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Separate but Equal?

The complexity of separately managed accounts presents technology challenges, but their integration into investment offerings is inevitable.

As investors continue to seek improved returns while maintaining risk aversion through diversification, Wall Street has seen a demand for more personalized offerings. Recognizing that one product does not always fit the bill for all clients, financial advisers are promoting separately managed accounts (SMAs) to affluent investors. SMAs offer products ranging from mutual funds to hedge funds, and everything in between, rolled into what the investor experiences as a single account.

With the complexity involved in coordinating different product types, Wall Street's CIOs are busy ensuring that the technology behind SMAs is ready for prime time. Operational challenges include the integration of portfolio-management and performance-reporting technology, a lack of standardization among asset classes and variations in tax allocations. "Lumping these things together is a challenge," points out Matt Schott, a senior analyst with the retail brokerage and investing practice at TowerGroup. To address these obstacles, CIOs are exploring overlay-management technology, which enables one manager to gain holistic control of all of an investor's accounts.

According to a TowerGroup report, authored by Schott, spending on overlay-management technology will hit $237.4 million by 2007. Schott adds that the concept of separately managed accounts is not new to the Street. "The whole idea of managed accounts started in the early 1970s," he says.

Schott explains that while overlay management can be administered in a variety of ways, its concepts are straightforward. According to the report, the process must incorporate three phases of the SMA life cycle: initiation, execution and maintenance.

First, the investor must be profiled, and new accounts must be initiated with the proper asset allocation. Next, those accounts must be executed upon, through the respective managers who oversee each one. Finally, the account must be maintained continuously, incorporating reconciliation and adjustment, tax-lot accounting, billing, corporate-actions processing, and performance measurement and reporting. If an overlay manager oversees all of these activities, Schott says, the firm can gain a 360-degree view of an investor's holdings that no individual adviser possesses.

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