Asset Management

11:47 AM
Bill McKinney, Fiserv
Bill McKinney, Fiserv
Commentary
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Greater Automation, Transparency Required in Model Portfolios

The increasing number of programs, complexity and strategies require better automated model communication for sponsors and managers.

Bill McKinney, Fiserv
Bill McKinney, Fiserv

Total managed solution assets surpassed $3 trillionin the second quarter of 2013, up nearly 140 percent since 2008, according to the Money Management Institute (MMI). During this time, the industry moved away from traditional separately managed accounts (SMAs) -- where the manager has full discretion -- to model portfolio programs, where the broker-dealer (managed-account sponsor) has control over the execution, or trading, of the portfolio. Historically, both sponsors and managers have faced a lack of automation in model communication, with managers suffering the compounded challenge of little transparency into how each model strategy is applied.

The Big Shift

This shift has occurred, in part, because a greater number of sponsors have leveraged model portfolios to achieve economies of scale and remove duplicative infrastructure. With large in-house trading capabilities already in place, why should a sponsor pay fees to an investment manager to execute portfolios? One positive benefit of model portfolio programs is that they allow investment managers to focus on their core competency -- portfolio management -- which represents their intellectual property and true value. However, as sponsors worked to absorb trading, accounting and performance reporting, model communication and strategy got lost in the shuffle.

Lack of Automation and Transparency

Many managers provide strategies, or models, across multiple sponsor programs -- upwards of 20 programs in some cases -- as well as across asset classes, including large-cap, small-cap and fixed-income. But when managers desire to implement a change in any of their models -- to reduce or increase exposure in a position -- they must manually key in or upload the adjustment in all sponsor programs where that model/strategy exists.  Managers must maintain separate login details, passwords and URLs for multiple modeling systems. Some updates must be emailed, while others are uploaded through spreadsheets or other documents in disparate formats.

Model Portfolio programs also lack transparency for the investment manager, especially with regard to measuring how a model strategy is applied by the sponsor. In many cases, managers are unable to receive feedback from sponsors about each model's sales performance and how many accounts are invested therein. This lack of transparency into model portfolios often results in significant uncertainty about a model's performance, which is critical information that managers rely on to guide them in adjusting their sales activities. 

The industry is at a critical point where there is now a distinct need for greater efficiency, automation and communication between managers and sponsors regarding model portfolios. And, there is no turning back.

Technology Advancements and Standards

There is good news: the era of incomplete information and manual updating of model portfolios is ending. Managers will soon have access to a model-communication hub as part of their model-management technology solution. Through this hub, managers will be able to communicate model updates to multiple sponsors with a single click of a button. Additionally, MMI launched a Model Standards Task Force to oversee the creation of an industry standard for delivering portfolio models by investment managers and overlay portfolio managers to sponsors. Since its 2012 formation, the Model Standards Task Force has been successful in creating new standards for automation in model portfolios.

Managers, who for many years have had to manually change model strategies and communicate changes one-by-one to each overlay sponsor, can now take advantage of unified technology for one-click model updating. This convergence in wealth management technology will help provide greater transparency into investment performance and strategy application, and ultimately improve model portfolio reporting.

About The Author: Bill McKinney is a Product Manager, Investment Services, at Fiserv. In his current role, he is responsible for the strategic direction of Fiserv's modeling and trading capabilities in servicing the managed accounts industry. McKinney has been with Fiserv for 15 years, and prior to his product management role, he worked in the business analysis and client services divisions of the firm. He holds a Bachelor of Arts degree in Political Science from the University of Notre Dame.

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Greg MacSweeney
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Greg MacSweeney,
User Rank: Apprentice
2/21/2014 | 7:07:39 PM
re: Greater Automation, Transparency Required in Model Portfolios
Yes, old habits are hard to break. Excel is still (by far) the favorite tool of portfolio managers.
NicholasW713
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NicholasW713,
User Rank: Apprentice
2/20/2014 | 12:40:58 PM
re: Greater Automation, Transparency Required in Model Portfolios
Transparency, Automation, Advance Technology? ClearStructure Financial Technology has been providing these key features with Sentry PM, a multi-asset front to back solution for years!
IvySchmerken
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IvySchmerken,
User Rank: Author
1/28/2014 | 10:40:02 PM
re: Greater Automation, Transparency Required in Model Portfolios
Great article on model portfolios! It's amazing that some investment managers are updating their model portfolios via spreadsheets in a market that has $3 trillion in assets. And, many of these managers participate in up to 20 managing account sponsor programs across asset classes. It's sounds like MMI (Money Management Institute)'s work on a standard for delivering updates is a breakthrough and needed to get transparency into model performance.
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