A variety of vendors are now offering overlay management software via unified managed accounts, allowing wealth managers to execute preset investment strategies with automated decisions about when to buy, sell or hold the investments within it. They are fully customisable and provide a holistic view of the client’s holdings.
Wealth management platforms built around overlay management are helping to improve the performance of clients’ investments in volatile markets – and by doing so, are attracting renewed attention.
Overlay management involves the use of sophisticated software that helps advisers maintain a constantly changing mix of investments optimised for the maximum return within the smallest tax footprint. The process requires putting all of a client’s investments – from stocks to mutual funds to exchange-traded funds – into a single, unified managed account (UMA).
Advisers then use overlay management software, purchased from vendors such as Fiserv’s CheckFree, Smartleaf or SunGard, among others, to execute a preset investment strategy with automated decisions about when to buy, sell or hold the investments within it. Overlay systems can be customised in an endless array of strategies, allowing wealth managers to gain a holistic view of the client’s holdings.
UMAs built on overlay systems are hot – assets within accounts that use overlay management are poised to grow 35 percent per year, reaching $327 billion by 2013, according to the Boston research firm Celent.
Overlay systems can work at all ends of the wealth market, said Paul Oliu, marketing manager for Fiserv’s Investment Services division, which offers one of the most popular overlay products for the wealth management market, the Model Management Solution.
“Wealth managers can gain a tremendous amount of efficiency by taking a holistic approach to the portfolio and rebalancing and tax implications,” Oliu said. “Overlay gives wealth management a level of sophistication that can really maximize investment strategies while providing real-time analysis and reporting. It is a reflection of the convergence already taking place in wealth management.”
Overlay gives money managers a dynamic view of the client’s entire portfolio, breaking down the silo approach of single managed accounts (SMAs) in ways that allow new strategies to emerge from the analysis.
“Most managers within a bank’s wealth management unit are in charge of strategy for just a slice of a client’s overall asset mix, so they may not know much about mutual funds and other investments the client holds outside the bank,” Oliu said. “With overlay, if a client has too many shares of stock in one sector spread across different types of investment vehicles, the client’s portfolio manager knows to hold off buying more shares in that sector.”
From automated rebalancing that accounts for portfolio risk to constant tax scenario maximisation, overlay managements systems replace many labour-intensive tasks of portfolio management with real-time monitoring preset by managers working with the client base.
Overlay technology has also made it much easier for bank trust departments to confidently move beyond the walls of the bank to outside money managers and facilitate that overlay outside the trust. That way the trust gains access to an investment style – one with a focus on international or small-cap stocks – that the bank does not provide in-house.
So now, instead of sending money to an outside manager, banks can now buy that manager’s investment advice, in the form of model portfolios. Overlay technology allows bank trusts to invest based on those instructions in a way that is co-ordinated with the larger portfolio.
New support infrastructure
In another sign of model portfolios’ growing popularity, Fiserv recently introduced a communications infrastructure designed to better transmit models between asset managers and clients, including bank trust departments.
Fiserv’s Model Information Exchange lets investment managers send information at one time, in a standardised format, to multiple sponsors who then can act on the suggestions. Investment managers typically send portfolio updates daily. Instead of sending, say, a set of instructions separately to 10 sponsors, the instructions can be loaded and sent to all the sponsors at once. That lessens the possibility of a sponsor getting instructions too late to act on them.
An increasing number of bank trust departments have been adopting investment management that includes a model-only option within unified managed accounts. This approach is intended to provide tax benefits and better asset allocation.
The model portfolio business is growing quickly; according to Cerulli Associates, 84 percent of asset managers now offer model portfolios, up from 50 percent in 2006.
Mike Cifrese, a product strategist at Fiserv, said that banks and trusts are extending their reach and seeking to work with a broader range of clients.
“Overlay systems make it possible to extend the business model in a way that does not necessitate adding lots of managers and staff each time you gain client base,” he said. “It is a really smart way to grow the business. The large organisations are in overlay in a big way, but we also have a lot of registered investment advisers looking an overlay solution, as well as some smaller banks as well. Everyone is looking for ways to provide wealth management these days.”
The Fiserv platform for managing UMAs recently surpassed one million sleeves, reinforcing the company’s position as the industry leader in the UMA marketplace, with nearly 70 percent of industry participants utilising its UMA functionality.
Over the past 12 months, mutual fund advisory (MFA) accounts also achieved significant growth, a reflection of Investment Services’ competitive advantage in this market. The key features in MFA include a specific design for MFA, automated portfolio rebalancing, automated systematic processing and the ability to handle Exchange Traded Funds (ETFs) along with core portfolio management portfolio accounting, performance and management reporting, reconciliation tools, and interfaces to enable straight through processing.
Financial Advisor Workbench, a solution designed for the “rep as manager” market, also expanded its account base and users significantly over the past 12 months. The current and expected growth in adviser-based accounts is attributed to the current economic environment, and will have a significant impact on the new capabilities added to this adviser-based platform, including option trading and support.