Industry challenges

 Investor demand for managed accounts has grown especially strongly over the last ten years, when managed account assets have quadrupled from approximately $200 billion in 1996 to over $800 billion by 2006. The growth rate of managed accounts has exceeded that of other managed investments since the third quarter of 2004, outpacing mutual funds and variable annuities for all but two quarters. Industry analysts expect that managed accounts will continue to grow at an average compounded annual rate of 18% over the next five years, ahead of an expected 10% growth rate for mutual funds.

 The expansion of the managed accounts industry places significant pressure on firms to build scalable operating platforms that enable account volume to grow without a corresponding increase in people and expense. One area of managed accounts operations where significant scalability concerns remain involves the processing of individual client requests to open accounts, make contributions, take distributions, harvest taxable gains and losses, and the like. The chart below, which represents a managed accounts operation starting with 50,000 accounts in 2007 and growing at 18% per year, illustrates how request volume increases as a function of the base of accounts.

 For most industry participants, the servicing of these requests is a highly manual process. Peridrome's research indicates that in typical environments, the operations staff necessary to process the request volume above can be projected as shown in the chart below.

 Concern among industry participants about the linear relationship of account volume to the number of staff required to process the business has driven several trends in managed accounts operations over the last five years:

• staff training and management, to ensure that accuracy and operational performance can be maintained as the number of staff increases (along with the associated turnover rate);
• straight-through processing, which aims to reduce the amount of manual processing and entry of data that must be performed to fulfill a client request by integrating and orchestrating core accounting and trading systems;
• communications standards, which seek to improve the efficiency of the interaction of sponsor and manager in fulfilling client requests; and
• outsourcing alternatives, which offer the potential to improve efficiency and reduce costs by pooling operational capabilities in one service provider supporting multiple managers.

For more information about Peridrome's research into metrics and staff projections for managed account operations, please contact us.