Separate but Equal?

Paving the Way

"From the standpoint of the initiation process, a lot of the sponsors are pretty far along," Schott says. "The one challenge has been the maintenance." A handful of firms and vendors, however, are developing technology and processes to address the challenges.

Citigroup's Smith Barney division operates a model, Schott explains, that consists of in-house-developed technology to integrate legacy systems, and internal financial advisers operating as overlay managers. Other firms choose varying levels of outsourcing and turn to vendors, such as Tysons Corner, Va.-based Foliofn, for the technology component. Finally, some broker-dealers, like McDonald Financial Group, outsource the entire overlay management process, including the technology and management aspects.

Schott notes that one point of contention, though, is how much control should be designated to the overlay manager. "To what degree does the overlay manager have autonomy and authority for executing the day-to-day decisions?" he asks. "Who do we give these overlay-management tools to?"

Schott adds that broker-dealers are struggling with these questions, as well as with what model is right for their businesses. But, he says, "They're all going in that direction. They're all trying to assess and ascertain, 'What does it mean for us and our clients, and what is our flavor of overlay management going to be?"

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