Tech firm offers to share discretion on UMAs on expanded WealthADV platform. Adhesion Technologies has expanded WealthADV, its wealth-management platform for independent RIAs, to include outsourced overlay management. Wealth-industry observers say the success of the move could depend on Adhesion's ability to forge links with distribution partners with deep roots in the RIA space.

"Distribution is going to be the million-dollar question for them," says Justin Van Til, head of business-development at Cambridge, Mass.-based Smartleaf, which provides overlay technology, mainly to bank-based wealth managers.

But if Adhesion can tap into robust channels and reach what Van Til calls "the [mutual-fund] wrap guys who want to go overlay," then, he says, it could bring them "tens of billions in assets."

Upstream

In the context of the unified managed account (UMA) -- a multi-manager, multi-asset class portfolio that typically blends separately managed accounts, mutual funds and ETFs -- overlay management is the process of running models-based portfolios with an eye to aligning trading activity, managing cash flow and enhancing their overall tax efficiency.

There were about $125 billion in UMA assets under management at the end of 2006, according to one industry estimate. Together with multiple-discipline accounts -- which blend different styles of the same asset class, usually equities -- UMAs are expected to cross the $500-billion threshold by 2011.

Adhesion uses Boston-based Upstream Technologies' model-management, investment-management and trade-order-management systems as the engine of its overlay offerings.

Until recently Adhesion's overlay -- one component of a web-based technology platform that includes back-office functionality, performance reporting and a multi-manager UMA program -- came only as a do-it-yourself option. That's mainly because Adhesion assumed most RIAs would prefer to run their clients' UMAs themselves.

New normal

"We thought they wanted to hang on to the overlay," says Adhesion's CEO Michael Stier. "But in our experience that's the exception: for they most part they want to let it go."

The other reason Adhesion is coming out with the outsourced overlay option now, about 20 months after rolling out its investment-management module, is that it was keen to get its UMA offering to market back in 2005.

"There was no grand design in coming out with one [version] first and now this," says Stier. "It was more a case of us saying, 'Let's not try to tackle more than we need to right now in order to get things launched.'"

Charlotte, N.C.-based Adhesion says it has about 50 WealthADV clients, all of them RIAs, with combined assets under management of about $5.5 billion. Three of its clients are using the new in-house overlay option. Over time though, Stier says he expects that use of the in-house version "will be the exception not the rule."

Assisted use

Seattle-based Tamarac, whose clients' assets under management hit the $30-billion mark in April 2007, has been providing portfolio-rebalancing technology, primarily to independent RIAs, for the past two or three years.

Though it doesn't provide overlay management as an outsourced service, Tamarac's founder and president Matt Springer says it's an idea he and his colleagues have "kicked around" in the past as a way to reach RIAs that "might not have the time or the expertise to undertake the task themselves but still want to take advantage of the technology."

To that end, adds Springer, Tamarac is "exploring an 'assisted-use'" system -- at least around trading -- as a pilot program.

Like Adhesion, Concord Wealth Management, a Matawan, N.J.-based back-office, account-management and investment-platform provider, lets its clients choose between do-it-yourself and outsourced overlay.

Friendly relationships

From a small sample -- Concord has fewer than 10 independent RIA clients -- the split between those opting for in-house overlay and the outsourced version is fifty-fifty, says Richard Trumpler, CEO of Concord's banking services group. But that includes firms that don't use UMAs.

Still, says Trumpler, outsourcing overlay management for RIAs is "a large market opportunity going forward."

Concord does most of its business in the small and middle-market bank space. It uses Smartleaf's overlay technology.

So, on both counts, does Advisor Technologies, Wayne, Pa.-based SunGard's third-party investment-platform provider.

Advisor Technologies' president Mike Winkel agrees with Smartleaf's Van Til in seeing Adhesion's ability to partner with firms that are entrenched in the RIA arena as "a necessary ingredient" for its success.

To that end, Adhesion has "very friendly relationships" with the principal RIA custodians, according to Stier. For example, "Schwab Institutional looks at us as a great competitive edge," he says.

Ten calls a day

Meanwhile Adhesion's clients are providing a steady stream of referrals, says Stier. "We feel we're pretty well positioned -- we're certainly not hurting for business."

Randy Bullard, president of Dallas and Wellesley, Mass.-based overlay manager Placemark Investments, thinks Adhesion could have its work cut out for it, especially if it ends up catering mainly to small RIAs.

"The danger is having the guy with $8 million on your platform who calls you 10 times a day," says Bullard.

That's why Placemark, which manages more than $6.5 billion, targets only large RIAs. "The RIA market is so fragmented it doesn't make sense for us to look past the top 50 or 75 firms," says Bullard.

Placemark's clients include brokerages Smith Barney and RBC Dain Rauscher. Among its RIA clients -- and Bullard says it only has a few -- is Atlanta-based RIA Homrich & Berg, which manages about $1.6 billion.

Cost and flexibility

But Adhesion's new overlay offering makes sense to John Erard, head of business development at Capital Market Consultants, a Milwaukee-based investment-manager research and platform-consulting provider.

"It's another indication of market forces driving toward increased flexibility in the open-architecture investing space," says Erard. "It's becoming clearer by the day that the old model of a fixed solution is being replaced by a model that allows for customization to meet the individual advisor's requirements."

Greg Horn, CEO of Blue Bell, Pa.-based multifamily office and fund-of-funds manager Persimmon Capital Management and former CEO of PFPC's third-party investment-platform provider Advisorport, thinks there's validity in the view that the RIA space is sufficiently heterogeneous to support multiple approaches to overlay management.

But he also believes that cost trends may be starting to favor overlay outsourcers. "The in-house option is a nice concept, but the pricing [of outsourced overlay] is coming down to the point where I'm not sure the RIA will want to do it in house," he says. -FWR

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