More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
Nearly 80% of wealth managers plan to expand open-architecture strategies using third-party products in the next two to five years—and this trend could change the industry in fundamental ways, says Ernst & Young in a new report.
Not only will the annual product review become more popular as a way to evaluate risk, but more wealth management firms will invest in advisor desktop tools for client reporting, according to the Ernst & Young report, “Investing in the future: 2011 U.S. wealth management study: a focus on product and client trends.”
“As firms continue to rely on third-party products, the annual product review will continue to be an important tool for firms to ensure their products are best in breed and are performing as expected,” said Anthony Caterino, a partner in Financial Services at Ernst & Young. “Additionally, the ability to integrate these products into the advisor's tools and the client portals, and provide timely and accurate reporting will continue to be a critical for wealth management firms."
One such open-architecture technology firm, Smartleaf, is riding this third-party trend. The Cambridge, Mass.-based firm founded in 1999 has grown to more than $50 billion assets under management from $10 billion in the last two years by selling its “unified overlay platform” as a way for wealth managers to make customized portfolio management cheaper.
In other words, the average investor can now get the same advantages that high net worth clients have been getting for years.
“We have made it possible to greatly broaden the deliverability of this,” said Smartleaf Chief Executive Jerry Michael. “It’s as if everybody had a full-time portfolio manager who spent their whole day doing nothing but managing that person’s portfolio. We can do this because we have automated much of the customization.”
About 50 RIA, broker-dealer and bank trust clients now use Smartleaf’s system, including U.S. Bank, DA Davidson, Comerica, BB&T and BBVA Compass.
Smartleaf’s customized portfolios’ cost is half that of mutual funds, Michael asserted. While a mutual fund typically charges about 100 basis points for an actively managed fund, “with overlay you never have to send out the money at all—you’re just getting the ideas,” he said.
Some Smartleaf clients have converted mutual fund customers completely to individual stocks, Michael added. “It was less expensive for the end investor and with a higher level of service.”
Plus, the platform is so fast that wealth managers can spend more time with clients, Michael said.
“One user of our system rebalances all of his accounts between 8 a.m. and 8:30 a.m., gets a cup of coffee, then spends the rest of the day with his clients,” he said. “During periods of market volatility, our clients will use the volatility as an opportunity to highlight their
As the technology of customization grows, so too will the technology of compliance, according to Ernst & Young’s Caterino, who said that 76% of wealth firms surveyed indicated a trend of developing a unique service model for each client segment served.
“This certainly complicates the business model for these firms, and will make regulatory compliance more complex and will increase the need for technology investment across multiple channels and segments,” he said.
Other key findings from the Ernst & Young survey include:
- Among firms that actively offer managed accounts, nearly 40% of them expect annual growth in this category to exceed 15%.
- Wealth managers expect success from advisor-directed accounts and unified managed accounts. They predict a 14% increase in assets under management in both categories.
- Wealth managers are responding to new regulations, such as the new fiduciary standards. Some 80% of them are investing in compliance, such as new people and better processing platforms.
Read Strengthen Portfolios and Client Confidence Through Open Architecture at AdvisorOne.com