The three stages of managed account client service

The managed accounts industry is stepping up its efforts to streamline electronic communications. For its part, the Money Management Institute (MMI) has led a longstanding drive to develop messaging standards in hopes of easing the exchange of data among program sponsors, asset managers and other stakeholders in the managed account supply chain.

MMI’s Account Origination and Maintenance subcommittee will soon publish a new version of its standards, and the Model Maintenance group is preparing to release its first set of standards. And in May, the MMI announced with software vendor Redi2 Technologies, which co-chairs the MMI Billing Standards sub-committee, availability of new billing messaging standards.

The push for standards stems from the scope and complexity of message structures needed to process managed accounts. The account opening process for example, involves numerous data elements to describe everything from investor suitability, account restrictions, the individual owners associated with the account and the securities used to fund it.

Investment management firms and sponsors use a variety of systems to service managed account client instructions, from account opening to distributions and contributions to account termination. Compounding a lack of consensus on the content of these instructions, process flows and rules vary widely from one firm to the next.

By way of contrast, income tax preparation has become substantially automated, with standardized data formats and processing rules across vendor applications now the norm. Tax filers can follow various prompts to submit standardized tax forms to the Internal Revenue Service online, regardless of tax preparation software.

Clearly, the same cannot be said for processing managed accounts. The industry’s lack of instruction content standards creates disconnects in process flows as the number of relationships among firms increases along with new managers entering the business and established managers expanding distribution.

To understand this further, consider three stages that describe what’s involved at the most fundamental level in processing managed accounts: Communication, Interpretation and Action.

Communication: Communication is the process of transmitting instructions from distributor (sponsor) to manufacturer (manager). Today, most communication is done using unstructured messages sent by email, by fax, and through proprietary sponsor web sites.

Instead, data standards are being adopted to improve industry-wide communications for managed accounts processing and service automation. Standards replace traditional communications methods, increasing productivity by enabling consistent receipt and handling of instructions from sponsors by investment managers.

Interpretation: Interpretation involves decoding information that has been communicated, and evaluating it based upon business rules. Today, interpretation is often done by highly trained staff who have memorized the content and rules specific to each product and distribution relationship. To support the industry drive toward straight-through processing, systems must be able to automatically analyze and determine whether or not instructions can be processed and through which channels. Can the instruction be accepted as given? Does it need additional review?

For example, investment managers or outsourcers sometimes process instructions using a “buck sheet,” which is a cover sheet listing actions that must be taken when opening an account. These actions include checking for adequate funding, the presence of restrictions, and the like. The buck sheet helps ensure completion of all necessary checks. Even so, the interpretation process is still heavily dependent upon the vagaries of human resources.

Data standards provide a common vocabulary for all instructions, allow for consistent rules to be constructed across business relationships, and therefore streamline interpretation. Consider how easy it would be for a manager to define suitability requirements for an investment discipline if every sponsor rated a client’s risk tolerance on a scale of one to five!

Based on a common business vocabulary, the elements of a data model can be mapped into subjects and objects, which may be represented in tables of a database. Rules technology can then be employed to automatically interpret incoming instructions. Further, the decisions made by the rules engine can be tracked for auditability.

Action: Actions, such as updates to accounting or portfolio management systems, can be technologically represented by the process path chosen as a result of the interpretation of a client instruction. Today, action often involves inefficient and error-prone steps as staff re-enter data into multiple systems that are used to service client accounts.

Instead, when workflow systems are used, the action path is represented by a process definition. Distinct action paths can be defined and selected based on business rules. In addition, automated interpretation can be designed to separate normal case instructions from exceptions that require special handling. This type of exception-based processing is most effectively implemented using a business process management engine coupled with real-time interfaces to partner accounting and portfolio management systems.

Consider this scenario: A new account instruction is communicated to an investment manager using a standards-based message that includes client information, account parameters and funding details. A rules engine interprets the content using defined business rules, determining the new account meets suitability requirements, is funded above the minimum required for the distribution relationship, and contains no onerous restrictions.

The rules engine chooses an action path that causes the client information and funding details to update the portfolio accounting system in real time. The action path next cues a trader to invest the account according to the specified portfolio model.

Alternatively, if the account funding amount, as a percentage of the client’s net worth, falls below a predefined tolerance, the rules engine chooses an exception action path that prompts a compliance associate to review and either approve or reject the account.

As this example demonstrates, the benefits of data standards, rules technology and real-time system interfaces are not just complementary, but cumulative. The ability to communicate instructions can enable automated interpretation followed by more efficient and accurate action.

What’s more, applications can be designed to work with rules that sit outside the system code itself. By taking this approach, as new business conditions arise, rules can be updated without changing the application(s) that call upon those rules.

Standards for processing managed accounts hold real promise for streamlining processing among market participants. However, historically, perhaps the most obvious dependency for managers to realize the benefits of data messaging standards has been implementation by wirehouse sponsors.

The shift of advisors (and market share) to the non-wirehouse and independent sponsor firms may prove to be a catalyst for greater adoption of message standards. Because these firms generally have not developed proprietary web portals for communicating with investment managers, they may be more likely to perceive use of message communications as a way to bring communications online while avoiding unnecessary development expense.

(For more on the operational implications of the advisor migration trend, click here to read Peridrome’s cover story in the April issue of Money Management Executive.)

Today’s lack of universally implemented data standards and rules technology has impeded consistent automated communication. However, firms are retrofitting their application programming interfaces (APIs) to adopt standardized message structures and rules that allow for automated communication, interpretation and action, thus enabling straight-through processing.

Rules technology and data standards make it possible to automatically interpret and act upon client instructions. This, in turn, can dramatically increase the speed and accuracy of managed accounts processing, helping to fulfill the promise of electronic communications.