, you'd have to think long and hard about doing it all yourself, which is why more and more niche managers are making that strategic decision.

MME: Will service providers need to reduce prices to accommodate smaller managers?

DeAngelis: There are pricing differences now. If there is more volume, there is more efficient pricing.

At the core of it all, all money managers need the same services from providers, which is the best practices, technology and expertise available. If they tried to replicate the same themselves, it would cost them so much more than if they outsourced.

MME: Don't service providers, like PFPC, end up taking the risk that technology implemented today may be outdated in a few years as standards and technology move forward?