Separate accounts management systems are cumbersome and inflexible, and could seriously undermine their long-term viability without much-needed reforms, according to a recent White Paper by Lockwood Financial Group, a financial services firm based in Malvern, Pa.

"It’s a very cumbersome administrative product that will never be able to handle volumes of business under the present structure," warns Len Reinhart, chief executive of Lockwood Financial Group, and co-author of the report.

A lack of basic standards is a major problem. "Each sponsor … is setting its own rules. It makes it very inefficient for the money manager, and when there’s inefficiencies the product's not as good," Reinhart said. The report argues that the present system creates overlap and redundancies in every tier --such as front-end/revenue-generating tools, supporting middleware/decision-making tools, as well as back-office tools.

Lack of portability is another major issue, according to Reinhart. He argues the system is inefficient for money managers looking for multiple custodial accounts, or for clients who want to change custodians. This only encourages the trend toward isolation. "Money managers are going to start creating their own products [by] picking a central custodian and selling them like mutual funds," Reinhart predicts.

The white paper also calls for a more open platform for trading executions Currently trades must be done in blocks, but in future they should be pooled and executed at the firm with the best price, Reinhart said. He argues an open platform would encourage more managers to get into the business, and increased competition would push prices down to mutual fund levels.

However, while they recognize the problems, some analysts do not think reforms are imminent. "We’re seeing firms moving in the opposite direction," said Erik Davidson, co-founder of Separate Account Solutions, a separate account platform developer, based in Carmel, Calif. He believes firms choose platforms with unique managers and approaches to help differentiate themselves in a crowded market. And most firms fear they'll lose assets if the products become more portable.

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