Toward a New Definition of Discretionary

Will Trout

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Jan 29th, 2015

The Unified Managed Account (UMA) has served since inception as a lightning rod for conflict between the sponsor firm and the advisor. Nowhere is the tension between customization and scale more acute. While the advisor may seek to customize a portfolio to justify his fee, the interests of the UMA sponsor typically are skewed towards scale.

Underlying this conflict, of course, is the question of who owns the client. In recent years, this age old issue has been complicated by the increasingly active role of the client in the investment decision process. The effect of firms seeking to get closer to the client has been increased client engagement, to the point where “discretionary” no longer means “hands-off”. The millennial tweaking assumptions around her self-serve, automated investments platform here represents one extreme; at the other end of the spectrum is the elderly bank trust client who has unquestioning faith in her advisor and may only occasionally glance at a statement.

I’d be interested in hearing if advisors have noticed the trend to greater engagement, and about the impact on their advised relationships. I’ll share any feedback and my perspective on the matter on this blog next week. In the meantime, perhaps we need to reassess our understanding of “discretionary”?

On the cusp: regional integration in Asia

Neil Katkov

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Jan 26th, 2015

It’s 2015, the mid-point of the decade and a good time to start looking at major trends in Asian financial services over the next five to ten years.

One of the major themes will be regional integration, which is another way of saying the development of cross-border markets. There are at least two important threads here: the ongoing internationalization of China’s currency, and the development of the ASEAN Economic Community (AEC) in Southeast Asia.

RMB internalization is really about the loosening of China’s capital controls and its full-fledged integration into the world economy. And everyone seems to want a piece of this action, including near neighbors such as Singapore who are vying with Hong Kong to be the world’s financial gateway to China.

The AEC is well on its way to becoming a reality in 2015, with far-reaching trade agreements designed to facilitate cross-border expansion of dozens of services industries, including financial sectors. While AEC is not grabbing global headlines the way China does, we see increasing interest in Southeast Asia among our FSI and technology vendor clients.

From Celent’s point of view, both trends will open significant opportunities across financial services. In banking, common payments platforms and cross-border clearing. In capital markets, cross-border trading platforms for listed and even OTC products. In insurance, the continued development of regional markets.

Financial institutions will be challenged to create new business models and technology strategies to extract the opportunities offered by regional integration. It’s the mid-point of the decade, and the beginning of something very big.

Managed Account Marketing vs. Reality

Will Trout

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Jan 23rd, 2015

In my last post I discussed some of the limitations of the unified managed household account or UMH, in which the investments of a household are managed within a single account.

Part of the challenge here in describing the managed account space is that TAMPs and other UMH providers have gotten a bit ahead of themselves, promising more than can be realistically delivered in a wealth management environment defined by systems spaghetti and silos.

Keep in mind that UMA was launched in the 1990s as a way station on the long road to UMH, and has been by no means perfected. Pulling data from multiple custodians remains difficult, for example. All the more reason why stretching overlay management and other unifying features of the UMA onto a household framework doesn’t always make much sense.

Real UMH functionality may be a while away, but the good news for firms and their end-clients is that core UMA functionality has real potential to deliver short-term. Deeper automation and the more efficient management of data can help resolve existing trade-offs between personalization and scale, if not completely.

Technology vendors must provide advisors with such tangible enhancements and stop trying to build castles in the sky. And wealth management firms should turn down the marketing bluster. It’d be best if both acknowledge the inherent limitations of the managed account product and focus on concrete ways to improve the client experience.

Issues with Multiple Utility Services in KYC

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Jan 20th, 2015

In a recent blog post we discussed about the emergence of utility model in the KYC, on-boarding space in the capital market. When one thinks of a utility model in KYC, one envisions a situation where a single utility will cater to the needs of the whole industry. That would be the optimal arrangement for a utility service, not just in KYC, but for any functions.


However, currently the situation looks a little different from what one would ideally want. We already have 3-4 utilities – from SWIFT, Thomson Reuters, Markit | Genpact, and DTCC and cofounding banks – catering to same, or overlapping areas within the KYC space. While SWIFT has positioned itself for the correspondent banking segment, the other three utilities are very similar in terms of their coverage.


The multiple utilities therefore give rise to some redundancies and duplications that ironically they intend to eliminate, which makes the situation sub optimal from an overall industry perspective. This raises a few questions regarding the future of the KYC utilities.

  • Why have multiple utilities for the same function?
  • Or Can FIs satisfy their needs by subscribing to a single utility, or do they need to subscribe to many or all of them? We have seen several banks have taken active role in developing more than one utility, so this is a possibility. But is it desirable for every fo every bank to have to do so?
  • Another question that is still waiting for a clear answer is in terms of geographic or jurisdictional coverage of these utilities. Will these utilities be mainly global in nature containing information on, and serving institutions in the developed global markets? Or will they also include coverage of local firms? Would they be able to sufficiently cater to regulatory and business requirement of each local market, or will their appeal be mostly restricted to the main developed markets?

These KYC utilities are still fairly new, some have yet to be launched, and the ones launched are still at an early stage of user adoption. So we will have to wait and see how the future unfolds for them.

Current Research: Defining the Next Generation Unified Managed Account

Will Trout

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Jan 20th, 2015

Five years ago, the concept of a next generation UMA could have meant one thing: UMH.  Since then, the ground has shifted, and today many wealth management firms, and certainly all TAMPs, claim to offer some sort of unified managed household account (or UMH) capability, even if how they define it may vary.

Progress? Perhaps. Certainly, platform gains continue to drive effectiveness and strip away cost. But I’d say that the UMH as an idea has lost a lot of its luster. Increasingly, we are seeing the holy grail of investment management become a packaged marketing concept.

UMH is to a degree a victim of its own hype. That is because UMH was (and is) always an ideal, a hypothetical construct. Among other things, UMH poses problems of definition: how does one define a “household,” and how does one account for the other types of relationships (for example, pricing relationships) that exist within the wealth management ecosystem? Tax location presents particular challenges to UMH. The point is that UMH may not always be right for the client, even when it is for the most part achievable.

So where do we go from here? In my next post, I’ll look at how the wealth management industry arrived at this point, and the steps TAMPs and other solution architects can take to better meet the needs of both UMA sponsors and end-clients.

Automated Investing: Not Just Passive ETFs

Will Trout

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Jan 14th, 2015

An investment management firm launches an actively managed automated investments platform and calls it pioneering. Automated competitors call this a dangerous heresy: portfolio management by algorithm and active money management should not mix!

Both sides are off the mark. Active asset management within an automated framework is not new…see firms like Hedgeable. Nor do automated platforms amplify any risks involved in active management. On the contrary, the efficiencies offered by automated investment platforms lend themselves to a range of active management strategies.

The objective here is not to argue for active or passive management styles but to clarify the parameters of the debate. Active investing is often understood by retail investors as simply “stock picking,” but it is really about taking a position against the market. Typically this is done within a discrete asset class, e.g. stocks or fixed income.

Tactical investing uses slightly different means (weighting one asset classes over another, rather than focusing on a discrete asset class) to achieve the same objective. It is a twist on active management that is often used to capture short term gains.

TradeKing Advisors’ automated Momentum portfolios employ just such a tactical approach, tweaking asset allocations to capture market momentum. Automated advisor Motif Advisors takes active management a step further via a thematic approach that allows investors to build what are essentially customized ETFs (based on holdings of individual securities and/or portions thereof), which are then bundled into “folios” or themed portfolios, e.g. Chinese Internet, Ebola-fighting drugs. In addition to personalization, this approach enables efficient tax harvesting, since the investor owns actual shares. Strip out the cost of the human advisor via an automated platform, and the investor has a more-than-decent shot at outperformance. The money manager also gains by eliminating the middleman and getting one step closer to the client.

Therein rests the point. The benefits of automated investment platforms accrue to both active and passive investment management styles and in this respect, the platforms should be considered agnostic. There will always be investors who want to take a position against the market, whether via tactical approaches, thematic models or security selection. Automated platforms give them a more cost-effective, and indeed transparent, way to do so.

How has the UK online retail brokerage market evolved over the past 12-18 months?

Jan 13th, 2015

The self-directed brokerage market in the UK continues to evolve in the post-financial crisis world. Investors increasingly demand transparency, competitive pricing, greater control over their investments, and multichannel account accessibility, while regulators impose stringent legislation with the intent to protect investors.

Despite a challenging and volatile environment over the past several years, the self-directed market has shown moderate growth. In an effort to retain and attract retail investors, online brokerage firms continue to improve the client experience by enhancing trading functionalities and platforms, offering multichannel account access, deepening their asset class lineup, and developing innovative, tech-driven tools and solutions.

The UK brokerage market is fragmented, with market entrants and “digital disruptors,” such as digital online advice and social trading firms, which are challenging traditional brokerage firms, while nontraditional brokerage firms have expanded into the space.

In this report, Celent aims to provide an overview of the current UK online retail brokerage market with particular attention to digital strategy developments among firms serving the self-directed retail investor. Celent will endeavor to:

  • Segment the UK brokerage firms based on their client type.
  • Identify recent developments and trends to the industry.
  • Categorize retail investor product preferences.
  • Provide a breakdown of the various customer investor groups.
  • Size the retail investor market by approximating the current and future self-directed investor population and next generation of investors.
  • Identify the major market players and types of firms.
  • Highlight developments in firms’ digital strategies, including the online, social, and mobile channels.
  • Conclude with a prospective look at the future of the online brokerage industry, the growth of the various retail investor categories, and how online brokerages can differentiate themselves in the marketplace.

“In order to attract and retain clients, particularly NextGen investors, online brokerage firms should focus on building a robust digital strategy,” comments Ashley Globerman, an analyst with Celent’s Wealth Management practice and author of the report. “With the proliferation of the Internet, information and education, social media, and the affordability of smartphones, clients’ expectations are changing. As such, the enhancement of online trading platforms, mobile apps, and social media presence are critical features to develop in this fragmented market. For example, we are seeing the addition of social features and hybrid services, both DIY and advisor-led, among traditional brokerage firms.”

Active Management in the World of Automated Investing

Will Trout

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Jan 9th, 2015

A small Pennsylvania wealth manager recently made headlines with the launch of what it touted as the first actively managed automated investment platform. The platform, known as ALTS, is a wrap program offering access to actively managed mutual funds and ETFs via an online interface. As the name suggests, the platform is heavily seeded with alternative investment managers.

The wealth management industry’s scornful response to the launch of the ALTS platform has been most notable for its vehemence. Passive investing rules the day, and automated advisors in particular appear affronted that anyone would question the mantra of buy and hold. The head of one prominent firm went so far as to describe the ALTS approach (that is, offering active management on an automated platform) as “adding cyanide to a cupcake.”

But active management is not dead, not even in the algorithm-driven automated investments universe.  On the contrary, active management occupies a small but privileged position within this universe, one that has its roots in an investing approach pioneered by FOLIOfn 15 years back and is perpetuated by a number of innovative online firms today. I’ll discuss these firms and their significance in my next post.

2014 Year in Review: Most Popular Blog Entries

David Easthope

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Jan 7th, 2015

As we reflect on 2014 and move into 2015, I thought it would be interesting to review some of the most trafficked, discussed and otherwise popular blog entries from 2014. Naturally some focused on the potential for disruption in the wealth management industry, always a visible and hotly debated topic, but other topics such as fixed income trading, utility models/outsourcing, and market structure were of continued high interest as key themes.


Fintech and the Democratization of Investments

Buy side insight for Fixed Income platforms

The Custodians Enter the Automated Advice Wars

Utility Model in Capital Markets

Social Trading

The Next Generation Investor

Outsourcing in Capital Markets

The Market structure debate in Asian context




Automated Investing 1.0

Will Trout

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Dec 6th, 2014

My recent report, Disrupting the Disruptors: RIAs, Online Brokers, and the Challenge to the Automated Investment Advisors, looks at the accelerating cycle of disruption that characterizes wealth management today, in which traditional, advisor-centric providers are coming under pressure from technology-based market entrants, which in turn prove vulnerable to disintermediation themselves.

Evolution of this sort used to take place over decades; today, disruption is measured in years. Technology has been the driver of change, lowering barriers to entry and expanding the price and servicing options available to investors. These investors include the mass affluent segment and the equally underserved Millennial Generation, whose behavioral characteristics and privileged position as inheritors and generators of assets make them the future of wealth management.

The shift toward a technology-driven means of investing has undercut the role of the advisor and exposed inherent weaknesses in the high-cost model of brokerage houses and registered investment advisors. Looking ahead, however, automated investment advisors will face a more rugged environment defined by tighter margins and competition from online brokerages (in many respects the natural competitors of the automated investment advisors) and institutional players such as Vanguard and Charles Schwab, which have built-in client bases and are better positioned to withstand an eventual market downturn.

Consolidation lies ahead, whether the result of a price war or a weaker outlook for equities. The real question is whether this consolidation marks the beginning of the end or the end of the beginning for the automated investment advisors. My bet is squarely on the latter.