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IT Challenge

The paper-intensive account-opening process can be a major burden at financial institutions, especially when it comes to separately managed accounts.

The Challenge: Jeannine Vanian, managing director at Kayne Anderson Rudnick Investment Management, LLC, needed a better system for managing the paperwork that comes with separately managed accounts. She looked to a solution from Business Technology Alliance, LLC, that allows her firm to open accounts electronically and flow information through the organization, improving Kayne's STP.


Opening 100 new accounts a day can be trying, even at the best of times, for any financial-services firm, notes Jeannine Vanian, managing director, Kayne Anderson Rudnick Investment Management, LLC., a Los Angeles-based investment manager.

But when they are separately managed accounts (SMAs), one of the hottest financial products on the market today, the challenge grows exponentially.

That's because it's not simply a case of the asset manager opening a new account. The manager must be able to communicate with a program sponsor (normally broker/dealers - the organizations bringing them the money to manage). The two parties exchange a volley of documents, containing things like the end-investors' risk profile and signature. As such, some of the documents can reach 30 or more pages. The information comes in a variety of forms, making it a faxing, e-mail and snail-mail nightmare and creating a real challenge in tracking, notes Vanian.

Kayne manages $9.2 billion of assets held mostly in high-quality equities and spread out in U.S. large, small and mid-cap portfolios and an international portfolio, making the firm one of the top 10 managers in the separate-account-consultant-program space, according to research firm Cerulli Association.

Vanian says Kayne works with 28 program sponsors, each of which has its own processes, standards and protocols for opening accounts and exchanging information.

The problem, she says, is that, "There's no standardization within the industry. Each sponsor brokerage has its own paperwork and forms. That's the biggest challenge - one firm wants to fax you a standard form for acceptance or rejection and another one wants you to sign page five of the agreement."

That means her firm could have one person spending a whole day entering new accounts into the system. In fact, Celent Communications of Boston notes that it can take one to two weeks to open an account, which includes getting the client's risk profile, finding a manager and getting it funded.

Vanian says she "knew there was a more efficient way of doing things" and agreed to test an interactive-management system from Business Technology Alliance, LLC, of Boston, Mass.

BTA's ePaperwork Manager allows Kayne to receive electronic-account information from program sponsors and make it available throughout the organization. It can also send information electronically to the program sponsor.

It's testing the system with Brinker Capital, which works with financial advisers and broker/dealers, helping them find investment managers and develop asset allocations.

Tim Henry, chief operating officer at Penn.-based Brinker Capital, says the "single biggest issue in separate-account business has been the operational inefficiencies that are involved in the business." But that's to be expected, he says, noting that SMAs have been around only 15 years. It's a business that's "in its infancy," he adds.

But what a business. Jack Rabun, an analyst at Cerulli Associates in Boston, says that the total managed-accounts business at the end of the second quarter stood at $752.5 billion, which includes separate accounts, proprietary-consultant programs, mutual-fund-advisory programs, discretionary-based brokerage and fee-based brokerage. That's up from $743.9 billion in 2000, but down from $774.1 billion in 2001.

About $409.7 billion is currently held in the SMA segment, which includes separate accounts and proprietary-consultant programs. The top 10 separate-account-program sponsors control just under 86 percent of the market. Salomon Smith Barney leads the way with 24.3 percent of the market, followed by Merrill Lynch with 23.6, UBS PaineWebber (9.3 percent) and Morgan Stanley (9.1 percent).

Boston's Celent Communications predicts a 15-percent-penetration rate for managed accounts overall among the mass affluent and high-net-worth individual, driving total assets under management to hit $1 trillion by 2006.

It estimates in a report, "Managed Accounts: Catching the IT Factor," that by 2006, spending on managed-account technology will double to $576 million from today's current figure of $277 million. Author of the study, Pamela Brewster, predicts that "retail-mutual-fund firms will enter with a vengeance and challenge today's entrenched money managers." The bulk of that tech spending will be by asset managers ($413 million) as opposed to program sponsors ($163 million).

Technology will become a battleground for business as firms scramble to eliminate the "notorious bottlenecks" that occur in the setting up and administration of such accounts, the Celent report notes.

Thusith Mahanama, chief executive officer, BTA, says there are a "lot of operational inefficiencies. Right now, a lot of people are finding it hard to justify being in the business."

The Money Management Institute, a national organization for the managed-account industry, has recognized that operational inefficiencies are impacting the business and warns that they are an impediment to growth.

About 70 percent of investment managers surveyed cited operations as the biggest challenge. In an August report, the institute noted that new-account setup is "highly labor intensive. Delays in opening the account can mean a lot of money to the industry," says Chris Davis, executive director of the institute. Now, the institute is working on bringing some standards to the SMA system, including the account-opening system.

Unlike the mutual-fund industry, there's no clearing or settlement system, notes Cerulli's Rabun. Standards are "sorely needed," he says, adding that separate accounts are a "much more complex and difficult product to offer the marketplace in terms of operational intricacies."

Hilary Fiorella, vice president, CheckFree Investment Services, whose APL platform has 60 percent of the marketplace for managed accounts, according to Celent, says right now, "It's all about eliminating paper, errors and keystrokes and getting data to people who need it to do their job more effectively."

Fiorella says that in order to "keep this business growing at a healthy clip ... we need to get rid of obstacles. One is operations."

CheckFree partnered with Imaging Solutions in Wallingford, Conn. to help SMA clients automate their workflow processes. Imaging Solutions is a reseller of OnBase, a document-management and electronic-workflow system from Hyland Software, Inc. It is now installed at Rorer Asset Management, a Philadelphia firm that manages more than $10 billion in assets.

Bruce Aronow, executive vice president and chief operating officer of Rorer, says they're using Hyland's technology to "streamline the entire process. Eliminating paper is only one small component."

All the new account paperwork that Rorer receives from sponsors is imaged in real time using the document imaging functionality of OnBase. Rorer has replaced all of its paper-based forms with electronic forms, known as "eForms." Rorer's processes have been converted to automated, rules-based workflows which require staff to enter data only once. The embedded rules within the workflow help ensure that each eForm is complete and accurate. Once complete, using a few keystrokes, accounts can be automatically forwarded and processed across various departments, such as trading, settlement, portfolio accounting and compliance.

"It provides flexibility that goes way beyond a paper-based system. People have simultaneous, real-time access to account information. The system also provides the ability to forward documents within the firm, as well as make use of electronic post-it notes. Also, given consumer privacy concerns, this system provides the highest level of security, control and monitoring," says Aronow.

"We feel the system has put us ahead of the curve," he says, adding that in a paper-based system, documents can easily go astray. "With this type of system, documents don't inadvertently get paper clipped together or misplaced on someone's desk."

Roger Tausig, president of Imaging Solutions, says the chief benefit of the system is "the ability to process higher volumes of accounts more efficiently and, at the same time, convert their paper documents into digital assets that can be electronically accessed by users on their desktops." That means "significant operational efficiency over manual-paper processing."

The systems out there range in price from the low to mid-six figures. Brinker's Henry says it's a "mid-sized investment" that is in the six-figure range. However, he expects to recoup his costs in 18 months. "Everybody's looking to cut expenses," he says, adding "it's a pretty simple decision" and one more step in the STP initiative.

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