Unified Managed Accounts: MMI Resurrects the Model Messaging Hub

Asset managers can start looking forward to an industry-standard way to communicate with sponsors and overlay management of unified managed accounts (UMAs).

Resurrecting the hub concept announced with much fanfare by the DTCC in 2011 and quietly abandoned by the US infrastructure giant the next year, a replacement is in the works through a collaboration between the Money Management Institute (MMI) and Envestnet.

The DTCC’s so-called Model Management Exchange got as far as being pilot-tested, before the plug was pulled. That left the board of governors of the MMI — trade group representing the US$3.2 trillion managed account business and the originators of the operational and messaging concepts that were the core of the DTCC project — to immediately issue a request for new proposals for building the hub. Envestnet, a Chicago-based software firm with a range of offerings in managed accounts technology, was chosen as MMI’s partner in the project.

The MMI and Envestnet have not disclosed an official timetable for the launch of the new hub nor the names of any pilot testers. The objective is to capture asset management models sent by asset managers by the end of the year and allow for testing of messages on models with sponsors and overlay managers, according to Gary Jones, a technical consultant with the MMI.

Tower of Babel

A big step will be getting the messaging right between asset managers and the overlay managers that manage the multiple “sleeves” of the UMAs.  UMAs are an advance on separately managed accounts in allowing more complex strategies using multiple asset managers, funds and other types of assets. By pulling a client’s assets together into a unified portfolio model, rather than breaking them up into separate accounts, it is easier to customize the portfolio, keep track of capital gains and losses, and improve post-trade tax returns.

Asset managers are responsible for the investment strategy for their sleeve of the UMA.  The strategy is then executed by an overlay manager who may also be the sponsor or end distributor to the high net worth investors. Sponsors that also take on the role of overlay manage have historically been Wall Street wirehouses such as BofA Merrill Lynch, Morgan Stanley Smith Barney and Citi, but now include banks, broker-dealers, registered investment advisors and custodians.

Operational risk is a serious issue when UMA communications are conducted by phone, fax or email. If the overlay manager misinterprets the information the asset manager sends, the result could easily be buying or selling the wrong security, the wrong number of shares, at the wrong price, or not making a model change the asset manager has directed. If that error negatively affects the investor’s expected returns from the UMA, someone has to make good on the mistake. In fact, asset managers will often limit the number of sponsors they work with to control the potential communication costs, as well as risks of being blamed in a communications snafu.

“The new resurrected hub would work along the same lines as the proposed DTCC-operated hub: instead of the asset manager sending multiple messages in multiple formats to multiple overlay managers it would just send the information once through Envestnet to send to the designated overlay managers and sponsors,” explains Jones. “Centralizing and standardizing the process would supply both sides with an audit trail that reduces the potential for error.”

The various standard message types in the new hub will include those that enable the provider of models — or asset manager — to establish a relationship with the receiver or sponsor, to indicate which securities are in a model and what percentage each security represents of the overall model, to update the model, close the model or cancel the relationship altogether. The overlay manager would acknowledge receipt of the model, pose any additional questions or confirm it was executed.

Envestnet officials insist they aren’t looking for the communications hub in itself to be a new cash cow for the public firm nor do they believe it will give them a leg up over competitors such as Vestmark and Fiserv which offer post-trade account administration programs and overlay management software, as does Envestnet which boasts links to about 1,000 asset managers.

“We are simply trying to address an industry problem by helping asset managers communicate effectively with sponsors and overlay managers,” says Mike Apker, managing director at Envestnet. The firm has yet to determine its pricing model, but is likely to follow the same approach envisioned by DTCC and charge only asset managers based on the number of sponsors which use the technology.

Of course, it stands to reason Envestnet might attract more interest from asset managers and more registered investment advisors to its core platform which provides RIAs access to asset managers and vice-versa. A separate Envestnet platform, which links asset managers to Envestnet  as a sponsor and overlay manager, is what Envestnet is leveraging for the new communications hub.

It remains to be seen whether asset managers and sponsors will want to abandon their current non-automated communications practices or their reliance on hubs provided by their technology providers in favor of an MMI-Envestnet hub. So far, two sponsors have agreed to participate in the pilot program. Although the sponsors have not been named,  Morgan Stanley Smith Barney has publicly disclosed its support for the initiative. Thatirm was also cited by DTCC as a potential pilot member of its communications hub.

Envestnet rival Fiserv could not be reached for comment at press time, but has publicly said the separately managed accounts market has no need for a single centralized hub and multiple ones would be just fine. Apker also concedes the new hub might be a tough sell. “Those using a current provider such as Fiserv or Vestmark to communicate might not want to change but an asset manager wanting to work with a brand new sponsor might find the cost of doing so a lot less using the MMI model hub provided by Envestnet,” he says.

Heeren Pathak, chief technology officer at the Wakefield, MA-headquartered Vestmark, says his firm will rely on the new MMI-created message formats to facilitate communications between asset managers and sponsors and he has no worries about heightened competition from Envestnet. In fact, his firm would link to the new hub, if there is sufficient client demand.  “What is important is the benefit to asset managers and sponsors, so the hub should be supported by all of the technology providers, who can differentiate themselves through the additional suite of post-trade services,” he asserts.

Nevertheless, if there is a single selling point that may attract asset managers to the new hub, it may be its software neutrality. No one is locked to a particular technology. Asset managers that want direct access to the hub will still have to find a way to pump the standard messages out of their own systems, but they will only have to do that transformation work for one standard. In return they will gain gain access to a growing universe of sponsors and overlay managers. Likewise, sponsors or their overlay managers will not be locked in to a particular overlay management technology in order to communicate with — and have the option of choosing to work with —  any asset manager that has signed on.

Assuming that this time the hub project makes it to fruition, the simplicity and the increase in potential business may be hard to resist.