A “Trifocal” View of the Managed Accounts Industry and DTCC’s MAS

DTCC is currently testing its Managed Accounts Service – both the hub and Web-based portal created for investment managers – with UBS Financial Services Inc. and 15 managers, including Thornburg Investment Managers. WMS Quarterly recently sat down with UBS’s Marianne Leone, executive director; Thornburg Investment Managers’ Randy Dry, managing director, Institutional Group; and Christopher Davis, president, The Money Management Institute, to discuss the future of MAS, as well as the state of the industry. What follows are three separate interviews from these pioneering advocates for a new model of operational efficiency.

Interview with Marianne Leone

WMS Quarterly: UBS has committed to using the DTCC MAS and MAS Portal. From a sponsor perspective, what were the key reasons your firm decided to become an early tester of MAS and the MAS Portal?

– Marianne Leone, UBS Financial Services

Leone: UBS is committed to the belief that our firm, our clients and the industry will always benefit by the standardization of systems and practices.

WMS Quarterly: What are the compelling benefits of MAS and the MAS Portal?

Leone: For managers, it is the ability to combine numerous input sources into one standardized view or workflow that enables the reduction of headcount, errors and training issues necessary to support multiple sources and business practices. Automating and standardizing a process suitable for all or many of their sponsor partners ultimately will reduce operational costs for these firms.

For the sponsor firms, the primary benefits are the ability to integrate the Portal into their Workflow in a more automated manner and eliminate emails and conversations external to the existing process. The MAS Portal introduces a concept of the complete lifecycle of the transaction, which clearly enables both sides of the equation to track each and every step of the process.

Furthermore, it provides for a standard in exception processing that expedites the approval of accounts that have been transferred from one sponsor to another via the ACATS system.

WMS Quarterly: In your view, what is the next logical stage of development for MAS?

Leone: The addition of dual contracts to MAS and the MAS Portal would streamline a process that plagues both managers and sponsor firms, because the current process is heavily reliant on paper flow and lacks practical automation. The benefits of this automation would truly be realized if we standardized the approach and methodology.

WMS Quarterly: From a sponsor’s perspective, what other operational inefficiencies should the industry be addressing?

Leone: UBS sees an opportunity to work with DTCC and the industry to enhance connectivity among various NSCC-supported systems, such as ACATS and Fund/SERV® and related communication alerts among broker/dealers, money managers and mutual fund companies for accounts in the ACATS* process. By doing so we, as a community, will benefit from a standardized communication that will help eliminate delays in transferring positions and trading for these client accounts.

WMS Quarterly: You recently said that operations are not a differentiating factor for sponsors and investment managers. What’s needed to bring the industry to a point of wide adoption, the way the mutual funds community did some 20 years ago with Fund/SERV, which allowed it to grow to a peak of $12 trillion in assets?

Leone: One would think that the frequent movement of financial advisors from firm to firm and the tremendous market swings experienced in the fourth quarter of ‘08 and first half of ‘09 – which catapulted our termination, withdrawal and account transfer volumes – were enough of an incentive for the industry to take pause and seriously consider the need for change. That said, as with Fund/SERV, which grew exponentially after a slow start, I expect that a few firms, with foresight, will commit to MAS, and the rest of the industry will naturally evolve to the platform, which represents a process that’s far superior to the way we’re communicating managed-account information today.”

*ACATS is an acronym for NSCC’s Automated Customer Account Transfer System. It is a central processing system that provides for the timely transfer of customer accounts among participant financial institutions.

Interview with Chris Davis

WMS Quarterly: At the time DTCC and the MMI began their partnership, what issues were your organization attempting to solve, and have those issues been solved?

– Chris Davis, MMI

Davis: We started out with the goal of attacking industry-wide operational inefficiencies relating to communications between investment managers and sponsors. This was the most pressing issue at the time. And while there is still more to do, we believe we have succeeded by giving the industry a solution that can be implemented, which UBS and some of our largest investment-manager member firms are currently doing.

WMS Quarterly: How did the MMI’s strategy for attacking this inefficiency develop?

Davis: One of the first things we did was to engage Deloitte to conduct a study of the industry and to answer, in particular, one critical question: Is the industry on the proper path to operate efficiently – and with scale – as we grow assets aggressively? Deloitte came back to us and said, “The answer is no.”

We also asked Accenture to help us examine next steps. How sponsors communicate with investment managers is unique to each sponsor program. That creates a heavy burden for managers. Accenture recommended that the MMI develop a set of standard communication message units – communication protocols – that would be specific to the industry but not unique to a sponsor firm. We then asked our Standards Committee to review Accenture’s recommendations and begin to create open industry standards using XML. That’s been completed, and we released the standards to the industry in 2009.

WMS Quarterly: Accenture also recommended that the industry have a choice – to use those message units through a centralized hub, such as DTCC’s Managed Accounts Service, or to communicate directly. Would you comment on that?

Davis: Accenture felt it was important to make the process of developing and publishing a solution open and accessible to all industry participants. The MMI Managed Account Solutions Standards (MASS) Committee has focused on developing a standard message protocol but not a platform for communicating the messages. The board had always envisioned that the messages could and would be used in many ways by the industry. DTCC took the first step and is using the messages for an industry-scale solution through its MAS hub and Web portal.

There are many reasons to support the DTCC solution, but one that resonates with our Board is what I call “the traffic cop.” If a firm attempts to send a message that doesn’t comply with our standards, the hub will reject it and return it to the sender. This process protects the integrity of our standards.

DTCC has a long history of ensuring that all parties involved in a transaction follow established rules and guidelines in order to make a process run as smoothly and efficiently as possible. This is an important part of the role they are playing in the managed solutions industry.

WMS Quarterly: In what stage of development are the messages now?

Davis: The MMI MASS committee has made great progress in publishing messages and improving them, as well as taking on new challenges like model portfolios. With UBS making a commitment to the standards and now testing the MAS hub and portal along with their top managers, this has given us an opportunity to make significant improvements in our first release and expand the number of messages being published. As a result, we’ll all end up with a much better solution.

WMS Quarterly: What are growth projections for the industry, and can they be achieved under its current operational state?

Davis: We expect the industry will resume an aggressive growth rate in 2010 as the nation’s economy recovers, particularly because advisors will be able to address client concerns by expanding portfolios to include exchange-traded funds, unified managed accounts and mutual-fund advisory programs. And also because they’ll be able to open and administer new accounts faster and easier using MMI’s communication standards and DTCC’s central facility to send and receive messages.

WMS Quarterly: How do you see MAS and the MMI’s message standards being leveraged to further support the industry?

Davis: We currently have subcommittees of the MASS Committee working on model messages, trading, reconciliation and billing, and they’re all making significant progress on delivering solutions that will solve operational challenges in these areas. This is a rapidly changing industry, so the Committee will continue to develop standards so our members can efficiently serve their clients’ needs.

We also look forward to continuing our partnership with DTCC and seeing the MAS hub and Portal grow into a full-scale industry solution.

WMS Quarterly: Early in 2009, the MMI sponsored a white paper on the need for the industry to address new investor strategies, such as the spend-down of assets and guarantees of retirement balances that combine insurance and managed accounts. Do you believe this will be the key focus for the next generation of wealth solutions, and why?

Davis: Absolutely. You know the saying, “Demographics are destiny.” As Americans age and as boomers reach retirement, they, and the managed accounts industry, will have a tremendous interest in bringing security to retirement-income management. As portfolios move from the build-up to the spend-down phase, we’ll see a host of products and portfolios with insurance-like features to address the needs of a massive aging population.

In fact, we’re already seeing our members doing this with early-stage, first-generation product development. The demographics point to enormous opportunities.

Interview with Randy Dry

WMS Quarterly: How do you see the MAS hub and Portal changing your operations when more sponsors become adopters of DTCC’s solution?

– Randy Dry, Thornberg Investment Managers

Dry: What we hope to get out of the MAS Portal are efficiencies similar to the mutual fund industry’s experience with Fund/SERV and NSCC’s other services. One key advantage would be reduced liability. By contract, we are obligated to act on a client instruction within two business days. That’s hard to do when you’re chasing down missing faxes and emails or accidently deleting instructions on new accounts, deposits or withdrawals. Standardizing operational tasks would make for a much more efficient workflow. In addition to that, it will allow us to grow without adding staff and free up staff to handle higher volumes.

Of course, this requires commitment and participation across the industry, and we’re optimistic that it will happen.

WMS Quarterly: What prompted Thornburg to become an early tester of the MAS hub and Portal?

Dry: We saw a lot of upside to it. For us, it’s replacing an existing process, not adding to it. So, being involved as an early adopter allows us to capitalize on the efficiencies gained by using the service.

WMS Quarterly: Have the industry’s operational inefficiencies been particularly problematic for Thornburg?

Dry: I don’t think we’re any different from most managers. We all have to work with sponsors’ individual platforms and ways of doing business. However, if we can improve and standardize the operational environment, then we can decrease our liability and work on improving our margins over time. And so we’ll continue to advocate for standard-izing the business. We’ve seen how much benefit there was to taking that route in the mutual fund space; if you layer that on top of the managed accounts business, there’s a lot to gain.

WMS Quarterly: With the advent of model messaging and other types of managed accounts being developed, are we witnessing the end of the traditional separately managed account?

Dry: Not by any means. UMAs and other types of managed accounts are becoming very popular, but the actual dollars invested in them are still quite small in comparison with investments in traditional SMAs. There certainly are benefits to end clients who have UMAs – one account, one tax form, and so on. But from our perspective, it’s equally important to consider the “value add” that an investment manager brings to the table. In Thornburg’s case, it’s a strategy that includes quite a large number of American Depositary Receipt orders which we can execute overnight in foreign markets. UMA platforms don’t yet have the infrastructure in place to do that.

WMS Quarterly: With the economic turmoil of the past year, customers’ demands and expectations have changed. How are you meeting that challenge?

Dry: Clients and advisors are looking for good absolute – and relative (to a benchmark) – performance; that is paramount. We believe that providing good performance will help build our business and in fact, it did, in both 2008 and 2009 – two very different markets.

WMS Quarterly: From an investment manager’s perspective, what should the managed accounts industry be tackling next?

Dry: With fee compression and the need to trim expenses across the board, you’ve got to take a look at being as efficient and streamlined as you can. A solution like the MAS Portal will allow advisors and managers to do just that.