The Year Of The SMA: Standardization Could Result in Faster Asset Growth
July 9, 2007
NEW YORK-Managed accounts have been steadily gaining traction, but 2007 may be the year they truly get unleashed, according to panelists at a recent conference here.
The New York-based Depository Trust & Clearing Corp. later this year will launch its Managed Accounts Service, which will, for the first time, provide one communications network and standardized set of messages for a now fragmented industry.
"We've reached an inflection point," said Chandresh Iyer, a managing director at Citigroup Securities and Fund Services. New York-based Citigroup Smith Barney is among those firms testing the new platform, along with JPMorgan Worldwide Securities Services, of New York, SEI Investments of Oaks, Pa., Redi2 Technologies, a company based in Oakland, Calif., and Burlington, Mass.-based Evare.
Until now, the SMA industry has been one marked with disparate systems and methods of communication, resulting in pastiche of faxes, phone calls and e-mails to place clients' money.
As the industry continues to grow, this system proves to be not only inefficient, but unsustainable, panelists said. "This is all about community building," said Scot G. Knight, project director and vice president with JPMorgan. By forcing sponsors to adopt a set of standard messages-so far, the system pilot employs 24-and supply specific, uniform data, a set of best practices will emerge.
JPMorgan already produces white papers outlining the challenges and successes in the industry. Other participants, from asset management companies to vendors to sponsors, are likely to produce their own, enriching the dialog surrounding the industry, he said. With time will come new ideas, and possibly a reduction in cost. Opening an account on the DTCC platform will cost asset managers $7.50, compared to the estimated $8.49 it costs today, said Brett Ginter, a principal at Chatham, Mass.-based Smart Consulting.
The lower cost per account, over time, will allow managers to hire fewer back-office staff, and enable companies to instead focus on expanding their client base, Ginter said.
Today, managed accounts represent an $870 billion industry, according to the DTCC. By the end of the decade, that figure is expected to reach $1.5 trillion, or to grow by 72%. That growth will be driven by Baby Boomers looking for a place to park their retirement money, and from investors overseas, Iyer said. Today, 25% of SMA investors are overseas, compared to 15% only five years ago, Iyer said.
Operational inefficiencies within the industry today cost tens of millions in resources and wasted time for money managers and investors alike, said David Gardner, also a principal at Smart Consulting.
"It's one thing to go to market with a product. It's another thing to sell it, and it's another thing to execute," said Daniel Delac an assistant vice president at New York-based Alliance Bernstein. "Nothing in the process is consistent," he said. With 72,000 managed accounts, up from 40,000 three years ago, Alliance Bernstein negotiates with 48 product sponsors. Each sponsor has its own lexicon and processing protocol. While one might send an 85-page document with a transaction, others might provide only the information on a fax cover sheet.
"The client wants to be put to market A.S.A.P," Delac said. But the present, sometimes-disjointed, process slows the time it takes for investors' money to be placed.
The new platform will eliminate inefficiencies by providing a system much closer to straight-through-processing and significantly reducing the number of errors that manual data entry from different sources now invites.
"This makes sure the client gets a positive experience and is on the right platform at the right time," Delac said.
"It comes back to the customer opening an account and getting it funded correctly and funded quickly," said Tom Huddleston, vice president of separate accounts technology at Boston-based IXIS. "That is an intangible," he said. "If we're not barred by inefficiency, that would help us quite a bit," he said.
Standardization and collaboration with the well-established DTCC can also help managers feel more confident about transmitting clients' personal data, said Elena Geraci, a director at Lazard Asset Management in New York.
The centralized platform also offers greater protection for data recovery in case of a disaster, said Richard Kaufman of Philadelphia-based Delaware Investments.
Most importantly, getting on the platform can help small managers with limited resources increase their market share in a segmented marketplace. "What better way to grow than to already know what you need for the next sponsor?" Kaufman said.
For providers like Citigroup Global Transaction Services, the DTCC platform promises fewer errors in transcribing information, and more efficient execution, said Jonathan Flitt, a vice president and product manager with Citigroup.
Features such as daily reconciliation offer a "quantum leap" compared to the existing, highly manual, process, he said.
Managers will also be able to create reports for clients consolidating products from different providers quickly, said Carmine Remo, of SEI.
The exchange of ideas and techniques will ultimately lead to innovation, said Bevin Crodian, a co-founder of Edison, N.J.-based Market Street Advisors. The more companies that participate, the greater the exchange of ideas, and the more types of instruments the platform will support, from securities to treasury inflation-protected securities to ETFs, he said. Iyer echoed this call for innovation.
"The cumbersome process discourages sponsors from including mutual funds in SMAs," Iyer said. Standardization will help break down the barriers to funds and even foreign stocks, giving managers more tools to include, and advisers more solutions to sell, he said.
"Standardization will bring efficiencies and therefore lower the barriers to entry," he said. In time, access to SMAs will help managers tap into a yet-unrealized, but latent, demand, he said. "This is no panacea, but it's a big step," Iyer said.
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