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2003 NICSA Technology Forum
Technology Challenges of Supporting Managed
Accounts
Vincent ManningVenture Financial
Systems Group, LTD.
2003 NICSA Technology Forum
Why Are We Here?
• Separately managed accounts (SMA) held $399 billion in assets at the end of 2002 (Source: The Money Management Institute).
• SMA assets are expected to increase to $1 trillion by 2006 and $2 trillion by 2011 (Source: Financial Research Corp – “FRC”).
• More investors will turn to managed accounts over the next five years, cutting the ratio of mutual funds to managed accounts in half FRC).
2003 NICSA Technology Forum
Why Are We Here?
• Growth in SMAs driven by the attractiveness of individually customized, professionally managed products.– Tax efficient– Decreased investment minimums
2003 NICSA Technology Forum
Why Are We Here?
• Current technical and operational landscape is void of industry standards.– Analogous to mutual fund industry in the early
1980s.– Until recently, industry power has been concentrated
in the hands of a few sponsors and systems providers.
2003 NICSA Technology Forum
Agenda
• Introductions• Industry Primer• Managed Asset Market Place• In-House Servicing• Outsourcing as an Option• Developing a Multi-Manager Strategy• Q&A
2003 NICSA Technology Forum
Panelists
Roger GregoryDST International
Chris FlynnMFS Investment Management
Dave ReinhartThe Bank of New York Separate Account Services
Donald FobergPhoenix Investment Partners
2003 NICSA Technology Forum
The Players
• Wirehouses/Sponsors– Top 5 control over 70% of the assets (FRC)
• Investment Managers– Top 10 control 35% of AUM (FRC).
• Technology Platform– CheckFree APL, IDS, Advent, DST, FIN
• Customization Tools– LifeHarbor, SoftPak, Upstream, Parametric,
Placemark, Tamarac, Smartleaf, BTA
• Outsource Providers– BONY, Mellon, State Street
2003 NICSA Technology Forum
The Problem: Technical and Operationally Inefficient Marketplace
Portfolio Manager
Model A
Model B
Model D
Program #1
Program #2
Program #3
Program #4
Program #5
Program #6
Program #7
Program #8
Logon
Logon
Logon
Logon
OperationsTeam
Model C
INTERFACE
Source: Cerulli Associates
2003 NICSA Technology Forum
FaxE-mailProprietary Link
FC
Sponsor
FC
IMIMIMIM
Sponsor Sponsor Sponsor Sponsor
IM
SponsorSponsor
FCC
FCFCFCFC FC FC FC
CCC C C
C = Custodian
The Problem: Technical and Operationally Inefficient Marketplace
2003 NICSA Technology Forum
The Problem: Technical and Operationally Inefficient Marketplace
Lack of standardization among sponsor systems presents significant operational hurdles and technical challenges.− Majority of major sponsors maintain proprietary
portfolio accounting and trading systems.− No standard technology protocols or workflow
processes across sponsor systems making it difficult to standardize operations across multiple sponsors.
− Operational complexity increases dramatically as the number of sponsor connections increases.
2003 NICSA Technology Forum
The Problem: Technical and Operationally Inefficient Marketplace
• Operational segmentation in the marketplace due to disparate applications will continue to place tremendous strains on operations.
2003 NICSA Technology Forum
Potential Solution: Industry Utility
• In a November 2002 white paper, The Money Management Institute (MMI) called for the creation of an industry utility to transmit critical communications between industry participants.
2003 NICSA Technology Forum
The Result: Technical and Operationally Efficient Marketplace
Industry Standards
Portfolio Manager
Model A
Model B
Model D
OperationsTeam
Model C
Program #1
Program #2
Program #3
Program #4
Program #1
Program #2
Program #3
Program #4
Program #5
Program #6
Program #7
Program #8
Program #5
Program #6
Program #7
Program #8
Logon
Logon
Logon
Logon
INTERFACE
2003 NICSA Technology Forum
The Reality: We Are Not There Yet
• The Money Management Institute is working to bring standards to the industry.
• DTCC is working to bring standards to new account openings process.
• New market participants offer expanded solutions along with pressure to standardize communications.
2003 NICSA Technology Forum
Ideal Operating System
• Communications– Seamless, secure electronic connectivity between all
parties.– Standardized electronic communications for all routine
operational tasks.
• Operations– Real time transaction fulfillment.– Easy to use and train.
Source: The Money Management Institute
2003 NICSA Technology Forum
Ideal Operating System
• Infrastructure– Internet-like disaster survivability.– Exponential scalability.– Open architecture.– Low cost.– Upgradeable.– Managed and owned by industry participants.
Source: The Money Management Institute
2003 NICSA Technology Forum
Managed Asset Market Place The Players, The Core Functions, The Tools
Roger Gregory
DST International
2003 NICSA Technology Forum
Managed Assets: The Players
• Wirehouse• Sponsor• Product Provider• Hybrid• Supermarket• TAMP
“the future ain’t what it used to be”
Yogi Berra
2003 NICSA Technology Forum
Managed Assets: The Players
• Wirehouse• Sponsor• Product Provider• Hybrid• Supermarket• TAMP
– Old-line large brokerage firms
2003 NICSA Technology Forum
Managed Assets: The Players
• Wirehouse• Sponsor• Product Provider• Hybrid• Supermarket• TAMP
– Wirehouses, firms distributing SMAs
2003 NICSA Technology Forum
Managed Assets: The Players
• Wirehouse• Sponsor• Product Provider• Hybrid• Supermarket• TAMP
– Asset managers, proprietary or outsourced
2003 NICSA Technology Forum
Managed Assets: The Players
• Wirehouse• Sponsor• Product Provider• Hybrid• Supermarket• TAMP
– Overlay managers, brand aggregators/consolidators
2003 NICSA Technology Forum
Managed Assets: The Players
• Wirehouse• Sponsor• Product Provider• Hybrid• Supermarket• TAMP
– Originally mutual fund distribution, now expanding product offerings
2003 NICSA Technology Forum
Managed Assets: The Players
• Wirehouse• Sponsor• Product Provider• Hybrid• Supermarket• TAMP – Turnkey asset management
program
2003 NICSA Technology Forum
Managed Assets: Core Functions
• Distribution Channel• Financial Planning• Product Offerings• Trade Execution• Custody• Product Provider
“if the world were perfect, it
wouldn’t be”
Yogi Berra
2003 NICSA Technology Forum
Managed Assets: Core Functions
• Distribution Channel – Banking– Insurance– Wirehouse– Regional brokers– Mutual Fund Complex
2003 NICSA Technology Forum
Managed Assets: Core Functions
• Financial Planning – Risk profiling– Asset allocation– Product selection– On-going monitoring
2003 NICSA Technology Forum
Managed Assets: Core Functions
• Product Offerings – Mutual Fund SMA– Annuities– SMAs– Self Directed Brokerage
2003 NICSA Technology Forum
Managed Assets: Core Functions
• Trade Execution – Mutual fund– Equity– Fixed Income
• Custody – Fully Disclosed/Omnibus– Self Clearing – Trust
2003 NICSA Technology Forum
Managed Assets: Core Functions
• Product Provider – Mutual Funds– Pensions/Institutional– Fund Wraps– SMAs– Hedge Funds
2003 NICSA Technology Forum
Managed Assets: The Tools
• Advisor Tool Kit• Interfaces• Decision Support• Order Management• Compliance• Trading Links• Back Office Processing• Reconciliation/Synchronization• Performance Measurement• Reporting
“you can observe a lot by watching”
Yogi Berra
2003 NICSA Technology Forum
Managed Assets: DST Solutions
• OpenPFA– Focused on firms with distribution channels
• MAP– Focused on product providers
• DataCenter Processing– ASP
• SS Message Hub– Message based interfacing, trading links
“The towels were so thick there I could hardly close my suitcase.”
Yogi Berra
2003 NICSA Technology Forum
In-House Servicing of Managed Accounts
Chris Flynn
MFS Investment Management
2003 NICSA Technology Forum
Discussion Topics
MFS’ Operational Model – Successes and Challenges
– Value Added Technology
* Highlighting: LifeHarbor DST – Automated Work Distributor
2003 NICSA Technology Forum
Operational Service Models
Internal Servicing vs. Outsourcing
• MFS’ Operational Model – Internal Servicing
– 27 employees dedicated to operations for 15,000+ accounts
New account setup, reconciliation , trading and support services– Cross Trained Staff – produces program experts
– Managed account platform fully integrated to all systems through out the firm – trading, sales, back-end compliance
– Operational support perceived as critical attribute to success
2003 NICSA Technology Forum
Advantages
Internal Servicing– Get to know your client– Ability to employ talent– Timely problem resolution– Can develop metrics to
prepare for growth – Ability to design
customized workflow
Outsourcing– Potential cost savings– Eliminate training costs
and concerns– Financial risks due to
operational errors are outsourced to third party
2003 NICSA Technology Forum
Disadvantages
Internal Servicing– Could be costly:
people, technology, infrastructure
Outsourcing– Potential to lose control
of effective client servicing
– Can lose ability to implement value added technology as needed
– Place all operational matters in the hands of a third party provider – reputation at stake
2003 NICSA Technology Forum
Value Added Technology
Trading and Account Monitoring Technologies
• Lifeharbor– Ease in Account Monitoring
Heat mapping and grouping of accounts for timely account monitoring and rebalancing
– Enhanced Trading CapabilitiesTax Aware, Compliance Module
– Risk Mitigation ManagementEnhanced User Security, Activity Auditing
2003 NICSA Technology Forum
Value Added Technology
Workflow and Imaging Technologies• Automated Work Distributor (DST product)
– Document ScanningOn site storage reduction, Easily obtain documents linked by account number
– Work Routing Through QueuesWorkflow designed to move account from opening to trading as well as maintenance
– Holdover AnalysisEnsures that items left in queues are moving through workflow timely
2003 NICSA Technology Forum
Separate Account Services – Outsourcing as an Option
Dave Reinhart
The Bank Of New York
2003 NICSA Technology Forum
Separately Managed Accounts Market Today
• Effects of Bear Market– Net Redemptions– Accounts Smaller– Sponsors Cutting Manager Fees
• Bear Market vs. Bull Market– Pressure to Reduce Expenses
Operations Technology Expenditures
2003 NICSA Technology Forum
Technical and Operational Challenges for SMA Managers
• Managing in Multiple Sponsor Programs means:– Multiple Custodian Interfaces
Trading Reconciliation
– Multiple Portfolio Management Systems Sponsor vs. Manager Provided Proprietary vs. Vendor Consolidated Reporting
– Multiple Ways of Doing Business Account Paperwork Procedures Advisor vs. Sub-advisor
2003 NICSA Technology Forum
Outsourcing Operations
• Not a New Concept for Investment Managers– Mutual Fund Services– Custody, Clearing, Payroll, Benefits, etc.
• Benefits of Outsourcing– Focus on Core Competencies– Reduced Upfront $ Commitment vs. Building– Scalability (Keeping up with Technology)– Staffing Peaks and Valleys– Offload Operations Risk– Speed to Market
2003 NICSA Technology Forum
Finding the Right Outsource Partner
Selection Criteria Listed in Order
Importance:
1. Stability of Outsourcer
2. Specific Expertise in Investment Area
3. People / Culture
4. Technology Platform
5. Cost
Source: Celent Communications Investment Manager Survey (March 2002)
2003 NICSA Technology Forum
Available Outsourcing Services
• For Sponsors:– All-inclusive SMA
Platform Customized to create a Unique Turnkey Program for a Sponsor
– Outsource Operations and Technology for your current SMA Program.
• For Investment Managers:– Outsource Operations &
Technology of your Multi-Sponsor SMA Business
– Create your own SMA Product Platform to Support Alternative Distribution Channels
2003 NICSA Technology Forum
• Front-Office– Money Manager
Research– Capital Markets
Research– Portfolio Design Support– Proposal System– On-line Account View
Available Outsourcing Services
• Middle/Back-Office– Trading and Rebalancing
– Account Set-Up and Maintenance
– Reconciliation
– Fee Calculation and Processing
– Performance Reporting
– Portfolio Accounting System
2003 NICSA Technology Forum
Solutions to Challenges
• Industry Standards are being developed to streamline inter-firm processes– Money Management Institute (MMI)– DTCC
• Open Architecture• Outsource
– ING (Furman Selz) has Outsourced to BNY– Scalable solution for separate accounts
2003 NICSA Technology Forum
Managed Accounts
Multi-Manager Challenges
Donald A. Foberg
Phoenix Investment Partners
2003 NICSA Technology Forum
Phoenix Investment Partners
• Phoenix Investment Partners (PXP) is a group of affiliated asset managers manufacturing and servicing Retail and Institutional investment products.
• Retail products include Mutual Funds and Managed Accounts• Growth through acquisition strategy:
– 11 Managers– 8 Investment Operations– Centralized Distribution - Wholesalers– 5 asset managers selling managed account models through sponsors– 2 back office operations supporting managed account processing
2003 NICSA Technology Forum
Strategy
• Review all Investment Operations for STP capability
• Develop an Operations and Technology Strategy based on findings
• Select initiatives based on impact and need• Managed Account operations and
technology first
2003 NICSA Technology Forum
Approach
• Focus on existing operational strengths– Productivity vs. industry benchmarks– Location– Staff - demonstrated expertise and intangibles
• Focus on platform– Nature of the technology– Vendor position– Cost
2003 NICSA Technology Forum
What Did We Want to Gain?
• Scalability• Cost efficiencies• Expertise• PXP supporting Partners
2003 NICSA Technology Forum
Filters
• RFI delivered to:– Outsourcers– Software/Service Providers– Software vendors
• Cross functional team reviewed and recommended direction– Do not outsource– Detailed review of the top three providers
2003 NICSA Technology Forum
Our Top 3
• Existing in-house providers– CheckFree Investment Services - Security APL– FIN
• DST International – MAP
2003 NICSA Technology Forum
Organizational Issues
• Which location should the operation reside in?• Affect of a technology conversion?• Re-building the operations staff?• Who should manage that staff?
2003 NICSA Technology Forum
Technology Issues
• Existing platforms closely held• Could a new provider out-perform the
incumbents?• Where was the industry model going?• How were the selected providers matching up
to the developing industry model?• Connectivity to sponsors was/is king
2003 NICSA Technology Forum
Operational Issues
• Connectivity to dozens of sponsors• Order management• Order volume• Workflows
– Manual– Repetitive– Need automation
2003 NICSA Technology Forum
Question and Answer
2003 NICSA Technology Forum
Contact Information
Vincent ManningVenture Financial Systems Group, [email protected]
Roger GregoryDST [email protected]
Chris FlynnMFS Investment Management [email protected]
Dave ReinhartThe Bank of New York Separate Account [email protected]
Donald FobergPhoenix Investment [email protected]
2003 NICSA Technology Forum
Biographies
VINCENT MANNINGVenture Financial Systems Group, LTD.Managing Consultant
Vincent Manning is a Managing Consultant at Venture responsible for providing leadership in the development and implementation of innovative solutions to solve complex technical and business issues. Vincent actively works with senior management teams to assess current business and systems environments and proposes organizational and process reengineering solutions. He is responsible for directing and managing project teams to ensure timely and effective execution of management efforts. Mr. Manning’s engagements have covered both front- and back-office initiatives ranging from conceptual design through final implementation.
Over the past five years Vincent has led initiatives in every area of the trading cycle covering issues ranging from data modeling, business processing, enhancing trading systems, providing web-based reporting platforms, and the integration of front- and back-office systems to provide real-time positions, prices, and transactions.
Mr. Manning is currently a member of the National Investment Company Service Association (NICSA) Technology Committee. Prior to joining Venture, Mr. Manning was with Fidelity Investments as a Senior Business Analyst. Prior to Fidelity, Mr. Manning was with William M. Mercer, Incorporated for five years as a Consultant. Mr. Manning holds an MBA with a Strategic Management concentration from Boston College and a BA degree in Economics from Brown University.
2003 NICSA Technology Forum
Biographies
ROGER GREGORYDST InternationalProduct Manager
Mr. Gregory has over 25 years of experience in portfolio management and accounting systems software development and is currently a product manager for DST’s Managed Asset Platform.
In this role, Roger is part of team responsible for both the functional and technical direction of DST’s managed account solutions and their current evolution.
Roger was previously responsible for the original design and development of DST's HiNet accounting solution, which is a rules-based client-server multi-currency portfolio accounting system, currently in use by many leading US financial institutions. Mr. Gregory holds an M.S. in Computer Science and a B.A. in Political Science from Boston University.
2003 NICSA Technology Forum
Biographies
CHRIS FLYNNMFS Investment ManagementPrivate Portfolio ServicesAVP - Operations Management
Chris has been employed with MFS Investment Management for the past 13years. He started at the firm in the role of custodian bank liaison overseeing the performance and relationships of MFS' custodian banks responsible for servicing their mutual fund business.
In 1992, Chris joined the Institutional Division of the firm serving as Accounting Supervisor for a large number of institutional accounts. For the next several years, he managed much of the back office operations for the Institutional Division. In 1999, Chris was asked to begin researching and investigating the operational requirements involved in starting a managed account division.
Upon the formation of MFS' Private Portfolio Services Managed Account Division in 2000, Chris moved permanently into this division serving as Manager of Managed Account Operations. His role is to support many of functions associated with in-house managed account operations.
Chris is a 1989 graduate of Georgetown University.
2003 NICSA Technology Forum
Biographies
DAVID G. REINHART The Bank of New YorkVP - Separate Account Services
In his role as Vice President of BNY Separate Account Services, Mr. Reinhart is responsible for developing new business opportunities with investment managers seeking to outsource their multi-sponsor back office operations for separately managed accounts and/or develop a platform through which they can distribute product directly. Dave has been in the financial services industry for 16 years. His prior firm, EMAT (Electronic Managed Account Technologies, Inc.), was acquired by The Bank of New York in October 2002. EMAT was a start up in 2000 and Dave was responsible for the firm’s initial marketing efforts and business development. Prior to EMAT, Dave worked as a trader of mortgage-backed securities for BankAtlantic in Ft. Lauderdale, FL, Eastern Mortgage Corporation in Boca Raton, FL, Meridian Securities Inc. in Ft. Lauderdale, FL, and Meridian Mortgage Corporation in Wayne, PA. Dave is a graduate of The Pennsylvania State University.
2003 NICSA Technology Forum
Biographies
DONALD A. FOBERGPhoenix Companies – 18+ years totalPhoenix Investment Partners – last 11 yrs
Initially responsible for technology and infrastructure from mainframe through distributed computing environments across Life, Annuity and Investment company operations from 1984 through 1998.
Responsible for strategic planning and technology related to investment company operations and service since 1999.
Sponsored an STP readiness review of all partner investment operations in 2001/2002. That review revealed opportunities for improvement. As a result, a review of Managed Account Operations and technology was initiated.
The Managed Account Operations review validated that multiple platforms and back office operations provided the same inter-partner service. It also documented process, procedures and in-place technology. Our focus was to identify which technology platform would suit the firm’s strategic purpose. In addition to in-place technology, other vendor offerings were reviewed as part of a corporately administered program.