Infrastructure initiative could help managed accounts

Over the years, the managed-account industry’s dream of rivaling the mutual fund business in size has been dashed…

Over the years, the managed-account industry’s dream of rivaling the mutual fund business in size has been dashed by the reality of its Rube Goldberg-like operational infrastructure.

Even such basic chores as fee billing are not standardized or automated. But that may be about to change.

As part of a continuing initiative to standardize data and the messages that convey that data, the Money Management Institute and Redi2 Technologies, a provider of fee-billing technology, said a week ago that they have published new billing messaging standards.

Given that a single unified- managed-account fee can be split five or more ways, the standard is an attempt to bring order to the profusion of billing and invoicing data that vary in the way they are named and transmitted among financial advisers, investment managers, sponsors, custodians, broker-dealers and other providers.

The complexity and resultant higher cost of dealing with separately managed accounts and unified managed accounts have deterred many smaller independent advisers from using the investment vehicles. Billing standardization will go a long way to making them more accessible, advocates said.

“Fee billing, by its very nature, has a great deal of variability. You have endless permutations of product types, asset management hierarchies, fee schedules, security types, asset valuations and pricing sources,” said James Penman, a wealth management technology consultant.

The overall standards ball got rolling two years ago when the MMI and The Depository Trust and Clearing Corp. tackled the account-opening process. DTCC, the industry-owned utility that clears and settles securities transactions, worked with the managed-money industry to come up with consistent computer language for dozens of routine operations, such as opening and closing accounts, and making transfers.

The logic is simple: Standards make it cheaper, as well as less time-consuming and less error-prone, for sponsors and managers to share information about accounts. This efficiency cuts costs.

Much additional work has been done since, including analyzing all industry processes so that standardization can be undertaken in manageable chunks.

Billing is one of five such areas that have been assigned to MMI Managed Account Solutions Standards subcommittees. The others are trading, reconciliation, account origination and maintenance, and model maintenance.

Two key components make up the initial standards in the billing area: An archive that contains the MASS billing message schema (a framework for how the content of the messages is to be defined) and a spreadsheet filled with the reference documentation for the MASS billing messages.

Drilling a bit deeper, the committee has released two new XML-based standardized billing messages. These messages can be used by providers to send data among themselves.

The first message provides a statement of the investment manager’s services and any fee adjustments; the second includes details needed to verify the manager’s fee for each account. This includes the identity of the investment sponsor and manager, market values and time period used to calculate the fees.

A wide variety of financial products have been coded into these messages, including hedge funds, private bank accounts, wrap ac-counts, advisory accounts, SMAs, UMAs, unified managed households, annuities subaccounts and others.

Fee types have been defined within the messages as well, including sleeve-level fees, asset-specific fees, fee-sharing allocations, multicurrency, discounting, assets-under-management reporting and fee adjustments.

“Sponsors and advisers can use these standards to share fee-billing results for one or a million accounts, and now all the techies like me have a single specification to write software against,” said Mr. Penman, who wrote the coding behind the messages.

Challenges remain, however.

Cerulli Associates Inc. senior analyst Jeff Strange pointed out that the existing pool of UMA programs is so heterogeneous that each program is likely to have a very different approach to fee calculation for its clients. He argued that this could result in sponsors’ thinking that they need unique ways of defining their processes.

“I think the industry will need to move toward a segregation of the advisory fee and the vehicle costs within managed-account programs, particularly UMAs, so that there is a true product-agnostic cost for advice,” Mr. Strange said, noting that he is hopeful but skeptical that standards may compel the industry to do this more uniformly and transparently.

With $1.8 trillion in assets at the end of last year, according to Cerulli, compared with $6.7 trillion in mutual fund assets, leaders of the managed-money business think that standards are essential for growth.

This year, the Model Maintenance and AOM subcommittees will publish their first set of standards as well.

For more information on the Money Management Institute visit the MMI home page.
For more on Redi2 Technologies visit the Redi2 home page.
Financial services firms and software vendors interested in the schema can visit the MASS web site (under Forums in the Community section) to download the messaging schema and its corresponding documentation.