technology challenges of supporting managed accounts

2003 NICSA Technology Forum

Technology Challenges of Supporting Managed

Accounts

Vincent ManningVenture Financial

Systems Group, LTD.


Why Are We Here?

• Separately managed accounts (SMA) held $399 billion in assets at the end of 2002 (Source: The Money Management Institute).

• SMA assets are expected to increase to $1 trillion by 2006 and $2 trillion by 2011 (Source: Financial Research Corp – “FRC”).

• More investors will turn to managed accounts over the next five years, cutting the ratio of mutual funds to managed accounts in half FRC).


Why Are We Here?

• Growth in SMAs driven by the attractiveness of individually customized, professionally managed products.– Tax efficient– Decreased investment minimums


Why Are We Here?

• Current technical and operational landscape is void of industry standards.– Analogous to mutual fund industry in the early

1980s.– Until recently, industry power has been concentrated

in the hands of a few sponsors and systems providers.


Agenda

• Introductions• Industry Primer• Managed Asset Market Place• In-House Servicing• Outsourcing as an Option• Developing a Multi-Manager Strategy• Q&A


Panelists

Roger GregoryDST International

Chris FlynnMFS Investment Management

Dave ReinhartThe Bank of New York Separate Account Services

Donald FobergPhoenix Investment Partners


The Players

• Wirehouses/Sponsors– Top 5 control over 70% of the assets (FRC)

• Investment Managers– Top 10 control 35% of AUM (FRC).

• Technology Platform– CheckFree APL, IDS, Advent, DST, FIN

• Customization Tools– LifeHarbor, SoftPak, Upstream, Parametric,

Placemark, Tamarac, Smartleaf, BTA

• Outsource Providers– BONY, Mellon, State Street


The Problem: Technical and Operationally Inefficient Marketplace

Portfolio Manager

Model A

Model B

Model D

Program #1

Program #2

Program #3

Program #4

Program #5

Program #6

Program #7

Program #8

Logon

Logon

Logon

Logon

OperationsTeam

Model C

INTERFACE

Source: Cerulli Associates


FaxE-mailProprietary Link

FC

Sponsor

FC

IMIMIMIM

Sponsor Sponsor Sponsor Sponsor

IM

SponsorSponsor

FCC

FCFCFCFC FC FC FC

CCC C C

C = Custodian




Lack of standardization among sponsor systems presents significant operational hurdles and technical challenges.− Majority of major sponsors maintain proprietary

portfolio accounting and trading systems.− No standard technology protocols or workflow

processes across sponsor systems making it difficult to standardize operations across multiple sponsors.

− Operational complexity increases dramatically as the number of sponsor connections increases.



• Operational segmentation in the marketplace due to disparate applications will continue to place tremendous strains on operations.


Potential Solution: Industry Utility

• In a November 2002 white paper, The Money Management Institute (MMI) called for the creation of an industry utility to transmit critical communications between industry participants.


The Result: Technical and Operationally Efficient Marketplace

Industry Standards

Portfolio Manager

Model A

Model B

Model D

OperationsTeam

Model C

Program #1

Program #2

Program #3

Program #4

Program #1

Program #2

Program #3

Program #4

Program #5

Program #6

Program #7

Program #8

Program #5

Program #6

Program #7

Program #8

Logon

Logon

Logon

Logon

INTERFACE


The Reality: We Are Not There Yet

• The Money Management Institute is working to bring standards to the industry.

• DTCC is working to bring standards to new account openings process.

• New market participants offer expanded solutions along with pressure to standardize communications.


Ideal Operating System

• Communications– Seamless, secure electronic connectivity between all

parties.– Standardized electronic communications for all routine

operational tasks.

• Operations– Real time transaction fulfillment.– Easy to use and train.

Source: The Money Management Institute


Ideal Operating System

• Infrastructure– Internet-like disaster survivability.– Exponential scalability.– Open architecture.– Low cost.– Upgradeable.– Managed and owned by industry participants.

Source: The Money Management Institute


Managed Asset Market Place The Players, The Core Functions, The Tools

Roger Gregory

DST International


Managed Assets: The Players

• Wirehouse• Sponsor• Product Provider• Hybrid• Supermarket• TAMP

“the future ain’t what it used to be”

Yogi Berra




– Old-line large brokerage firms




– Wirehouses, firms distributing SMAs




– Asset managers, proprietary or outsourced




– Overlay managers, brand aggregators/consolidators




– Originally mutual fund distribution, now expanding product offerings



• Wirehouse• Sponsor• Product Provider• Hybrid• Supermarket• TAMP – Turnkey asset management

program


Managed Assets: Core Functions

• Distribution Channel• Financial Planning• Product Offerings• Trade Execution• Custody• Product Provider

“if the world were perfect, it

wouldn’t be”

Yogi Berra



• Distribution Channel – Banking– Insurance– Wirehouse– Regional brokers– Mutual Fund Complex



• Financial Planning – Risk profiling– Asset allocation– Product selection– On-going monitoring



• Product Offerings – Mutual Fund SMA– Annuities– SMAs– Self Directed Brokerage



• Trade Execution – Mutual fund– Equity– Fixed Income

• Custody – Fully Disclosed/Omnibus– Self Clearing – Trust



• Product Provider – Mutual Funds– Pensions/Institutional– Fund Wraps– SMAs– Hedge Funds


Managed Assets: The Tools

• Advisor Tool Kit• Interfaces• Decision Support• Order Management• Compliance• Trading Links• Back Office Processing• Reconciliation/Synchronization• Performance Measurement• Reporting

“you can observe a lot by watching”

Yogi Berra


Managed Assets: DST Solutions

• OpenPFA– Focused on firms with distribution channels

• MAP– Focused on product providers

• DataCenter Processing– ASP

• SS Message Hub– Message based interfacing, trading links

“The towels were so thick there I could hardly close my suitcase.”

Yogi Berra


In-House Servicing of Managed Accounts

Chris Flynn

MFS Investment Management


Discussion Topics

MFS’ Operational Model – Successes and Challenges

– Value Added Technology

* Highlighting: LifeHarbor DST – Automated Work Distributor


Operational Service Models

Internal Servicing vs. Outsourcing

• MFS’ Operational Model – Internal Servicing

– 27 employees dedicated to operations for 15,000+ accounts

New account setup, reconciliation , trading and support services– Cross Trained Staff – produces program experts

– Managed account platform fully integrated to all systems through out the firm – trading, sales, back-end compliance

– Operational support perceived as critical attribute to success


Advantages

Internal Servicing– Get to know your client– Ability to employ talent– Timely problem resolution– Can develop metrics to

prepare for growth – Ability to design

customized workflow

Outsourcing– Potential cost savings– Eliminate training costs

and concerns– Financial risks due to

operational errors are outsourced to third party


Disadvantages

Internal Servicing– Could be costly:

people, technology, infrastructure

Outsourcing– Potential to lose control

of effective client servicing

– Can lose ability to implement value added technology as needed

– Place all operational matters in the hands of a third party provider – reputation at stake


Value Added Technology

Trading and Account Monitoring Technologies

• Lifeharbor– Ease in Account Monitoring

Heat mapping and grouping of accounts for timely account monitoring and rebalancing

– Enhanced Trading CapabilitiesTax Aware, Compliance Module

– Risk Mitigation ManagementEnhanced User Security, Activity Auditing


Value Added Technology

Workflow and Imaging Technologies• Automated Work Distributor (DST product)

– Document ScanningOn site storage reduction, Easily obtain documents linked by account number

– Work Routing Through QueuesWorkflow designed to move account from opening to trading as well as maintenance

– Holdover AnalysisEnsures that items left in queues are moving through workflow timely


Separate Account Services – Outsourcing as an Option

Dave Reinhart

The Bank Of New York


Separately Managed Accounts Market Today

• Effects of Bear Market– Net Redemptions– Accounts Smaller– Sponsors Cutting Manager Fees

• Bear Market vs. Bull Market– Pressure to Reduce Expenses

Operations Technology Expenditures


Technical and Operational Challenges for SMA Managers

• Managing in Multiple Sponsor Programs means:– Multiple Custodian Interfaces

Trading Reconciliation

– Multiple Portfolio Management Systems Sponsor vs. Manager Provided Proprietary vs. Vendor Consolidated Reporting

– Multiple Ways of Doing Business Account Paperwork Procedures Advisor vs. Sub-advisor


Outsourcing Operations

• Not a New Concept for Investment Managers– Mutual Fund Services– Custody, Clearing, Payroll, Benefits, etc.

• Benefits of Outsourcing– Focus on Core Competencies– Reduced Upfront $ Commitment vs. Building– Scalability (Keeping up with Technology)– Staffing Peaks and Valleys– Offload Operations Risk– Speed to Market


Finding the Right Outsource Partner

Selection Criteria Listed in Order

Importance:

1. Stability of Outsourcer

2. Specific Expertise in Investment Area

3. People / Culture

4. Technology Platform

5. Cost

Source: Celent Communications Investment Manager Survey (March 2002)


Available Outsourcing Services

• For Sponsors:– All-inclusive SMA

Platform Customized to create a Unique Turnkey Program for a Sponsor

– Outsource Operations and Technology for your current SMA Program.

• For Investment Managers:– Outsource Operations &

Technology of your Multi-Sponsor SMA Business

– Create your own SMA Product Platform to Support Alternative Distribution Channels


• Front-Office– Money Manager

Research– Capital Markets

Research– Portfolio Design Support– Proposal System– On-line Account View

Available Outsourcing Services

• Middle/Back-Office– Trading and Rebalancing

– Account Set-Up and Maintenance

– Reconciliation

– Fee Calculation and Processing

– Performance Reporting

– Portfolio Accounting System


Solutions to Challenges

• Industry Standards are being developed to streamline inter-firm processes– Money Management Institute (MMI)– DTCC

• Open Architecture• Outsource

– ING (Furman Selz) has Outsourced to BNY– Scalable solution for separate accounts


Managed Accounts

Multi-Manager Challenges

Donald A. Foberg

Phoenix Investment Partners


Phoenix Investment Partners

• Phoenix Investment Partners (PXP) is a group of affiliated asset managers manufacturing and servicing Retail and Institutional investment products.

• Retail products include Mutual Funds and Managed Accounts• Growth through acquisition strategy:

– 11 Managers– 8 Investment Operations– Centralized Distribution - Wholesalers– 5 asset managers selling managed account models through sponsors– 2 back office operations supporting managed account processing


Strategy

• Review all Investment Operations for STP capability

• Develop an Operations and Technology Strategy based on findings

• Select initiatives based on impact and need• Managed Account operations and

technology first


Approach

• Focus on existing operational strengths– Productivity vs. industry benchmarks– Location– Staff - demonstrated expertise and intangibles

• Focus on platform– Nature of the technology– Vendor position– Cost


What Did We Want to Gain?

• Scalability• Cost efficiencies• Expertise• PXP supporting Partners


Filters

• RFI delivered to:– Outsourcers– Software/Service Providers– Software vendors

• Cross functional team reviewed and recommended direction– Do not outsource– Detailed review of the top three providers


Our Top 3

• Existing in-house providers– CheckFree Investment Services - Security APL– FIN

• DST International – MAP


Organizational Issues

• Which location should the operation reside in?• Affect of a technology conversion?• Re-building the operations staff?• Who should manage that staff?


Technology Issues

• Existing platforms closely held• Could a new provider out-perform the

incumbents?• Where was the industry model going?• How were the selected providers matching up

to the developing industry model?• Connectivity to sponsors was/is king


Operational Issues

• Connectivity to dozens of sponsors• Order management• Order volume• Workflows

– Manual– Repetitive– Need automation


Question and Answer


Contact Information

Vincent ManningVenture Financial Systems Group, [email protected]

Roger GregoryDST [email protected]

Chris FlynnMFS Investment Management [email protected]

Dave ReinhartThe Bank of New York Separate Account [email protected]

Donald FobergPhoenix Investment [email protected]


Biographies

VINCENT MANNINGVenture Financial Systems Group, LTD.Managing Consultant

Vincent Manning is a Managing Consultant at Venture responsible for providing leadership in the development and implementation of innovative solutions to solve complex technical and business issues. Vincent actively works with senior management teams to assess current business and systems environments and proposes organizational and process reengineering solutions. He is responsible for directing and managing project teams to ensure timely and effective execution of management efforts. Mr. Manning’s engagements have covered both front- and back-office initiatives ranging from conceptual design through final implementation.

Over the past five years Vincent has led initiatives in every area of the trading cycle covering issues ranging from data modeling, business processing, enhancing trading systems, providing web-based reporting platforms, and the integration of front- and back-office systems to provide real-time positions, prices, and transactions.

Mr. Manning is currently a member of the National Investment Company Service Association (NICSA) Technology Committee. Prior to joining Venture, Mr. Manning was with Fidelity Investments as a Senior Business Analyst. Prior to Fidelity, Mr. Manning was with William M. Mercer, Incorporated for five years as a Consultant. Mr. Manning holds an MBA with a Strategic Management concentration from Boston College and a BA degree in Economics from Brown University.


Biographies

ROGER GREGORYDST InternationalProduct Manager

Mr. Gregory has over 25 years of experience in portfolio management and accounting systems software development and is currently a product manager for DST’s Managed Asset Platform.

In this role, Roger is part of team responsible for both the functional and technical direction of DST’s managed account solutions and their current evolution.

Roger was previously responsible for the original design and development of DST's HiNet accounting solution, which is a rules-based client-server multi-currency portfolio accounting system, currently in use by many leading US financial institutions. Mr. Gregory holds an M.S. in Computer Science and a B.A. in Political Science from Boston University.


Biographies

CHRIS FLYNNMFS Investment ManagementPrivate Portfolio ServicesAVP - Operations Management

Chris has been employed with MFS Investment Management for the past 13years. He started at the firm in the role of custodian bank liaison overseeing the performance and relationships of MFS' custodian banks responsible for servicing their mutual fund business.

In 1992, Chris joined the Institutional Division of the firm serving as Accounting Supervisor for a large number of institutional accounts. For the next several years, he managed much of the back office operations for the Institutional Division. In 1999, Chris was asked to begin researching and investigating the operational requirements involved in starting a managed account division.

Upon the formation of MFS' Private Portfolio Services Managed Account Division in 2000, Chris moved permanently into this division serving as Manager of Managed Account Operations. His role is to support many of functions associated with in-house managed account operations.

Chris is a 1989 graduate of Georgetown University.


Biographies

DAVID G. REINHART The Bank of New YorkVP - Separate Account Services

In his role as Vice President of BNY Separate Account Services, Mr. Reinhart is responsible for developing new business opportunities with investment managers seeking to outsource their multi-sponsor back office operations for separately managed accounts and/or develop a platform through which they can distribute product directly. Dave has been in the financial services industry for 16 years. His prior firm, EMAT (Electronic Managed Account Technologies, Inc.), was acquired by The Bank of New York in October 2002. EMAT was a start up in 2000 and Dave was responsible for the firm’s initial marketing efforts and business development. Prior to EMAT, Dave worked as a trader of mortgage-backed securities for BankAtlantic in Ft. Lauderdale, FL, Eastern Mortgage Corporation in Boca Raton, FL, Meridian Securities Inc. in Ft. Lauderdale, FL, and Meridian Mortgage Corporation in Wayne, PA. Dave is a graduate of The Pennsylvania State University.


Biographies

DONALD A. FOBERGPhoenix Companies – 18+ years totalPhoenix Investment Partners – last 11 yrs

Initially responsible for technology and infrastructure from mainframe through distributed computing environments across Life, Annuity and Investment company operations from 1984 through 1998.

Responsible for strategic planning and technology related to investment company operations and service since 1999.

Sponsored an STP readiness review of all partner investment operations in 2001/2002. That review revealed opportunities for improvement. As a result, a review of Managed Account Operations and technology was initiated.

The Managed Account Operations review validated that multiple platforms and back office operations provided the same inter-partner service. It also documented process, procedures and in-place technology. Our focus was to identify which technology platform would suit the firm’s strategic purpose. In addition to in-place technology, other vendor offerings were reviewed as part of a corporately administered program.

technology challenges of supporting managed accounts

Documents