A new paradigm of outsourced investment consulting may be coming into view. TD Ameritrade Institutional (TDAI) is bringing unified managed accounts (UMAs) to registered investment advisors (RIAs) that use its custody and trading services. The RIA service agency says the upgrade is part of a broader campaign to attract and retain independent advisors in the face of competition from direct rivals like Schwab Institutional and Fidelity Registered Investment Advisor Group as well as the wirehouses from which TDAI hopes to lure "breakaway" brokers. But, in partnering with made-to-order platform builder Capital Market Consultants (CMC) rather than a more traditional overlay manager or technology, TDAI may also be striking a balance between manager oversight and customization so far available only to advisors at ultra-high-end boutiques.

"CMC leaves the door open for RIAs to create solutions that best serve their clients" says Steve Winks, a Richmond, Va.-based wealth-industry consultant. "It's not a complete fiduciary solution, but it has more of the elements of a complete fiduciary solution than anything else out there."

For TDAI the point of offering UMAs and platform customization through CMC is "to become the premier player in offering investment advisory services" to RIAs, says Brian Stimpfl, the TD Ameritrade division's head of product development. "Right now we don't have a significant presence in separately managed accounts (SMAs)."

Catch-up

TDAI is working to fix that by boosting uptake for SMA-related products, which now account for between 8% and 10% of an overall an investment program that also includes mutual funds, exchange-traded funds (ETFs), fixed income and third-party sub-advisory. "We'd like to get that up to the 10% to 12% that other custodians are seeing," says Stimpfl.

TDAI's existing SMA program is a four-year-old platform provided by Chicago-based Envestnet Asset Management that provides old-school SMAs only. "That doesn't give advisors a lot of flexibility," says Stimpfl. "You can't unbundle the services."

SMAs are single-account, single-style portfolios of investor-owned securities with investment minimums generally ranging from $50,000 to $250,000 in the retail space. UMAs blend different asset classes, security styles, and investment vehicles -- SMAs, ETFs and mutual funds, say -- in a single account, and with roughly comparable minimums. Multiple-discipline accounts (MDAs), a mid-step between SMAs and UMAs, provide different styles of a single asset class in a single account. MDAs have been on the market a lot longer than UMAs and account for a lot more in overall SMA assets.

That said, UMAs are viewed as the coming thing in fee-based products. More to the point, they're finally starting to seep out of their wirehouse bastions into the RIA space. That's mostly because ex-brokers are telling custodians that they want access to the products they're accustomed to. At the same time, RIAs who have traditionally managed their clients' portfolios personally are seeing value in stepping down to a relatively flexible packaged product, just as RIAs who have traditionally leaned heavily on mutual funds are seeing value of stepping up to a more streamlined and -- in theory -- customizable approach to diversification.

"Our advisors are the ones who drive what our platform looks like," says TDAI's Stimpfl.

About this time last year Fidelity's RIA group became the first of the big custodians to launch a UMA program -- one that's managed by Envestnet as it happens. In June 2006, Pershing's Advisor Solutions unit responded with an array of UMA platforms from Envestnet as well as AssetMark (now part of Genworth), Placemark and Pershing's own Lockwood subsidiary. Later that month Schwab Institutional struck back with an MDA offering managed by Legg Mason's ClearBridge -- the direct descendent of MDA pioneer Citigroup Asset Management.

Open architecture

CMC's approach to the investment-manager universe differs substantially from these offerings, however. "The managers we follow are a by-product of the needs of our clients," says Barry Mendelson, founder and managing director of Milwaukee-based CMC. "They're not pre-determined."

At least they're not usually. One option that CMC is bringing to TDAI-affiliated advisors is in fact a selection of model portfolios that CMC manages -- but then that option leaves the advisor free to use their own models instead.

For the most part though, CMC confines itself to manager research and due diligence, proposal generation, asset-allocation models and negotiating sub-advisory fees. Another CMC-run platform option focuses on broadening the selection of investment strategies available to RIAs who prefer to do their own research and selection. In yet another permutation, CMC acts as a consultant to advisories thinking of building proprietary platforms or offering other, perhaps more specialized, investment services.

This last option touches on another point of differentiation that CMC likes to emphasize: its "open architecture" approach to investment advisory services goes beyond manager selection to include best-of-breed support technologies.

"There are scores of firms that provide specialized and very robust services and technologies that support the delivery of fee-based investment advice -- and they're all 'talking' to each other, so you really can build customized support structures," says Mendelson. "It's like Apple and Dell. With Apple, it was all made and engineered by Apple. Then Dell came along and said, 'Look, we'll find all the best components, and you the customer can determine what we actually build for you.'"

Today's big players in SMA outsourcing are "an outgrowth of the dot-com era," adds Mendelson. "The idea of a single technology solution to handle everything was very appealing 10 years ago. But we know now that there is no such thing as one single 'best provider' of anything. The 'best provider' is the one that suits your needs."

"And that," says CMC marketing head John Erard, "is why our first priority is to understand the individual advisor's business."

CMC's policy of aggregating complementary elements of fee-based investment management together rather than erecting walls between disparate offerings strikes a chord with Envestnet's president Bill Crager. "It's a mantra of mine that we've got to be a unifier for integrated solutions," he says. "That's part of delivering on the promise of advisor independence -- which certainly sounds good, but is mighty hard to achieve in reality."

Sine qua non

For wealth-industry consultant Winks, however, none of the old-line third-party investment-platform providers belong in the RIA space, period. That's mainly because they're married to the UMA, which in and of itself "doesn't allow you to fulfill your fiduciary obligations." What's needed, he says, is a "sleeveless" overlay technology like Smartleaf's -- he couldn't comment on providers like Tamarac and Adhesion -- that makes the advisor directly and solely responsible for everything that happens to his clients' portfolios.

But then Winks takes a hard-line on fiduciary obligations. As editor of the RIA-industry newsletter Senior Consultant he delineated 240 must-have fiduciary obligations, and then challenged the industry to come up with an outsourced solution that addresses each and every one of them.

In that light, Winks' praise of CMC is fulsome. "They're about 30% of the way there," he says. "No one else is even close."

TDAI doesn't seem to share Winks' views on the inadvisability of bringing pre-packaged investment products to RIAs, however. It's making Boston-based platform provider FundQuest an SMA option along with the existing Envestnet platform. It's also in the process of selecting an institutional UMA provider as a companion to its bespoke CMC offerings.

Jersey City, N.J.-based TDAI supports about 4,300 RIA firms. -FWR

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