Masters of the Universe

Fixed income, equities, mutual funds, exchange-traded funds, hedge funds, separately managed accounts ... As the laundry list of possible investment vehicles grows, so does the job of the financial adviser.

"People are now throwing in the kitchen sink," says Vincent Lepore, senior adviser to the Money Management Institute's (MMI) board of governors. As wealth management has evolved over the past decade, high-net-worth clients have realized that diversifying investments in various vehicles is the best way to manage risk, he continues. Each distinct vehicle, however, has its own custodial account, with its own contracts and paperwork.

Jack Rabun, a senior analyst at Cerulli Associates in Boston, adds, "Historically, if an adviser wanted to use fee-based services and products for an investor's entire portfolio, there would be multiple contracts and lots of paperwork," a process that could turn clients off. "That could be a motivator for [the adviser] not to reach out to all potential investment options. Part of working with a client is keeping things simple, and when you're having to push three or four program contracts in front of an investor, you're not doing that," he says.

To simplify the process, financial firms have created "unified managed accounts," which consolidate a client's assets into one investment vehicle. "Broker-dealers are making efforts to consolidate and combine disparate managed-account programs into more streamlined programs," Rabun says. He points out, however, that technology has been a major stumbling block to the success of unified managed accounts. "There are a lot of moving parts and a lot to tie together," he explains. "Firms are faced with the challenge of legacy systems and programs, as well as integration."

Facing the Challenge

Smith Barney, a unit of Citigroup, has gone full-steam ahead with a unified managed account program. The firm went live with its Integrated Investment Services program about six months ago, according to Timothy Williams, senior vice president and product manager for Smith Barney's consulting group.

"Unified managed accounts are a new concept in the industry," Williams says. "We've seen a lot of people talk about it, but few have gotten to a point of execution because it takes a lot of effort and mind power."

Williams acknowledges that a major technology challenge is working with dozens of legacy systems that a firm has built up over the years for its various investment products. "It's about trying to get disparate systems to talk to each other," he says, noting that Smith Barney had nearly 30 systems to tie together in order to get one holistic program in place.

In addition to integrating legacy systems, the firm also needed software to perform necessary unified-managed-account tasks in the front office, including client profiling, to identify clients' risk-tolerance and the suitability of particular investments, Williams notes. And the software must be able to monitor investments across asset classes, and then rebalance those multi-asset-class investments to retain long-term target weights. Finally, the software has to report on all of these investments from a performance perspective, he explains.

Smith Barney investigated the vendor marketplace for six months before ultimately deciding to build the software in-house, Williams says, explaining that start-up vendors lacked the experience that the firm was looking for, and more established vendors were missing the unified-managed-account concept. Additionally, Williams says, if the firm brought in a vendor, "We would have to do a lot [to] retrofit the vendor models that we already use. It might have taken longer to build, but the connectivity was key."

Williams concedes that the seven months of development had their share of challenges. Thorough auditing and testing was required to ensure that no legacy systems were unintentionally affected during the construction.

Now that the kinks have been worked out, however, Williams says that the financial advisers have taken to the program, with user volume going up every month. Although not all of Smith Barney's 12,000 financial consultants use the program, Williams maintains that the firm's "best financial consultants use it."

AMEX in on the Action

American Express Financial Advisors Inc. also offers its own unified-managed-account program, Premier Portfolio Services. About three years ago, the firm decided to test the concept, says Julia Newberry, director of product development for the brokerage. The firm essentially "rented" software to evaluate the idea in the field, she says, though she declines to name the software vendor. "We got a positive response [from clients and advisers] to the pilot we ran, but the software vendor wasn't robust enough to handle the business," she adds.

So, the firm decided to put together several of its back-office systems and tap Integrated Decision Systems (Los-Angeles) for its Global Investment Manager 2000 application. Newberry says that the software performs three primary functions: it calculates performance across accounts, it accounts for tax-lots when buying and selling securities and it bills an asset-based fee.

"American Express has a commitment to component-based architecture," she says. "We're able to bring in new pieces of software and integrate them so that we're not stuck with legacy systems."

Others Opt to Outsource

While Smith Barney and American Express did their own legwork, McDonald Financial Group, based in Cleveland, looked to Placemark Investments to provide what it calls Total Overlay Management services for 300 investment advisers, half of McDonald's adviser team.

Placemark, a Boston-based registered investment adviser, partners with Jersey City, N.J.-based CheckFree Investment Services to provide money-management and portfolio-optimization advice for investment managers. Placemark uses CheckFree's accounting systems and McDonald's client-holdings and tax-optimization data to perform an "overlay function" for McDonald, says Lee Chertavian, chairman and CEO of Placemark. He describes the overlay function as "actively looking for the optimal portfolio implementation, client by client, that balances risk, investment return and taxes."

Audrey Harris, director of account administration for the investment and banking services department at McDonald, explains that the firm still plays a vital role in the process. "We do the due diligence on the managers that Placemark uses, and the customer can still work with the financial adviser to tweak the model," she says.

Harris notes that building in-house would have been time consuming and expensive, and McDonald found that Placemark had a desktop tool already in place. "They've been great about working with us and enhancing the system for our needs," she says.

Still, she adds, the concept of unified managed accounts is new to many investment managers. "A lot of people are waiting to see if this is going to work, and then jump on it."

MMI's Lepore stresses that buy-in from financial advisers is vital. "It's going to take some time for adoption to be widespread because most financial consultants are not even familiar with separately managed account services."

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What's Next?

Gazing into a crystal ball, industry observers say that unified-managed-account programs could benefit from additional features, including:

Enhanced tax management.

The MMI's Vincent Lepore says, "Clients who are very tax sensitive appreciate sophisticated systems that distinguish between different taxable events that occur within their portfolios."

Increased product coverage.

Audrey Harris, McDonald Financial Group, explains that "A total unified managed account would take into account all of a client's assets - can I bring in checking, trust, etc., and have it all under one roof?"