DTCC automates managed accounts

A new service from the Depository Trust and Clearing Corp. automates the account setup and maintenance of managed accounts — eliminating an onerous and non-standardized manual process.

The New York-based DTCC’s service allows sponsors, investment managers and service providers to transmit and communicate account information through the processing equivalent of a junction box.

Enabling automation is the industry’s adoption of standards that establish a consistent computer language for dozens of routine operations, such as opening and closing accounts and making transfers.

The standards make it cheaper, as well as less time-consuming and less error-prone, for sponsors and managers to share information about accounts. The belief is that lower costs and greater operating efficiencies will lead to expansion of the business.

Prior to the development of DTCC’s service, it was as though “you had 269 area codes, and you had to use a separate phone for each of them,” said David H. Gardner of Chatham, Mass.-based Smart Consulting Group LLC, who provided consulting services to DTCC and the Washington-based Money Management Institute during the development of the service.

The MMI hammered out the standards over the past six years and is continuing to work on them.

“From my perspective as an independent registered investment adviser, working through sponsor firms, there’s no question that consistency in communications is imperative if we are going to scale our business,” said Pete Quinn of Riverfront Investment Group LLC, a Richmond, Va., advisory firm that manages $300 million in assets.

“The promise of the DTCC managed account service is that it streamlines the whole industry and allows it to scale,” he said.

Standardizing the industry brings several benefits to firms and clients, Mr. Gardner said.

First, there is a dramatic reduction in processing time for all account operations.

“In our discussions with managers, we have found the new-account-opening process times to be days, weeks and in one case, 88 days,” Mr. Gardner said.

The service cuts the time required to open accounts to hours or a day or two.

Similar reductions in time were achieved for dozens of other back-office chores, such as account terminations and depositing funds into the account.

One benefit of consistency is that product innovation becomes much easier, allowing sponsors, managers and vendors to create products and processes that allow the adviser to provide better service, according to several industry participants.

“Dealing with standardized data and centralized communications, along with the use of model portfolios, provides this industry with a clean slate for development,” said Mr. Gardner.

The process, including gathering the paperwork and supporting documentation, made managed ac-counts difficult, confusing and labor-intensive for organizations. Opening those accounts has been much more difficult than opening a wrap mutual fund account.

“The impact to financial advisers is greater efficiency and transparency. Does anyone stop and think about a mutual fund trade? No, you just do it,” said Gary Jones, the MMI’s Jersey City, N.J.-based vice president for industry operations.

Managed accounts will achieve the operational ease and speed that mutual fund products have achieved, said Ann Bergin, managing director and general manager of DTCC’s Wealth Management Services.

The service is similar to DTCC’s Fund/SERV offering, which “ad-dresses the communications be-tween mutual fund distribution and mutual fund partners,” she said.

From an asset perspective, certainly, managed accounts have a long way to go to catch up to mutual funds. Mutual fund assets stood at $7.2 trillion as of the second quarter; fee-based managed-account assets were $1.7 trillion at the end of the third quarter, down from $2 trillion a year earlier, according to Cerulli Associates Inc. of Boston.

Another major advantage of the new service is standardized pricing.

Its fees are assessed based on the transaction type and are paid by the investment manager. The fee for setting up an account, for example, is $4. Fees for deposits, withdrawals, terminations and client profile updates are $2 per transaction.

However, with increased managed-account business, these fees should come down.

“A new-account opening cost somewhere north of $7 three or four years ago,” said Dana Fowler, a managing director at Smith Barney, a unit of Citigroup Inc. of New York. Smith Barney, Citi’s global-transaction-services unit and UBS Financial Services Inc. of New York agreed to use the DTCC system in October.

According to Cerulli, Smith Barney is the largest sponsor of managed accounts in the United States, managing nearly 30% of accounts.

Because of the improved technology and the reduced time demands, asset managers who had not participated in managed accounts will reconsider them, said Ms. Fowler.

“As we get more and more managers to embrace this service, we’ll have opportunities to attract more diverse types of managers, especially institutional-type managers who may not have been in any of these type programs before,” she said.

E-mail Davis D. Janowski at [email protected].