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New Study on Unified Managed Accounts Reveals Growing Need for Infrastructure Standardization

Growing Use of Model Programs Creating Communication Gaps

New York, September 3, 2008 – Rapid growth in unified managed accounts (UMAs) will be undermined unless the need for greater industry standardization and automation can be addressed soon, according to a report issued by Dover Financial Research LLC, a well-known firm in the managed accounts industry.

UMA assets under management have grown to $127 billion, and investment managers and sponsor firms are projecting they will likely increase to $355 billion in the next five years.

Unlike a separately managed account which includes just one type of investment, UMAs include diversified portfolios that can contain stocks, bonds, exchange-traded funds, mutual funds and a growing number of alternative investment choices within a single investor account at a sponsor firm. Investment managers are typically responsible for portfolio construct, trading and administration.

UMAs and Model Portfolios

A more multifaceted environment has been gaining traction in recent years with the evolution of model portfolios, where an overlay portfolio manager (OPM) takes over trading and administration, leaving the investment manager with responsibility for constructing the portfolio.

Model portfolios were designed initially to make it easier for industry participants to customize and balance portfolios, provide tax-management expertise and facilitate communications between sponsors and investment managers. However, explained Jean Sullivan, managing principal of Dover Financial Research, "The added complexity of having a third party involved poses a set of new challenges related to communications and processes, and affects a number of issues: how quickly decisions regarding an investor’s portfolio can be completed; how costs can be contained; and how levels of market, investment and operational risk can be reduced."

Dover’s research found that investment managers and sponsors expect between 30% and 50% of SMA assets – now at $519 billion – will convert to UMA model portfolio programs within five years. "The industry should seize the opportunity to embrace standards, rather than create more inconsistency. As proven in other sectors, such as the mutual fund industry, standardization provides the foundation for product innovation and flexibility," Sullivan added.

The Depository Trust & Clearing Corporation (DTCC) underwrote the report as a way to help identify issues and provide solutions to the communications issues facing the UMA market segment. DTCC has a Managed Accounts Service that provides a centralized, automated communications platform to facilitate the electronic exchange of information throughout the life cycle of a managed account, beginning with account openings. Fully operational for separately managed accounts, the technology underpinning the service is currently being leveraged to support UMAs, as well as dual-contract portfolios.

"It’s vital that we identify the issues and obstacles that can impede growth of UMAs and avoid the operational issues that have already put significant pressure on the separately managed account market," explained Ann Bergin, managing director and general manager of DTCC’s Wealth Management Services. "We are committed to working with our participants and the industry to address the findings that have been identified in Dover’s report, and develop solutions that significantly address them."

Key Findings

Dover’s report (titled "Unified Managed Accounts and Model Portfolios: Poised for Growth, But Can the Industry Support It?") identified several key findings.

• There is growing concern that fiduciary responsibility, customization trends and increased utilization of tax management capabilities will drive an increase in communications associated with account openings, maintenance and reconciliation.
• Because exchanging information between investment managers and overlay portfolio managers is new, the industry is experiencing inconsistencies regarding the actual data elements and the use of different communication methods. Also, investment managers need to individually update models on each platform in which they are participating, a process that is "ripe for error."
• Manual processes associated with back-end communications are becoming more difficult and more costly to maintain and result in a greater likelihood of errors.
• Investment managers want more sales-tracking information than they are currently receiving but only a few sponsor firms with model portfolio programs share sales patterns with them; and without sales information, it’s not possible for them to prepare accurate invoices.
• Investment managers have no way to validate the number of accounts that are using their model portfolios since only the OPM or sponsor has access to the information.

Recommendations

To solve these issues, the Dover report recommends that the industry:

• Leverage current industry standardization efforts across UMA platforms to facilitate account openings, maintenance and reconciliation, as well as account conversion and set-up from SMA to UMA programs.
• Create a single automated interface that simultaneously uploads models to all relevant programs.
• Create standard communications to validate and confirm model changes, execution price and trading instructions.
• Develop an electronic link between an OPM and an investment manager which would allow the manager to receive relevant sales data on an account.
• Leverage sales data to validate billing and payment information.

Christopher Davis, president of The Money Management Institute (MMI), noted, "The managed investment solution industry is becoming increasingly complicated due to an ever-expanding set of solutions to investor needs. By implementing communications standards, the industry will realize significant efficiency gains, and benefit from accelerated growth and greater margins." The MMI is the national association representing the managed solutions industry.

According to Dover, "DTCC can provide a benefit to sponsor firms by facilitating the conversion of accounts and assets to the new UMA environment."

Full Report

To download the report, follow this link: http://www.dtcc.com/products/documentation/wealthmgmt/mas/UMA_Model_Portfolios-Dover_Research.pdf, or point your browser to www.dtcc.com/managedaccounts. On the right, click on "User Documentation" under "Customer Resources." The report will be accessible under the "Research" heading.

About Dover Financial Research LLC

Dover Financial Research LLC is an independent research and consulting firm specializing in the financial services industry. Over the past several years, it has published several studies on the managed accounts market. Dover represents more than 20 years of industry experience and has worked extensively with a wide range of financial services firms representing all aspects of the industry. The firm’s clients include top mutual fund companies, brokerage firms, banks and insurance companies. For more information, visit www.doverfr.com.

About DTCC

The Managed Account Service is an offering DTCC Solutions LLC, a subsidiary. The Depository Trust & Clearing Corporation (DTCC) is the world’s largest securities clearance and settlement organization. Through its subsidiaries, it provides clearance, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives. In addition, DTCC is a leading processor of mutual funds and insurance transactions, linking funds and carriers with financial firms and third parties who market these products. DTCC's depository provides custody and asset servicing for 3.5 million securities issues from the United States and 110 other countries and territories, valued at $40 trillion. In 2007, DTCC settled more than $1.86 quadrillion in securities transactions. DTCC has operating facilities in multiple locations in the United States and overseas. For more information on DTCC, visit www.dtcc.com.