December 15, 2003
Jonathan G. Katz
US Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Re: Response to SR-NSCC-2003-21
Market Street Advisors, Inc. respectfully submits this letter in support of the above-referenced proposed rule change of National Securities Clearing Corporation (NSCC) relating to NSCC's proposal to offer a messaging system for separately managed accounts.
Market Street Advisors (MSA) is a new company established by two senior Wall Street executives to capitalize on a significant niche-market opportunity by developing an advanced new Internet-based full service provider (FSP) for handling the back-office administration of individual securities portfolios (wrap accounts) on behalf of investment managers and program sponsors.
Founders Bevin Crodian, PhD and Robert Lage, CFA draw upon a combined 35 years of experience in the management, marketing and technology infrastructure of wrap-account business and are personally acquainted with virtually all of the prominent participants in this rapidly-growing investment management sector.
The sector of the financial services industry broadly defined as separately managed accounts (or managed accounts) can be roughly divided into four categories:
Private Wealth Asset Manager: A company that distributes separately managed accounts directly to high net worth individuals. These services require very high minimums, often in excess of $1,000,000.00. Aggregate fees for this service can be bundled or unbundled.
Institutional Asset Manager: A company that distributes separately managed accounts directly to institutions, often tax-exempt. These services carry minimums that can range higher, some times far higher, than $5,000,000.00. Fees for custody, brokerage, and asset management are often unbundled.
Wrap Asset Manager: A company that distributes separately managed accounts through intermediary sponsors such as Salomon Smith Barney and Merrill Lynch. So called "wrap" accounts are separately managed accounts that are distinguished by their all-inclusive, hence "wrap" fee, and their lower account minimums, sometimes as low as $50,000.00.
Sponsor: A company that through either a captive or non-captive sales force provides distribution for wrap managers. Sponsors also provide varying degrees of oversight of the asset managers that comprise their offerings. Depending upon the level of oversight provided, the sponsor, just like a nonbank money manager, may register under the Investment Advisors Act of 1940. Sponsors that are affiliated with wirehouses also often provide brokerage and custody in one bundled service. At the independent sponsors, these services are sometimes unbundled.
Reasons Why Market Street Advisors Favors NSCC's provision of the Separately Managed Account (SMA) Service
Reason #1-Greater efficiencies will provide more investment options for investors.
NSCC's offering is a crucial first step toward eliminating a major obstacle in the asset management industry. Focusing on the wrap industry, there is a general need for greater, and more efficient, connectivity between wrap asset managers and trading desks and custodians. This need is further complicated by the fact that the wrap business often requires a different connection than that which would be used by an institutional manager. For example, it is possible that a multi-discipline asset management company (deploying both institutional, private wealth, and wrap strategies) could conceivably have to use two or more different connection protocols to connect to the same broker dealer and/or custodian-one or more for their institutional portfolio and one or more for their wrap portfolio. This is an obvious inefficiency that the industry can easily forego. These problems with connectivity cause some institutional asset management companies to avoid the wrap business. Since chronologically the wrap industry developed later than the institutional business, it is usually the wrap business that suffers the most from this avoidance. As a consequence, investors who cannot afford the high institutional or high net worth minimums are denied a more robust menu of managed account offerings.
Reason #2---The NSCC initiative opens competition for back office providers.
Again focusing on the wrap industry, there is no universal protocol for connectivity between asset management companies, broker dealers and custodians. Often the wirehouses provide both brokerage and custody in addition to distribution. Some wirehouses require that wrap asset managers connect directly to their sponsoring platform. If the wrap manager distributes through only one sponsor, such a requirement is not onerous. However, if the manager chooses to connect to more than one sponsor, this process becomes problematic. The manager often must log onto one system, complete the necessary transactions, log off, log on to the next sponsor, etc.
Wrap managers who desire a consolidated set of books and records that will provide a check against the reports provided by the individual sponsors often seek the help of a middle and back office service provider. This service provider will then build the connectivity on behalf of the money manger, and then usually will remarket it to subsequent clients. This process frustrates the entry of new service providers into this business, not because these connections are difficult to develop, but because the service provider can only provide the connection on behalf of the client/money manger. Vendors on their own behalf cannot connect directly to custodians and trading desks. Consequently, new entrants to this space cannot finish their processing platform until they can find a client who is willing to hire them before their platform is completely built. This barrier is not insurmountable, but it certainly discourages competition in back office processing in the wrap business.
If there were a readily available industry utility such as NSCC providing connectivity to broker dealers and custodians, then there could be more new entrants in this business, and the new entrants could focus on providing more efficient and different processes for money managers - like automatic reconciliation and straight through processing of new accounts. Currently, just one provider dominates the bulk of the outsourcing business among wrap managers and, as indicated above, ready built connections are not available for use by outsourcers new to the business. Among wrap managers, it is common to hear complaints about a lack of competition among middle and back-office outsourcers. The lack of competition lends itself to higher processing costs. These high processing costs are an impediment to the growth of the wrap industry.
Reason #3-A lack of process efficiency will drive some wrap managers out of the business.
The absence of a universal protocol for connecting to broker dealers and custodians is a major cause of high processing costs in the wrap industry. Because of these high costs, many money management firms avoid the wrap market place. Worse, some existing wrap managers have witnessed their profit margins erode significantly because of the high costs of processing the business. Since wrap managers have their fee set by the sponsor, they do not have the ability to overcome high processing costs through fee increases. Consequently, the wrap industry is becoming unattractive to some quality managers in the wrap space. Investors need financially healthy firms to manage their portfolios. Finally, it is difficult for the total cost to investors of a managed account to decline while processing costs remain so high.
Market Street Advisors supports NSCC's proposal to offer the SMA service because it works to lower industry costs thus creating a larger variety of managers from which investors can choose. A major cost component of wrap asset management business is middle and back office processing. A major driver of this cost is connectivity to the broker dealers and custodians. Many firms avoid the wrap marketplace because of high processing costs. The NSSC initiative seeks to address this problem. A universal protocol for connectivity will make the wrap business more attractive to both institutional and private wealth managers. Thus NSCC's provision of the SMA service will benefit the investing public by increasing the likelihood of a more diverse offering of wrap managers while also offering the possibility of lowering investment costs.
Bevin Crodian, CEO
Market Street Advisors