For years money managers in the business of providing separate accounts for affluent investors have bemoaned the lack of technology standardization at the leading brokerages. But a long-awaited breakthrough is in the offing: Smith Barney Consulting Group, the largest distributor of separate accounts, and its sister outsourcing company, Citigroup’s Global Transaction Services, have decided to adopt new message formats from the Money Management Institute, the industry’s Washington-based trade group, and transmit them through Depository Trust & Clearing Corp.'s new central communications network. That gives the standards a seal of approval and much-needed volume, which should encourage others to join.
Separately managed accounts have less than one tenth the assets that mutual funds have, but the vehicles have been attracting money at a far faster clip, bolstered by baby boomers seeking the tax efficiency that comes with direct ownership of securities and the cachet of investing with exclusive managers. Nonetheless, the lack of standardization has hurt SMA growth. When assets stood at $456 billion in 2003, consulting firm Financial Research Corp. predicted that SMAs would cross the $1 trillion mark by 2005. Yet as of December 31, 2006, the latest date for which figures are available, SMA assets stood at just $806 billion.
The new standards are expected to boost growth in SMAs, both by drawing new money managers into the business and by making it easier for banks and regional brokerages to attract managers. The standards comprise 23 plain-English descriptions of operational processes developed by the MMI. The trade group will release them as a technical blueprint, called an XML schema, that firms can use to program their systems. MMI head of operations Gary Jones likens the protocols to instructions that “turn the description of a house into an actual building.”
The standardization effort got off to a rocky start. In 2003 the DTCC developed a plan to address the industry’s operational headaches. But it was based on proprietary standards that would run only on its network -- and it was scuttled in part by technology provider CheckFree Investment Services, which had built a profitable business helping money managers connect to brokerage firm platforms. A breakthrough came in 2005, when consulting firm Accenture suggested that the MMI embrace open standards.
To flourish, though, the standards needed a big brokerage advocate. The five largest firms -- Smith Barney, Merrill Lynch & Co., Morgan Stanley, UBS and Wachovia Securities -- controlled 79 percent of the separate-account market and had little incentive to adopt a standard that would make it easier for others to enter their niche. Consultant Frank Campanale, who was once president and CEO of Smith Barney Consulting Group, says his former firm developed its own technology as part of its effort to woo the best managers.
“We were the easiest place for money managers to work,” he says. “This was good in terms of our market share but not good for the market overall.”
Campanale embraced the idea of standards several years ago, when managers began telling him that entering the SMA business wasn’t worth the cost. He concluded that the way to build Smith Barney’s business was to grow the entire market. But he left the firm in 2003, and it remained silent on standards.
Smith Barney’s position changed after Global Transaction Services, Citi’s funds services arm, launched an outsourcing service for asset managers in 2005. That move put Smith Barney’s lack of support for standards in direct opposition to the needs of GTS clients, which coveted the efficiencies that standards would bring. Now the two Citi divisions are collaborating: GTS is building a translator that will reside on DTCC’s hub and convert incoming messages from managers into Smith Barney’s format, then convert outgoing messages from the brokerage’s systems into the MMI standard. The translation will allow Smith Barney to keep its systems intact and avoid a technology overhaul. It’s an approach that other brokerages may also take, although none have said yet whether they will support the new standards.
Even if they do, more work remains to be done. Another burgeoning product lacking standards, according to David Gardner, a project director at DTCC, is the unified managed account, which combines mutual funds, exchange-traded funds and other securities. If coordination is more forthcoming than with SMAs, says Gardner, the industry just might be able to develop efficient systems from the start.
