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

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

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.

“With all the risk on the table today — uprisings in the streets, midnight votes — all investors are nervous,” says Chris Davis, co-author of UMAs Made Simple and managing director at UMA provider GlobalBridge.

“And with live coverage on the news networks, you’ve got to have the tools available to inform your clients what their exposure is and why you’re making the trade tomorrow or not,” he adds.

Once-passive clients demand immediate answers

In fact, the industry gurus at PricewaterhouseCoopers recently polled wealth management CEOs and discovered that just about everybody’s clients are second-guessing their advisors more than ever.

As PwC puts it, the global financial crisis and Wall Street’s latest round of scandals changed the DNA of the rich, leaving even families that once were blissfully uninterested obsessing over performance and risk.

When the markets are humming along, these clients now covet exposure to every exotic investment strategy they read about in the Wall Street Journal.

And when things get scary, they demand to know immediately whether their trust is invested in whatever it is that’s crashing today — even if it’s buried in one of those alternative asset classes.

No wonder wealth managers are scrambling for a way to simultaneously incorporate a wider universe of investments into their clients’ portfolios and keep better track of every share of stock on a minute-to-minute basis.

That’s where the marriage of third-party investment ideas and unified managed account structures is shaping up as a game changer, says Jerry Michael, CEO of overlay management Smartleaf.

In an overlay system, security selection is outsourced to best-of-breed investors whose ideas are “overlaid” on the portfolio, but all assets remain held in house.

“Overlay management systems like Smartleaf enable wealth managers to respond with unprecedented speed to macro events,” Michael explains.

“They can implement asset allocation or security selection shifts across their entire book of business in one day.”

Chris Davis of GlobalBridge agrees that overlay management and UMA structures give advisors the tools they need to evaluate their clients’ exposure in an emergency and react accordingly.

“What we’ve found is that our managers do a fantastic job on the upside, but managing downside risk is more important,” he says. “The first rule of the markets is ‘don’t lose money.’”

Not optional in today’s environment

Even if your clients aren’t watch late-night CNBC and wondering how developments in Tokyo will play out in their heirs’ quality of life, 21st-century markets mandate that the advisors themselves have the ability to move fast when needed.

On a bad day, that means liquidating investments that suddenly deteriorate below the parameters set forth in the trust paperwork and are unlikely to ever recover.

And even on the days when the media get ahead of the fundamentals, you need to be able to see what’s at risk.

“If you are waiting for your month-end or heaven forbid, quarterly statement, I guess it becomes buy and hold at that point,” David says.

Volatility is also becoming a bigger personal concern for money managers.

A full 62% of all the professional investors Northern Trust talked to a few months ago say the markets are going to get even choppier in the near term.

And 36% say they’re more risk averse than they were last year.

In fact, between unrest in the Middle East, the recent oil spike and the prospect of deeper inflation ahead, Northern Trust says bearishness on the global economy has climbed to levels not seen since the 2008 credit crash.

Some wealth managers are raising their allocation to equities in order to keep their clients ahead of inflation.

Others are chasing commodities with the goal of diversifying client portfolios away from what they see as a lackluster stock market.

Meanwhile, there are a lot of managers out there just trying to maintain course and add value for their clients over the long haul.

That kind of difference of opinion in the markets is exactly what drives volatility and creates winners and losers, but here too, unified account structures give the firms that use them a long- and short-term edge.

In the short term, UMA management provides both speed and the ability to manage risk across increasingly sophisticated portfolios of foreign stocks and debt, real estate and everything else out there.

And in the long haul, the fact that these account structures allow advisors to be proactive — harvesting tax losses on the fly, for example — as well as reactive should never be underestimated.

“This may be the single most valuable element of overlay,” says Jerry Michael of Smartleaf.

“It enables firms to ensure that every investment portfolio incorporates the best thinking, without sacrificing high levels of customization and tax management,” he sums up.  “For our clients, this becomes a core competitive message.”

Scott Martin, senior editor, The Trust Advisor Blog. Steven Maimes contributed to the research.

Permalink: http://thetrustadvisor.com/news/confidence

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

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