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INTERVIEW: Smartleaf On Wealth Managers' New-Found Focus In Tough Times

Harriet Davies

12 September 2012

Wealth managers are not reinventing what they are delivering clients in today’s tough environment, but they’re improving how it’s delivered, explains Jerry Michael, president of Smartleaf, the overlay technology provider.

Overlay technology allows wealth managers to adopt open architecture without sending clients’ money out to various other funds and fund managers. Instead, fund managers distribute their strategies through the overlay platform.

Culturally, this empowers the wealth manager, and strongly contrasts with alternative approaches that “effectively turn advisors into a front-end window,” says Michael.

Today, because clients often expect open architecture, the argument for overlay largely rests on its effect on client-service delivery and workflow processes, says Michael. After all, retaining clients and developing new, profitable relationships are most firms’ top priorities.

But the environment at the moment is one of low returns and low levels of trust, making that goal all the harder. “That’s the world as our clients see it, in fact I think as everyone sees it,” says Michael.

Not what but how

“What’s the response to that? Broadly speaking, one would be to totally reinvent what is being delivered; this might be in the form of stressing wholly new approaches to asset allocation, stressing portfolio insurance, stressing alternative investment… That is not typically how our clients are responding,” he says.  

“Instead, they’re not reinventing what’s delivered - they’re reinventing how it’s delivered. The answer for our clients seems to be: they are going to empower the front end person, the relationship manager, the portfolio manager.”

And the way relationship managers are being empowered falls into two categories: one is more time with the end investor and the other is greater tax and allocation management.

“When you have 60/70 basis points of tax alpha, that means more in a low environment than in a high return environment,” says Michael.

Individual users of overlay credit the technology with giving them over three times more time to spend with clients, Michael says, but how replicable is this to the wider industry? As the technology is relatively new, there are not comprehensive studies examining this.

“The industry is still exploring this. This is a relatively new technology and there’s many forms of it,” says Michael. For example, he thinks the industry is exploring the most efficient way of using extra time created by technology. However, he thinks many organizations are “determined to go down” the road of spending more time with clients.

“Overlay simply gives firms more possibilities, so it gives them questions they’ve never faced before.”

What unifies the options firms are exploring though is that they are based on deepening relationships and trust. “That is the way they are responding to the current market. It’s not necessarily new products per se, it’s more relationships, more of the services that they’re already providing – but brought up to a whole new level.”

New asset management models

If this were to become widely adopted, it would impact the asset management world, with providers moving toward selling strategies instead of money management. With overlay, asset managers sell ideas, in the form of a weighted-list of securities, but the money is consolidated with the relationship manager – which Michael sees as a way of helping to combat problems such as Ponzi schemes.

“We’re not seeing anyone purchase a strategy or a model from someone who just sells strategies or models. There’s definitely a demand and it’s definitely growing, but it’s from people who also manage money,” he says.

One question is whether that would devalue the asset management industry, and whether remuneration from selling strategies would be enough to tempt the best stock pickers.

Michael says the fees are less but the margins are higher, and for this reason top managers do participate. Eliminated costs include: contracting, account setup, trading, reconciliation, compliance, customer support and reporting. Due to this, incremental revenues from selling models are 100 per cent profit, he says.

Overlay technology also puts relationship management, tax management and portfolio allocation in the hands of one person, which arguably is a lot of responsibility. However, most of this is automated, negating this effect.

“A lot of the detailed work that was done literally on a yellow pad can now be automated, so I think it actually makes it easier,” says Michael.

Also, he says, it’s the way it used to be – the person sitting behind the table is the person managing your money, and you can speak to them regularly: “It’s back to the future wealth management.”