[Will the future of investment portfolios increasingly be built, not on mutual funds and ETFs, but on customized managed accounts? A strong trend has emerged as recent advisor surveys report that 62% of financial advisors use separately managed accounts (SMAs), and that number is even higher among advisors under 40 (70%); in addition, 56% of advisors who use SMAs also plan to increase their usage over the next two years.

Much of this trend is built on advisors seeking differentiation and becoming more focused on providing the best client-centric investment experience and more perceived client value. This is leading advisors to re-evaluate how best to be equipped with the right tools and investment products to service their clients and investment portfolios in this evolving financial services business environment geared to “personalization.”

Unfortunately, many financial advisors and wealth management firms are at the mercy of their firm’s numerous and sometimes disparate technology systems many of which are outdated, inefficient, and error prone. Add that to the ever-changing regulatory environment pushing stringent standards often creating a maze of policies, audit, and oversight requirements that must be followed when providing investment advice. Technology becomes the only key to opening up these opportunities and spawning the flexibility and creative innovations to investment customization that can truly engage investors.

To better understand where the technology and implications of these trends are taking advisor business models and client experience with financial services, we reached out to Institute member Mike Blundin, new CEO of Vestmark—a leading provider of portfolio management/trading solutions that enable financial institutions and advisors to efficiently manage customized client portfolios through an innovative SaaS-based cloud platform. Their history of rapid and continuous innovation has enabled the multi-award-winning platform to deliver a streamlined solution for management, trading, and delivery of managed accounts that can propel wealth management firms to the next generation of digital investment solutions.]

Bill Hortz: Do you see the future of portfolio management by advisors increasingly built - not on mutual funds and ETFs - but towards more customized portfolios and implemented as an SMA or UMA? Does that shift reposition or redefine the Advisor of the Future?
Mike Blundin:
The short answer is yes, there absolutely is a tendency towards personalized managed accounts; SMAs and UMAs. The challenge with mutual funds and ETFs is that they do not allow customization, nor personalization. And they can be tax inefficient vehicles, both to simply hold, but also to transition into from a legacy portfolio. The accelerated demand in the marketplace for customization and personalization is really putting a premium on capabilities that have been available in SMAs and UMAs since day one.

However, managed accounts are also rapidly evolving, adding new capabilities that they have not had historically. There is a stream of new types of investment products being built on the managed account chassis and the key driver here is enabling technology. It is bringing higher degrees of customization allowing an advisor to be increasingly consultative and deliver a portfolio tailored to a client’s needs. It enables an advisor to shift their value proposition away from “stock picking” to a deeper service-oriented dialog with the client.

Hortz: So SMAs and UMAs are gaining traction because they offer the advisor the ability to do so much more for the client – both in terms of personalization and tax management. Is this what is also driving the current direct-indexing craze? How does direct indexing fit into this equation?
Blundin: This absolutely all ties together but one of the interesting things here is that there are some other fundamentals driving direct indexing in addition to the desire for personalization and tax management. One of them is the rise of passive investing. 0ver the last decade passive investing has actually grown to exceed active investing in the retail marketplace. The other, over the same time frame, has been a correspondingly large rise in interest in sustainable investing. Direct indexing is a little bit like the chocolate and peanut butter coming together. It is the desire for a lower cost product, which the passive strategies bring, along with the ability to express personal preferences to put their money to work in ways investors believe in personally.

The desire to reflect one's personal preferences and get the pricing power benefit of passive investing requires a degree of personalization and customization, and the SMA & UMA frameworks are perfectly aligned with delivering on these expectations as well as tax management. Technologies are extending these capabilities, bringing it all together to make a direct indexing craze possible.

Hortz: You and your fellow founders saw this opportunity emerging 20 years ago when you started the firm. How did you design your technology platform to enable advisors and financial institutions to efficiently manage and trade investor portfolios in expanded ways and investment arenas? What guided your tech development process?
That is a great question and there's a lot of good anecdotes and stories from the deep past. It might interest people to know that before Vestmark, the firm’s founders were involved in online personalization in the days of dot.com 1.0 and our personalization product at the time was part of a Web 1.0 success story. Our early personalization knowledge and perspectives were formed in the 90’s when “mass customization” was booming and we were building a retail and online personalization company. Those experiences were instructional for us in terms of what it takes to build a platform that can really achieve retail scale and deliver high degrees of personalization, which we carried over into the financial marketplace.

One of our very early precepts was that you need to scale not just technologically, but also operationally. Individuals or teams of people need to be able to manage the personalization of hundreds and even hundreds of thousands of accounts efficiently. And that means that you need to enable processes that are highly automated but also oriented around exception processing. You do not want to spend time looking at or examining a portfolio that is in good order. You need to pay attention to the portfolios that have drifted far away from their targets, have pending withdrawals, or have other exceptional conditions. And we architected into the technology, right from the get-go, facilities that make it very easy to identify and correct the same issue across many accounts in one shot, with one mouse click. We have carried along that mindset throughout all of our innovations to continue to enable scalable, exception-based workflows that allow personalization for clients.

Another one of our founding precepts, the way we looked at the platform from an architectural perspective, is that we defined retail scale as a million accounts. It led to an internal maxim, “institutional capability at retail scale.” If we were able to figure out how to implement something and make it operationally efficient at the million-account level, we were all in. And if not, our general perspective was that it was probably not a capability that was ready for retail yet. With this philosophy, we have steadily advanced the capabilities of the platform and maintained operational scalability.

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