Posts Tagged overlay management
Networking and Tech Gadgets Attract Wealth Advisors to Big ABA Trust Convention This Week
Posted by Scott Martin in News on March 11, 2012
American Bankers Association wealth management and trust conference brings cutting-edge technologies together with the industry’s decision makers under the banner of building stronger client relationships and enhancing business.
In a few days, an elite 500 or so bankers and other financial professionals will be in Scottsdale, Arizona hammering out the future of high-net-worth advice, and open architecture investing will be front and center.
The American Bankers Association is the elite trade group representing the industry. Just attending the three-day conference can count as a full year of continuing education credit for certified financial planners.
And on average, the people there manage well over $1 billion apiece.
With that kind of firepower packed into one place, the talking points are likely to set the tone for wealth managers and trust companies over the next year.
The “holistic” era is here
If the list of exhibitors is any guide, this is the year giants and niche players alike aggressively roll out solutions that give advisors a 360-degree view of their clients’ finances while keeping the assets under direct supervision.
“Our goal this year — as always — is to give trust companies the tools they need to be as effective, profitable and client-centered as they can be,” says Jonathan Flitt, director of Citibank’s Investor Services unit.
Flitt’s team will be coaching the crowd at booth 312 how true front-to-back open architecture solutions are finally available and already transforming the business.
The linchpin here is Citi’s “unified managed household” structure, which aggregates data across all accounts- — trust and brokerage, throughout a client family’s financial life — and then gives the advisor the keys to that fully loaded car.
Naturally, a clearer view of the data means more efficient wealth management practices.
And as these solutions move toward the center of the industry, Flitt says early adoption can get firms ahead of both the learning curve and the earning curve.
“Wealth managers who are already thinking in these terms can definitely grow their assets at the expense of competitors who aren’t,” he says
Once niche products, the unified managed account structures that make those efficiencies possible are already hitting the mainstream — and again, there will be plenty of UMA vendors exhibiting their wares at the ABA conference.
The proposition driving advisors to adopt UMA structures is simple. By importing the best investment ideas the industry has to offer, even a small institution can give its clients best-of-breed portfolio management without breaking the budget.
And unlike conventional “separately” managed accounts that export the assets to the third-party managers to trade, UMAs let a trust company or other fiduciary retain direct custody.
The money doesn’t move. Only the investment models come in to be “overlaid” on your client’s wealth.
One product they’ll be talking about in Scottsdale is Smartleaf’s model distribution service, which promises to streamline both sides of the overlay relationship.
“This will make it much easier for wealth managers to bring in outside models, track the ideas they’re using and automatically receive updated models as they change,” says Jerry Michael, the company’s present.
Once the web-driven version of this product rolls out, you can think of Smartleaf as the “app store” of investment strategies for participating advisors to load with all the third-party models they need.
As the “idea store,” Smartleaf handles the billing and the bookkeeping. And because participation is open to any manager willing to sign up, the architecture is completely open.
Naturally, the relationship can go both ways, Michael tells me.
He has a few customers who push one or two in-house specialty strategies back out for other firms to buy while importing the models that run the other allocations in their clients’ portfolios.
As a result, he says, if the flows work out right, that push/pull approach to overlay management can become both a cost-saving measure and a bona fide profit center — a promise few wealth managers can pass up.
Automating the back office
Smartleaf is also deepening its own “holistic” capabilities to let participating advisors automate basic tax strategies across third-party allocations, ensuring that the right shares are sold to match capital gains to losses.
Automation is also in the air in the trust accounting space.
Infovisa is coming off a record-breaking sales year and is eager to demonstrate its new automated account review and risk management systems at the ABA show.
“Prospective clients who currently use similar products offered by our competitors have also told us it is more functional and user-friendly,” says Mike Dinges, the company’s president.
One edge here is integration. Infovisa runs those risk management tools right in the accounting platform, eliminating the need to run two applications at once and pass data between them.
This, in turn, cuts down on the amount of babysitting that staff have to do and lets the automation actually save labor instead of creating new work.
And as for 2013, Dinges tells me he’s got a true industry smash moving toward the launch pad: mobile applications.
By this point, just about everyone in the business who wants a tablet computer has one — and if not, vendors like Citi are giving iPads away.
But even in high-powered groups like the ABA, mobile interfaces have lagged the hardware. Next year, once the account structures are in place, that may finally change.
Scott Martin, senior editor, The Trust Advisor.
Permalink: http://thetrustadvisor.com/news/aba
Why Did LPL Financial Acquire Fortigent?
Posted by Scott Martin in News on January 8, 2012
When the biggest independent broker-dealer bought Fortigent, industry gurus heralded the deal as a game changer for advisors everywhere. Here’s why.
Many commentators have described LPL’s purchase of investment management outsourcing firm Fortigent as a straightforward bid to muscle into the high-net-worth market.
After all, some of America’s biggest advisory firms rely on Fortigent to help them run about $50 billion in client accounts.
But while Reuters was quick to characterize this deal as a naked grab for “higher-end clients,” it’s lot more strategic than bolting on high-quality assets.
Remember, LPL is best known as a commission shop, but it’s already an unheralded but unarguably massive player in the RIA space as well.
Their nearly 13,000 advisors have accumulated $96 billion in fee-based AUM. That’s more than the top 20 fee-only advisory firms in the RIA Database, put together.
Dig down, and it’s less about the assets than the architecture. And the writing’s been on the wall for months.
All the keys to the open architecture platform
When we first heard about the Fortigent deal, we thought back to April, when LPL paid $20 million for relatively obscure software provider Concord Wealth Management.
Concord’s technology helps financial firms that use the “overlay” approach manage their relationships with third-party investment managers.
The outside managers pick the securities, the client-facing advisors pick the managers and software like Concord’s keeps everything straight.
And as it happens, Fortigent picks the managers — or at least does the research and makes recommendations on who’s good and who’s not worth bothering with.
Now that LPL owns both companies, it has all the pieces it needs to offer affiliated advisors a true “outsourced” asset protection platform even though all the important functions can be handled in house.
Concord provides the back office support from proposal to billing. Fortigent can populate the platform with its universe of pre-approved managers.
And in theory, LPL reps can spend a lot less time building client portfolios themselves — and a lot more time keeping existing clients happy while prospecting for new business.
“LPL is now unique as an outsource organization,” Aite Group analyst Sophie Schmitt told me back when the Concord deal closed.
Now, LPL is obviously capitalizing on what she calls “intense interest in open architecture solutions.”
“This creates plenty of new expansion opportunities,” she explains.
This might be why Ron Carson, LPL’s top producer, recently brought his $3 billion in client assets back to the firm after leaving back in May.
Carson left because he wanted to run his own fund. A fully integrated overlay system can give him the next best thing by letting him distribute his “model” portfolios to every other advisor out there.
When he came back to LPL a few weeks ago, he said the firm was working on “one of the most exciting technologies I’ve anticipated in a long time.”
A completely in-house open architecture platform definitely seems to fit that bill.
Custody is part of the equation
LPL can also package Fortigent’s manager research to sell back to Concord’s bank-and-trust-heavy clientele.
At the time, LPL raised eyebrows by touting Concord as its toehold in the personal trust custody space, but the synergies weren’t obvious.
LPL is already a major player in bank-resident brokerage services through its UVEST subsidiary, which runs the investment programs for 300 banks and credit unions and supports about 2,300 advisors.
With Fortigent’s managers on the table, these institutions can now outsource their entire investment operation — including the trust portfolios — to LPL and its affiliates.
That’s a sales pitch that cost-conscious bankers are going to be a lot more eager to listen to, especially if it means more time for their in-house personnel to court new accounts.
“It’s obviously very beneficial from a cost savings perspective,” Schmitt says.
Since Fortigent supports unified managed account (UMA) structures and various alternative asset classes, it seems a natural fit as an outsourced solution for trust portfolios in particular.
With a UMA structure, the introducing institution never gives up custody of the underlying assets, but instead simply imports and “overlays” the third-party models to determine how to invest its clients’ wealth.
This overcomes some of the traditional stumbling blocks of separately managed account (SMA) approaches in the trust space.
Meanwhile, the asset-class-neutral UMA structure ensures that real estate, private equity and any other “legacy” alternative assets held in trust can coexist with stocks, bonds, mutual funds and anything else the investment managers and grantors desire.
Which overlay provider is next?
With all these opportunities opening up, LPL executives may not even feel the need to expand much into the high-net-worth advisory market in the near term.
After all, that’s what its independent reps are for. And the banking opportunities look even more seductive — if you connect all the dots.
The question is really how much LPL paid for Fortigent. We’ll find that out in a few months when the company reports its next quarterly numbers.
But if the $10 billion on Concord’s platform brought a price of $20 million, Fortigent — which runs five times that much money — may have cost at least as much.
Will other overlay vendors become takeover targets? We’ve been covering this space for awhile, so you can get a sense of some of the players here.
Scott Martin, senior editor, The Trust Advisor. Steve Maimes and Jerry Cooper contributed to the research.
Permalink: http://thetrustadvisor.com/news/fortigent
Confidence in Banks Falls to New Low; Farming Out Investment Decisions to Top Advisory Firms Seen as Best Way to Restore Trust
Posted by Scott Martin in News on June 26, 2011
UMAs offering best of breed managers are now in fashion for bank distribution channels while bank crisis refuses to go away.
According to a new poll by Gallup released last week, 36 percent of Americans now say they have “very little” or “no” confidence in U.S. banks, the highest percentage on record since Gallup first started tracking that data.
Safe to say it’s been a tough year in the banks’ public relations departments. The nation’s five largest mortgage firms — Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial — have been the focus of a federal investigation into whether they defrauded taxpayers in their handling of foreclosures.
All of this coupled with market turmoil are good reasons for UMAs (unified managed accounts) to restore image and help clients properly diversify, rebalance portfolios and soothe nerves.
Investors scarred by one of the worst decades in market history are still finding plenty of reasons to be a little edgy, and they’re leaning harder than ever on their advisors to ease their nerves.
Experts Say Concord Clients Likely to Jump as LPL Warms Up for New Trading and Custody Business
Posted by Scott Martin in News on April 30, 2011
Giant brokerage firm claims acquisition will be business as usual for overlay provider’s legacy clients. Analysts say at least some defections are likely. Competitors are already on the move.
When the parent company of independent brokerage firm LPL Financial announced last week that it is buying overlay technology vendor Concord Capital Partners, the brokerage community cheered.
But the mood in the banking channel was a lot more subdued.
Concord had built its business — about $10 billion under administration for 70 institutions, according to a company press release – on the proposition that its investment platform was completely free from any whiff of preference for one wealth manager over another.
(For an overview of how overlay UMA systems work, click here.)
Thankfully, LPL has no proprietary product to push at Concord’s clients, but it has aggressively built out its clearing and custody business over the years.
Once the deal closes later this year, Concord will be formally tied into that platform at least on a corporate level. That’s enough to get some of its customers reviewing their options, competitors say.
“Some may have issues down the road with how the new parent company wants them to handle their trust assets,” says Joseph Mrak, CEO of overlay firm Folio Dynamix.
“It all depends on how LPL integrates the existing clients into its own platform,” he adds.
Custody is the key here
Independent custody has been one of the selling points of the overlay management approach, and Concord may have lost that, whether LPL has proprietary funds to sell or not.
“Concord’s big advantage is that they’ve been independent with no requirement to use their trading and custody providers in order to do business,” says Kelly Coughlin, CEO of competing overlay firm GlobalBridge.
“Now that LPL is on the scene in order for them to harvest true value from this acquisition, they’re likely going push trading and custody arrangements with LPL, perhaps as a condition of doing business,” he added.
“Those arrangements could in turn translate into higher costs for Concord’s customers, potentially denigration of service and possible conflicts of interest,” Coughlin remarked.
Clients are owed the duty of best execution. In this case, LPL may not offer the best performance at the best cost with a sea of trading and custody vendors able to offer a better deal.
With an overlay system, trust companies and other institutions can farm out the job of determining how the underlying assets in an account are invested, but while investment ideas flow into the portfolio, the assets themselves stay right where they are.
This is especially valuable for fiduciaries, which have a regulatory obligation to have their clients’ funds under their control at all times.
Initially at least, LPL says Concord and its clients will continue on exactly as they have.
But in practice, anything can happen, says Sophie Schmitt, a senior analyst at the Aite Group, which covers the financial industry.
“We just don’t know yet what they’re thinking at LPL, but it is clear that they are absolutely looking to take these outsourced solutions to new markets,” she says.
LPL CEO Mark Casady might have tipped his hand in his company’s recent quarterly earnings call by saying that he’s “very excited about the cross-selling potential” that Concord provides his broker-dealer network.
“It creates new expansion opportunities, giving us the ability to custody personal trust assets for banks throughout the country.”
For new clients, that “cross-selling” may be welcome as a way to get an integrated one-stop wealth management, brokerage and trust services solution.
Sophie Schmitt, for example, suspects that LPL is going to use Concord as a way to tap into the mid-tier banks that are too low on the industry feeding chain to do all their investment management in-house, but high enough up the industry feeding chain to benefit from an outsourced solution.
However, Concord’s existing clients may not take kindly to having LPL services pitched at them, much less taking a back seat if regional or national competitors — banks on the level of Compass, Synovus and Capital One — are induced to climb aboard.
Naturally, trust service providers who liked being bigger fish in a $10 billion pond will end up gravitating toward partners that give them a better fit, Schmitt says.
Joseph Mrak isn’t gearing up to actively hunt these trust companies because he says Folio Dynamix is already a much bigger pond — but he expects other vendors to start wooing Concord accounts.
“This opens up the market a little for vendors like Fortigent and GlobalBridge,” he says. “Maybe even for us too. Maybe we can pick up a bit of the business in the Concord space.”
The triumph of open architecture
We’ll have to wait for future LPL earnings reports to find out how much they paid for Concord.
In terms of size and strategic value, Mark Casady has compared the deal to the $27 million acquisition of National Retirement Partners last summer.
At the time, that deal — which valued NRP at 63% its annual revenue — was widely considered overly generous.
But it also got LPL a toehold in the potentially vast retirement plan services market, and getting a similar toehold in the trust business is what industry observers say probably attracted the brokerage firm to Concord now.
“We’ve seen a lot of guys try to go after the trust space because there’s literally trillions of dollars there,” says Joseph Mrak.
“But it’s important that you know these markets, and they are not easy markets to get into. When you sell to independent advisors, you’re looking at more retail-style reps with a totally different customer base. Those guys are not trust officers.”
As those trust officers embrace open architecture solutions like those Concord and its rivals provide, the race for those trillion-dollar markets may only be heating up.
Two weeks ago, most of the brokerage trade publications didn’t even know what overlay investment management was, beyond some vague sense that it involved “open architecture.”
Today, this approach to wealth management is making headlines, and as bigger and bigger banks sign up, it will likely only get richer from here.
Scott Martin, contributing editor, The Trust Advisor Blog. Jerry Cooper and Steve Maimes contributed to the editing and research.
Permalink: http://thetrustadvisor.com/news/concord
Citigroup Adds Trust Services to Its UMA Platform
Posted by Scott Martin in News on March 6, 2011
Unified managed accounts no longer just “nice to have” but essential for trust companies looking to stay competitive. Citi in particular is working to take the UMA model to the next level.
This may be the year of the UMA as wealth managers embrace a high-tech approach that was considered too esoteric and complicated even a few months ago.
Back in August, we reported that unified managed accounts were not getting traction with advisors who considered these programs poorly documented and supported.
At the time, 80% of the advisors out there had no plan to integrate UMAs into their business.
But since then, several top-tier providers have gotten into the UMA space or deepened existing programs to make them more immediately useful to outside wealth managers.
Just this weekend, we saw UMA provider GlobalBridge launch an aggressive marketing program to advisors — mere days after Citigroup widened its UMA platform to support trust services, operations outsourcing and custody.
Throw in big moves over the last few months from Fidelity and TD Ameritrade on the RIA custodian side, and there seems to be a gold rush into UMAs building here.
Widening the space on both ends
As usual in the UMA world, a lot hinges on the definitions.
At the core, a unified managed account is simply an accounting solution that enables advisors to build a client portfolio out of securities from multiple asset classes and hold them on the same platform.
But more sophisticated UMA systems provide a menu of third-party investment ideas that advisors can then “overlay” on their client accounts.
The goal is to give clients access to the best investment ideas out there while letting their advisors stop spending a fortune to match the trades the best talent on Wall Street can come up with.
This is the flavor of UMA that Citi’s Global Transaction Services team says now makes the difference between a competitive trust industry and extinction.
“If technology was previously considered more of a ‘nice to have,’ Citi asserts that truly integrated wealth management is simply impossible without a cutting edge wealth management technology,” the company recently stated.
In fact, Citi now integrates trust management and custody into its established UMA platform to let advisors monitor and manage their clients’ wealth across all household accounts: taxable and non-taxable, held in trust and otherwise.
After all, as the trust officers that Citi talked to ruefully point out, the clients themselves are already operating out of a unified household-level perspective and want to make sure their paid advisors can spot inefficiencies across accounts faster than they can.
Jonathan Flitt at Citi tells me that the newly enhanced UMA is an obvious fit for private bankers in particular, since they’re most likely to have ultra-high-wealth clients who’d benefit from this kind of all-inclusive approach.
Meanwhile, on the RIA side, the mere fact that UMAs — with or without overlay — are rolling out at all is noteworthy.
Fidelity, for example, seemed almost grudging back in January when it added UMAs as an option for its high-net-worth clientele, largely as a tax planning strategy.
But while innovation is good, it seemed like a missed opportunity to keep the job of creating these unified portfolios “in the family” in the form of captive RIA Strategic Advisers.
TD Ameritrade, on the other hand, has promised that it’s happy to add third-party managers to its UMA platform if enough advisors nominate a particular strategy for inclusion. This is a true open architecture solution, and one that has the potential to earn the UMA approach the spotlight it deserves.
Scott Martin, contributing editor, The Trust Advisor Blog. Jerry Cooper and Steve Maimes contributed to the editing and research.
Permalink: http://thetrustadvisor.com/news/umaboom
GlobalBridge Launches “Unified Managed Accounts Made Simple” Campaign
Posted by Scott Martin in News on March 5, 2011
Trust companies and other financial service providers looking for a way to keep their clients happy and even cultivate new ones are finding it in the sweet spot between third-party portfolio management and high-tech account structures, says GlobalBridge CEO Kelly Coughlin.
“We firmly believe that this combination will, if used well, result in higher net profits,” he explains.
The problem is that until now, there was no concise guide out there to describe exactly what “overlay management” — the third-party investment strategies — and unified managed accounts (UMAs) do on their own, much less in combination.
We profiled Minneapolis-based GlobalBridge a few months ago. Since then, Coughlin’s team has been working overtime to develop a marketing platform that eliminates the jargon while spotlighting that sweet spot.
The first fruits of their labor debuted today at the ABA Wealth Management & Trust Conference in Miami Beach, where Coughlin and several other members of the GlobalBridge brain trust are staffing exhibitor booth 516.
“Unified Managed Accounts Made Simple” is unique in the industry for doing exactly what it sets out to do: describe what companies like GlobalBridge do and what the value is for banks, trust companies, broker-dealers and RIA firms that sign up. (Get a free copy HERE.)
Inside the Integrated UMA
A lot of firms are at the ABA conference showing off their overlay solutions. Even giants like Citi have entered the arena with new tweaks to their OpenWealth platform, which now integrates trust accounts into its overall view of each client family’s sometimes far-flung assets.
But to pare it all down to basics, overlay management is really a business process, Coughlin says.
Companies that join an overlay platform get access to best-of-breed wealth managers’ security selection and trading strategies — their “portfolio recipes” — and can then “overlay” or replicate the recipes in their own clients’ accounts.
These accounts are structured as UMAs. The back-office systems that give overlay managers the ability to monitor, adjust and support the UMAs are a technological solution, Coughlin says.
“A lot of providers offer some version of what they call ‘overlay management’ or a ‘unified managed account,’ but really lean one way or another,” he explains.
“The problem is that both categories have been thrown around so much that the terms have become practically meaningless.”
GlobalBridge cuts through the haze by branding its combined overlay UMA offering as the Integrated UMA.
It’s in the “integration” of the two that makes the GlobalBridge solution really interesting.
For one thing, the company’s UMA platform goes far beyond old-fashioned separately managed accounts in the sheer variety of asset classes and strategies it can handle.
And with the proprietary “three-dimensional” asset allocation model built into the platform, alternative assets are not only allowed but practically accepted as the 21st-century default — and truly integrated with conventional stocks and bonds to give advisors a real diversified portfolio, draw-down risk management, and dependable returns – thus the 3 D.
As a sample, GlobalBridge also culminated 10 years of work by unveiling five pre-optimized 3-D portfolio strategies today. These overlay portfolios — focusing on core, income, growth & income, global balanced and growth strategies — use the top managers on the platform and as the company points out, “back testing has generated extremely impressive results.”
Separating the wheat from the chaff
GlobalBridge also prides itself on the due diligence with which it vets every manager on the platform. This frees fiduciaries in particular from a lot of the cost of manager selection by ensuring that every name that comes up on the screen truly is “best of breed.”
The company extends that care to the financial firms it chooses to work with, Coughlin says.
Instead of chasing every bank or broker who comes calling, GlobalBridge performs thorough due diligence on would-be partners.
“If we identify there is a need and a match for our services, we pursue the relationship,” Coughlin explains. “Otherwise, if we can’t deliver what they need, we won’t waste their time..or ours.”
The courting process can take months because these relationships are more like marriages than short-term vendor partnerships.
“We want to build our business around clients that enjoy and have mutual respect with us, and each of us wants to make sure the other is getting value,” Coughlin says.
“If it’s a mutual thing, we all benefit and it’s going to be a very good long-term relationship. If it’s all about who can do it the cheapest, it may not be a good fit for anyone.
GlobalBridge has lined up a “backstage pass” tour of their platform — basically a VIP test drive — for those who want first-hand insight into the benefits of an Integrated UMA approach.
Less pain, more gain
Naturally, being able to tell a client that you have the best investors in the world pumping ideas into his or her portfolio is a huge competitive advantage.
Clients won’t be tempted to flee to the next hot manager setting up shop and it can even be a differentiating factor with which you can lure prospects.
As Coughlin notes, institutional and high-net-worth clients alike are already fleeing the wirehouses, so this is an opportunity.
Meanwhile, Coughlin mentioned it last time, but it bears repeating. Overlay management lets a financial institution outsource non-core functions — wealth management — to the experts, saving money and refocusing on core expertise.
Your in-house investment managers can focus on the value-added specialties your clients already appreciate, without having to stretch or buy their way into generic or crowded strategies.
And the trust officers themselves can get back to the job of managing relationships with grantors and beneficiaries, instead of trying to manage money.
Scott Martin, contributing editor, The Trust Advisor Blog. Jerry Cooper and Steve Maimes contributed to the editing and research.
GlobalBridge UMA Platforms Continue to Win More Trust Firms
Posted by Scott Martin in News on December 18, 2010
Trust banks and independents are flocking to the firm’s easy-to-use manager selection and monitoring as their preferred choice for UMA overlay management.
In an environment where financial institutions are grappling with the notion that you can be both too big to fail and too big to earn a decent profit, banks and trust companies alike are adopting unified managed account (UMA) overlay wealth management as the answer.
GlobalBridge, a Minneapolis-based UMA overlay solutions provider, has seen demand for its services surge as the logic of outsourcing day-to-day investment decisions in order to focus on client relationships becomes crystal-clear.
The company now distributes the money management expertise that runs $440 million in client assets for 65 banks, independent trust companies like Atlanta’s Reliance Trust, a few independent broker-dealers and even a number of advisory firms.
Most recently, the company added River Rock Asset Management to the list and is currently negotiating with several other potential customers.
Delegating non-core wealth management functions like trading and back off routines, manager due diligence and research is a big part of the modern strategic landscape for any trust operation, explains GlobalBridge CEO Kelly Coughlin.
“Successful firms in the industry are focusing on their core competencies and offloading the rest,” he says. “This is a common theme in modern business, but it’s more important now than ever.”
Specialization is the key
Globalbridge’s UMA overlay system gives clients the benefits of world-class investment ideas at a better price than its competitors — for both the investor and the firm applying the overlay.
As industry analyst Robert Testa of Cerulli Associates has pointed out, freeing trust officers from the responsibility of performing as “pseudo-portfolio managers” eliminates distractions and lets them focus on their core competency: managing relationships with trust grantors and beneficiaries.
But refusing to delegate may be strangling bank trust departments in particular. Bernard Garbo, publisher of Trust Updates, notes that trying to do everything in-house can have a serious negative impact on profitability in today’s financial services industry.
“The most profitable trust institutions are simply not full-service organizations,” he says. “They are generally focused on only two or three markets, whereas 90% of the bank trust departments take a full-service approach to as many as five or six key account categories.”
On the independent trust company side, overlay can be a competitive advantage by giving a firm with limited in-house proprietary wealth management expertise present an investment services profile that compares with its biggest white-glove rivals.
Here, too, specialization is the secret. An independent trust company or regional bank can still focus on differentiating its investment platform in one or two proprietary strategies — large-cap value, for example, or municipal bonds — without having to support everything other asset class under the sun.
In fact, in June, $70 billion Reliance Trust teamed up with GlobalBridge to co-develop and cross-sell overlay solutions into the RIA and independent broker-dealer channels.
By letting both Reliance and GlobalBridge focus on what they do best — trust and custodial services, on the one hand, and managed accounts on the other — the deal “puts both firms in a solid position to deliver industry-leading open architecture investment platforms,” said Reliance CEO Anthony Guthrie when the deal was announced.
The UMA advantage
While older forms of open architecture investment management — separately managed accounts or SMAs — have failed to catch on with fiduciaries unwilling to actually sign over the underlying assets to the outside managers, systems like what GlobalBridge offers take a more sophisticated approach.
Instead of SMAs forcing a bank or trust company to export client funds, these new products work on a unified managed account or UMA model that keeps the assets in-house and imports the expertise of third-party managers.
This expertise is then applied or “overlaid” onto the UMA assets, creating a mirror of what the outside manager would do with the money — but without ever giving up control of the funds.
The bank or trust officer chooses which managers to use and how to allocate the portfolio among their strategies — GlobalBridge has about 70 managers and over 100 separate strategies to choose from, for example.
Because the funds remain in-house in a UMA system, trust officers can monitor and tweak the models to reflect their in-depth knowledge of their clients’ situations and overriding wishes.
Tax efficiency and the ability to screen investments to comply with a trust grantor’s investment policy statement are only the tip of the iceberg here.
Integrated solutions like what GlobalBridge offers can streamline the work of “managing the managers” by as much as 75% or even more, ensuring that both compliance and the fiduciary duty to invest client money the best way available are satisfied.
That kind of cooperative approach is the heart of the overlay philosophy, Coughlin says.
“We want to build our business around clients we enjoy and have mutual respect for,” he says. “Each of us wants to make sure the other is creating value, not trying to find who can do something for the lowest price. It’s always got to be a mutual thing.”
Scott Martin, contributing editor, The Trust Advisor Blog. Jerry Cooper contributed to the editing.
Permalink: http://thetrustadvisor.com/news/globalbridge
Why Aren’t Overlay Providers Closing the Sale?
Posted by Scott Martin in News on August 7, 2010
Cerulli survey says wealth managers don’t understand and aren’t buying UMA overlay capabilities. One firm, Smartleaf, bucks the trend and continues to close deal after deal. Here’s why.
When industry research firm Cerulli Associates released its latest benchmarking report on unified managed accounts (UMAs), the headlines screamed that advisors just weren’t buying into these theoretically advisor-friendly investment vehicles.
According to Cerulli analyst Jeff Strange, less than half of the financial advisors he surveyed have ever used unified management accounts and roughly 80% have no plans to rely on UMAs more in the future.
“They still don’t understand why UMA is beneficial to their process,” Strange tells the Trust Advisor. “A big part of that is still just that the providers haven’t taken off the training wheels yet.”
While about $80 billion is now managed on UMA platforms, new flows have been stubborn to capture. Only $1.7 billion in new money came to UMAs in 2008 and while aggregate AUM in these vehicles jumped 70% in 2009, most of that growth was simple appreciation in a bull market year.
Overlay providers fire back
Statistics like that are frustrating for companies that sell UMA software and investment models on the premise that UMAs are better for trust companies, banks and advisors than either traditional mutual funds or separately managed accounts (SMAs).
Both UMAs and SMAs tap the expertise of third-party managers to build a customized investment portfolio. However, while an SMA exports the assets to the outside managers to run, UMA assets never leave the sight of the bank or advisor that landed the client in the first place. Instead, the UMA imports the manager’s expertise and applies it to the assets in what’s called an “overlay.”
Trust officers and other advisors can then tinker with the overlay to improve tax efficiency, balance out clients’ outside holdings or obey restrictions against investing in various types of companies—tobacco, for example.
While the combination of flexibility, best-of-breed investment models and custody of the underlying assets should be a win with advisors, most overlay providers still have well under 100 clients on their platforms.
But those narrow client lists—and the Cerulli data—disguise the fact that while the typical RIA may not be eager to sign up, the institutions that are adopting overlay approaches tend to be banks and other relatively big wealth managers.
While a vendor like Smartleaf may only have about 50 clients running its overlays, those elite four dozen institutions still manage about $31 billion in AUM between them. This effectively makes Smartleaf the leader in the bank UMA marketplace.
Most of our clients are banks now, says Smartleaf president Jerry Michael. And many of those banks are pretty big names like BB&T, BBVA Compass and, most recently, Bank of Hawaii’s $6 billion investment services group.
Scale is a big part of the UMA value proposition. Specialized vendors like Smartleaf (which provides the back office software that supports these accounts) and Placemark (which gathers the proprietary investment models) cater to firms that already have accounting systems, trading systems and the dedicated IT staff to keep them talking to each other.
Resellers like Concord Wealth Management and others, package and resell Smartleaf with enhancements into an integrated solution for smaller players like the archetypal independent broker fresh out of the wirehouse.
If you’ve got 100 clients, you can probably build them customized portfolios yourself. But as Placemark CEO Lee Chertavian tells me, going the overlay route looks a lot more cost-effective if you’re running $5 billion in 13,000 client accounts.
“Overlay management can be as simple as an accounting solution to combine separately managed assets or as complicated as a system that helps an institution make better investment decisions,” he explains. “We’re on the far end.”
The real buyers don’t need to be sold
Banks that have the scale and the sophistication to benefit from true UMA programs rarely need much of a sales pitch, Smartleaf’s Jerry Michael says.
“Often as not, they approach us,” he notes. “Firms with strategic objectives requiring change tend to see it as a must-have product. Firms looking for incremental improvement are more reluctant.”
The ability to bring in outside expertise while retaining ultimate discretion is especially attractive for trust companies and other fiduciaries, Michael says. Farming out the assets in an SMA approach rubbed too many banks—not to mention RIAs reluctant to “share” their hard-won clients—the wrong way.
“SMAs just didn’t work for banks,” he explains. “They like being fiduciaries. They wanted to remain fiduciaries, but they needed to open up their wealth management to outside research. This lets them have their cake and eat it.”
Of course, concentrating on the bank channel contains its own challenges. The only client Smartleaf has lost in its 10-year history was when Regions Financial bought Union Planters and threw out its UMA systems.
That’s true of the advisor channel as well. Jeff Strange at Cerulli acknowledges that much of advisors’ distrust for UMAs comes from the notion that overlays are not portable from one broker-dealer to another, and too complex for the typical independent operator to run on his own.
“You can take the mutual funds and the underlying securities with you, but the tax management and other features are not transferable,” he says. “Same with the specific mix of asset managers you have running the portfolio.”
For Jerry Michael, the important thing is clearing up the vagueness surrounding these accounts and what they do.
“I personally twinge when I hear the word UMA,” he says. “It’s too confusing.”
“There’s one type of UMA that’s really just a souped-up SMA that helps the institution monitor what the outside managers are doing in all the separate accounts. Then there’s what we do, where the outside managers’ brainpower is brought in to sit on that truly unified internal account.”
Scott Martin, contributing editor, The Trust Advisor Blog. Steven Maimes contributed to the research and the editing.
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Overlay Management Hits the Big Time Among Once-Stodgy Trust Companies
Posted by Scott Martin in News on July 10, 2010
New “overlay” technology puts sub-manager’s real-time performance on trust firms’ radar screens. Benefits include enhanced performance and less mistakes. Our survey reveals New Jersey-based Concord Wealth Management steals the show.
More independent trust companies than ever are relying on overlay management software to streamline their investment process. However, finding the right fit can be difficult if you don’t know exactly what you’re looking for.
“Self-described overlay vendors run the gamut,” says Robert Testa, an analyst at Cerulli Associates who covers the wealth management industry. “Some simply provide access to third-party investment models. Some provide a more comprehensive technology solution.”
At its most basic, an “overlay” is simply a model used to determine how a given account should be invested. In traditional separately managed account (SMA) structures, the money is actually delegated to multiple outside managers to invest, but in an overlay system, the assets—and the ultimate responsibility—stay together in a unified managed account (UMA).
The UMA approach made sense for trust companies like Alaska Trust, which bought an overlay system from Matawan, NJ-based Concord Wealth Management about a year and a half ago.
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Guide to Trust-Friendly Overlay Providers |
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Designs, develops and administers wealth management programs for financial institutions. 70 customers including Alaska Trust. Since 1975. |
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A leading global provider of information management and electronic commerce systems for the financial services industry. Many customers. Since 1984. |
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Wealth servicing innovation and platform technology modernization. 115 customers including Northern Trust. Since 1999. |
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Offers managed account platform services to trust banks and institutional investors. 90 customers including Reliance Trust. |
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Advisors for individual and institutional investors. Division of Natixis Asset Management. 30 customers including FundQuest. Since 2003. |
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Industry-leading provider of structured portfolio management and overlay portfolio management. Since 1987. |
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Investment industry’s leading overlay manager for enabling UMAs. 25 customers including Piper Jaffray. Since 1999. |
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Provides real-time technology platform for integrating portfolio management and backoffice functions. 40 customers including UBS Global Asset Management. Since 2001. |
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Source: Internal Research. |
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“We really felt that investment management had become a utility just like the electricity at your house,” says Matthew Blattmachr, who runs the Alaska Trust system. “But we didn’t want to outsource the actual management. We wanted to make sure those assets stayed in-house.”
Flexibility, customization
It took Alaska Trust about a year to pick an overlay vendor once they decided to make the change. After auditioning several platforms, they chose Concord because it offered the best combination of flexibility and a-la-carte pricing.
“We just wanted the overlay,” Blattmachr says. “Our backoffice already provides some of the other capabilities that go into an UMA solution. And we wanted to make sure we weren’t going to get a cookie-cutter solution.”
Cost was another factor. A Concord system starts at around $50,000, which can be relatively inexpensive depending on the number and complexity of the investment accounts a would-be customer is working with.
Robert Testa says that while other trust providers use similar criteria to find the best match, their motivations are often different.
“The bank trust departments in particular are looking to move away from proprietary asset management in order to streamline their operations and costs,” he says. “And some want to move away from the old stodgy image by offering more esoteric products.”
Developments in the larger accounting and compliance environment are giving some trust companies—banks and independent operators alike—a new incentive to consider switching to an overlay approach.
Trust officers looking for a way to break out investment fees from other expenses in the wake of Knight vs. Commissioner may need to change their accounting systems anyway, Testa says. “This presents them with an opportunity to offer UMA-style vehicles as part of the normal upgrade cycle,” he says.
A lower-cost solution
Depending on the exact solution a trust company picks, the long-term savings can be profound.
Just moving from a traditional SMA approach will provide access to the same institutional-level investment options at a lower price—not to mention cutting down on the amount of time and money it takes to manage the managers.
Many overlay systems also contain built-in due diligence and reporting functions that lighten the administrative load of coordinating with the underlying money managers. That’s especially attractive for a fiduciary institution that needs to ensure compliance with a trust account’s investment policy statement, but might not have the internal resources to keep one eye on the portfolio at all times.
In fact, there are overlay systems out there that let trust companies cut their fiduciary compliance costs by 75%.
“You can reorganize your staff,” Testa observes. “Bringing in a third-party solution relieves trust officers of the responsibility of being pseudo-portfolio managers and lets them go back to being full-time relationship managers.”
Finding a way to outsource the models while keeping the assets in-house was important for Alaska Trust for both fiduciary and client service reasons, Matthew Blattmachr says.
“A trust company can have a difficult enough time convincing clients to give us control of their assets without telling them that those assets would be managed by someone else,” he explains. “We didn’t think a lot of people would be receptive to that.”
Best of both worlds
To put this story together, the Trust Advisor team talked to a lot of other great overlay companies—the chart above lists a few of the top players out there—and each has its strong points. With about 70 clients, Concord is not the biggest shop out there, but it won points for giving independent trust companies like Alaska Trust a “best of both worlds” solution.
Most overlay vendors focus on either the RIA market or on the big banks. RIA specialists tend to provide more comprehensive systems that completely outsource the investment management piece, while those that mostly work with big banks often end up selling just the models and not the software that an independent trust company needs.
Trust companies often fall in the gap between the two models, says Roy Wheeler, who heads up business development at Concord. While they generally prefer to hire and fire their own third-party managers (like a bank), they often need technological support to make the process more efficient.
“On the trust side, they want the overlay, but they need to be the overlay manager,” he explains. “That’s where an overlay system can add value.”
Either way, business is booming. All the overlay providers we talked to say their client pipelines are packed with banks and trust companies, and some are looking at 75% to 100% growth over the next year.
It isn’t hard to see why. UMAs have been working their way through the RIA world for a few years now, and should represent a $327 billion market by 2013 according to data from industry research firm Celent.
Banks and independent trust companies have been relatively slow to catch on, but they’re moving in with a vengeance, Robert Testa says.
“Some of the vendors are very busy right now,” he explains. “Even trust providers often complain that they can move at a glacial pace, but this is where the industry gets going on the overlay front. This really is the way of the future.”
Scott Martin, contributing editor, The Trust Advisor Blog. Steven Maimes and Jerry Cooper contributed to the internal research.
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