As industry dialogue about separately managed account (SMA) platforms has shifted beyond connectivity to flexibility, providers are responding to asset managers' key question: "How can we profitably capture a piece of the SMA growth?" Assets in this type of structure are expected to exceed $1 trillion by 2008.
Managers' ability to connect with a variety of SMA sponsors - long perceived as the major stumbling block - is now a given, thanks to our growing familiarity with file transfer protocols and standard messaging types. The next big step toward operational efficiency will be the Money Management Institute's uniform file formats for communications between sponsors and managers.
Today, virtually any asset manager can acquire the software necessary to create a "shadow environment" that facilitates an all-encompassing view across accounts with all sponsors for strategy implementation, trade allocation, tax management, compliance and performance reporting. Rather than interacting separately with each sponsor and risking human error in the effort to consolidate the data manually, managers can now do their work across all accounts and depend on the software to push the right trades out to the right sponsor system.
For most asset managers, however, software and standard formats alone will not meet all of the challenges involved in building a profitable SMA business. Of greater concern today is the ability to scale the business on a shadowed platform that is flexible enough to include various asset classes without incurring prohibitive labor costs or creating delays that cause them to miss a market opportunity.
The market demand for fixed-income products raises a good example of asset managers' challenges. Formerly, they may have been reluctant to offer robust fixed income management through an SMA program for two reasons. One was the challenges created by the variety of the securities; different maturities, rates, call features and conditions make corporate and mortgage- or asset-backed securities difficult to service in volume. The second was a traditional fee structure that placed a higher value on equity management. Managers who wanted to include fixed income in their strategies often relied on simple, straightforward Treasuries or bond funds because they did not have the margin to go beyond these. As the Baby Boomers move into their retirement years, however, the demand for more sophisticated fixed income solutions within the SMA structure will increase.
Then there's the matter of various account structures. Multi-disciplinary accounts (MDAs), sometimes referred to as Multi-Style Portfolios (MSPs), are making the benefits of transparency and customization available to investors at lower account minimums. Another recent development, the Uniform Managed Account (UMA), creates an umbrella under which an SMA and other investments such as mutual funds and exchange-traded funds can sit, again for the client's benefit in terms of diversification, asset allocation and account management.
Performance reporting is another area where managers are likely to need ongoing assistance. While the CFA Institute's final revisions to the guidance statements on global investment performance standards (GIPS) removed some of the recordkeeping challenges that would have been imposed on managers in the draft proposal, managers still have to face these challenges in their SEC compliance and sales reporting.
With all these issues, how can managers make SMAs a growth engine? For all but the very largest firms, the answer likely lies in outsourcing the operational processes.
As you look for an SMA service provider, consider these questions: Does the service offer a fully shadowed environment that provides a consolidated view of your SMA business across all your distribution channels? Does the service include the front-, middle- and back-office functions you need, from account openings and reconciliation to performance calculations? Is the platform Web-based and fully secure? Will the package adapt to the way you do business day-to-day? Does the service include audited security pricing, corporate actions and security master file updates?
Other considerations include: Is the provider familiar with the MMI data standards and active in the effort to bring them to fruition? Can the platform handle MSPs and UMAs as easily as single-contract products? Can the platform automate the security set-up and handle complex fixed income instruments? How easy is it to add a new product or a new sponsor to the platform? Does the provider understand the dynamic compliance environment? Finally, are there any conflicts of interest inherent in their business model?
The right provider should start increasing the size and profitability of your SMA business almost immediately. Now is the time to align your business with a partner that will help you get the share you deserve.
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