Technology Developments in the Separate Managed Account Industry

Technology developments in the fast growing Separately Managed Account (SMA)/Wealth Management business will have a dramatic effect on the efficiency, cost structure and product offerings of the investment management industry. Success at choosing and deploying technology from the fragmented and rapidly changing systems providers will help determine which firms succeed or fail in the SMA business.

The SMA industry is the fastest growing sector of the Investment Management Industry
The WRAP business has spawned a whole new industry now referred to as Separately Managed Accounts. The market, which is currently $300 billion, is projected to grow to as high as $3 trillion over the next five years. Mutual funds, insurance companies, banks, trust companies and regional investment managers are competing aggressively for market share.

SMAs will transform the Investment
Management Industry
Process and technology innovation will rival the rapid technology changes that occurred in the mutual fund industry during its explosive growth in the 80s and 90s. Cost reduction, business process efficiency and scalability will allow money managers to reduce account minimums and bring customized investment solutions to retail customers. SMAs will threaten mutual funds as the primary investment vehicle for individual investors.

Technology will drive change in all areas of the business and is evolving rapidly
The SMA technology challenge is to execute and administer an investment program involving thousands of accounts with multiple partners and complex activities. Vendors are pursuing a wide variety of strate gies to play in the SMA market but are focused on portfolio modeling and manufacturing, account administration and communications among participants.

Modeling and manufacturing
Dozens of start-up software vendors are spending millions of dollars in a race to build portfolio modeling and manufacturing technology that will automate many of the functions currently performed by the portfolio manager.

Vendor capabilities are progressing from portfolio cloning to much more sophisticated processes that will support mass customization complying with regulation 3a4. Systems will allow large-scale SMA programs to deliver timely, customized client portfolios to individual investors that optimize investment manager strategy and research with client tax, risk and financial parameters.

Account administration and communications among market participants
Existing portfolio system vendors and custodians are racing to capture market share by developing outsourcing and technology to support and automate account administration. For example, sponsor platforms are adopting automated workflow and imaging technology.

Automation will require the industry to standardize data communication protocols and formats for the communication of account information between Sponsors, Financial Consultants, Turnkey Asset Management Programs, Overlay Managers and Custodians. Consideration will be given to developing a centralized clearing vehicle similar to the NSCC.

On September 10 at 11 am (EST) Cutter will review its research and insights regarding SMA technology via a webcast. To participate please email beth@cutterassociates.com

The Cutter Edge,is a bimonthly
publication that provides
commentary on systems and
operations issues critical to
investment managers. We
welcome your comments and
suggestions.

Upcoming editions include com-
mentary on risk management
systems, outsourcing, fixed
income analytic systems and
other current industry issues.

SEPTEMBER 10
Webcast at 11 am (EST)
Technology Developments
in the Separate Accounts
Business

OCTOBER
The Technology Alliance™
Boston

   Topics:
   • Performance Measurement
      and Attribution Systems
   • Outsourcing

IT Budget Survey Findings
and Report

NOVEMBER
The Technology Council ™
New York and London

Update on Performance
Measurement and Attribution
Systems

DECEMBER
The Technology Council™
New York and London

   Topics:
   • Market Data
   • Security Master/Reference
     Data Systems

A
A

Copyright 2002 Cutter Associates, Inc.
All rights reserved.