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“Now, you and I both remember the cost basis legislation, that was a while ago. Since then, at least there is a source of good accurate cost basis information. But to this day, we see situations where firms have layered on a portfolio management or rebalancing or trading system on top of a core system of record. We still see cases where firms do not have good or accurate cost basis and tax lot data when we’re doing a conversion. So there’s always something to delve into.”
— Rob Klapprodt, Corporate Strategy Officer, Vestmark
Topics Mentioned
- Data at Enterprise Scale
- Unified Managed Households
- UMA Is Always The “Next Big Thing”
- Horrendous Tax Lot Data
- Best Practices Managing Client Data
- Getting Your Client Data in Order Now
- Sleeves vs Strategies: What’s the Difference?
Episode Transcript
Craig: I am happy to introduce our next guest on the program is Rob Klapprodt, Corporate Strategy Officer at Vestmark. Rob, welcome.
Rob: Thank you Craig, thanks for having me on.
Craig: I’m glad you could make it, glad we could coordinate this. Thank you for making time for us. Where are you calling in from?
Rob: I am calling from just North of Boston. About 20 miles due North of Boston along the coast.
Craig: Love that area, love going to Boston, Not this time of year.
Rob: It’s a little cold.
Craig: You get used to it. Cool. I’m in my home state of New Jersey, it’s also pretty cold here. So we’re talking about organizing and managing client data which is the topic of the month. But before we do that, can you please give us the 30-second elevator pitch for Vestmark?
Rob: Sure. Vestmark is a wealth management technology platform provider, that’s a little bit of a mouthful. We’ve been around about 20 years and we have tools for wealth managers and enterprises of all shapes and sizes that are trying to manage tailored personalized portfolios for end clients. Our clients really run the gamut of banks, broker dealer, asset managers and independent advisors. Currently we have about $1.5 trillion in assets that are managed on the platform and that spans over 5 million investor accounts.
Craig: You guys are old school, you’ve been around a long time and you’ve stood the test of time. Haven’t been acquired, you’ve stayed independent, one of the few firms that hasn’t been snapped up which is a testament to how well the firm is running. I was just thinking how long we have known each other, we met in 2008 on a bog insurance company project, that was crazy back then.
Rob: I believe that is correct. It was just before the financial crisis really hit. That’s always a mental marker.
Craig: We won’t say the name of the company, but it was a company that was way over their skiis, and they were trying to build a whole new platform for themselves with a million different things in a million directions and they just wound up taking a bath.
Rob: Yeah. A lot of companies did at that time, they had the right idea but some factors outside of their control really conspired against them. What are you going to do?
Craig: And one thing that’s part of any of these projects that we work on, we’ve worked on a couple different projects together, on different sides, usually I’m working for one vendor and you’re running Vestmark. It’s always interesting projects where they’re looking to integrate something, or coordinate it and it all comes down to data. Data drives everything we do, that’s why we have this topic. So to start things off, can you talk about how Vestmark approaches organizing and managing data? How does it work?
Data at Enterprise Scale
Rob: Thinking specifically about client information, as I mentioned at the outset there. We’ve really grown up in the retail wealth management space. Ultimately it’s all about the end investor and the firms we work with they, they want to have a lot of investors, a lot of clients at the end of the day. There’s always an enterprise scale component to everything that we do and everything that we think about. So as we think about client information and what we need to really support our clients, there’s a few areas that we always hone in on in terms of what are the sources of the information that we need? How is it managed, how is it maintained? How do we make sure it’s accurate and up to date.
Rob: At a very high level, again, there are few sets of information that we think about. One, of course, is just the client profile and information itself. Where’s it coming from? We’re not a CRM system, we’re never the source repository for that type of information. But we just need to be aware of where that information is held to make sure we can access information from the CRM system. So there’s client profile information, we think about their investment goals, risk tolerance, time horizon, things like that, that may influence the portfolios that are managed on our system. So that’s always an area of consideration.
Rob: Client investment preferences, we have grown up in the separately managed account world where client preferences, client customizations always come into play. So what are those investment preferences? How are they captured? Can we help our clients capture investor preferences to make sure that we understand how portfolios need to be tailored, always an area that we think about. Taxes, clients tax rates, capital gains budgets, any other tax considerations that might influence the trading and the portfolio activities that are happening on our system.
Rob: And last but not least are investment accounts. Clients, people, you and I, that’s who we all are here to serve at the end of the day, the end investor, but their holdings, their financial lives are kind of spread out in granular investment accounts. Accounts can be used and organized in different ways to fund an investment goal or an investment objective. I’m married, so there’s the consideration of my wife’s account, my children are different investment goals. So there’s some notion of the accounts that are being used to manage and help achieve help the clients achieve their financial goals and objectives. Those can be internal accounts, they can be held away accounts, they can be discretionary accounts, non discretionary accounts. We need to understand all these factors because ultimately, it’s going to influence how we build and scale the overall investment process without neglecting levels of personalization and customization that we want to help our clients the enterprises that we support, what they want to achieve. So as we think about client information, client data, especially in enterprise setting, there’s a lot of things that we have to think about and consider and help our clients pull together.
Craig: Were you talking about account structures, and all the different types of accounts, there’s also held away accounts, does that lead into an area where you guys are pretty strong, which is the UMH structure?
Rob: I would say as we think about the account, the structure of the client relationship, at the highest level, you have the client and the clients household. I mentioned in there I’m married, so any spousal relationships, familial relationships that you need to be aware of, as a financial advisor, as the enterprise wealth manager, what will the client’s goals and objectives be, thinking about estate planning and things like that, are there are heirs, and other considerations when you think about the overall household in the client relationship. So that’s at the very highest level, what is the family structure? As we start thinking about a unified managed household, that gets into how do I pull all the accounts together that fit into a particular client relationship, and that might those those accounts might be held within my firm, they might be held away, but there are accounts that I want to be knowledgeable about, because that might help influence or guide what I’m going to do with the accounts that I’m advising the client on.
Rob: I might want to complement activities that are occurring outside of my purview, and to do that I really need to know what’s in those accounts. So there’s a household level information in the accounts that I need to understand. We have tools to group accounts across the client relationship, to define asset allocation policies, investment goals and objectives. So you can kind of collect and organize, Okay, I have two sets of accounts or assets that I want to use to fund or support a particular goal. And clients may think about these things in different ways. We try to be fairly flexible in modeling the overall client relationship, grouping the accounts that might be applied to a particular investment purpose.
Rob: As I mentioned before, the accounts themselves we need to know what those accounts are. Do I have discretionary control over those or not? Do I need to provide advice back to the client for them to implement in a held away or client discretionary situation? All these things influence the amount of automation we can instrument across the client relationship. And then UMH, unified manage household has been a buzzword for quite some time in the industry for good reason, we’re all aspiring to add intelligence and automation at the overall client level, which comes with it a whole slew of tax benefits and considerations that can kick in too.
Rob: At Vestmark though, we’ve also been working heavily on the UMA, the unified managed account and what can be done and automated in a single custodial account while providing diversification and supporting different actors, if you will, that might be participating in managing the client portfolio. The financial advisor, a centralized investment team, third party money manager and outside overlay manager. So there’s a lot of actors that ultimately need to be organized to drive the best outcome for the client. You might be operating across multiple accounts, right, in a household setting. It might be a single account. There’s just all kinds of combinations that we see out there.
UMA Is Always The “Next Big Thing”
Craig: It’s funny how since we’ve known each other for 15 years or more, UMA is always been the next big thing. UMA is going to take over, everyone’s gonna be on a UMA and we’re still not really there yet. There’s still a lot of Rep-as-PM and a lot of other strategies or management programs. Are you seeing a trend with your clients moving more assets onto onto UMA platforms, or is it still the next big thing for next time?
Rob: We are seeing that and you’re right, as an industry, we love our acronyms, right. We love our terminology. From our point of view, if you think about mutual fund wrap, SMA separately managed accounts, ETF advisory, Rep-as-PM, UMA, they’re all just different gyrations trying to capture a diversified portfolio where the only differences are, what are the securities in it? Are they individual equities? Are they bonds, mutual funds or the ETFs, start thinking about crypto and digital assets, but the only differences are, what are the securities in it and who’s in the driver’s seat? And the different combinations of those factors those dimensions have just spawned all these different terms.
Rob: In architecture could constructed correctly, you have the flexibility to build and support diversified portfolios using the investment vehicles that are best for the client situation. And with the actors being able to contribute to the alpha, to the returns whatever it might be in the client situation that is best suited for for a given situation. So as we think about Rep as Portfolio Manager and overlay, I would agree that the flows haven’t been as
strong as they could be in the UMA for a couple different reasons. One is compensation, right, there’s always that factor. But a lot of people I think have mistakenly associated UMA with an advisor fully relinquishing control of the portfolio, and that doesn’t have to be a true statement. For some situations for some programs that have been architected, that is true. The advisor has to give everything up and some advisors are resistant to that. The way we’ve set things up is to allow our clients, our enterprise clients, the home offices to kind of figure out alright, what is the right role of any given financial advisor in any given client situation? Advisors are people at the end of the day, not everyone can be an expert in all things. So there has to be some balance there.
Rob: I think properly constructed well, one, UMA Rep as Portfolio Manager, Rep as advisor, put all those aside. What is the role of the financial advisor, how do you build and support a diversified portfolio? To me that is a you UMA if you’re bringing diversification, mixing equities with funds, you know, pull vehicles where they have their place. To me, that’s UMA I don’t care if the advisor is in the driver’s seat or somebody else, as long as it’s appropriate for the client and the advisor is doing the right thing and the home office agrees with everything that’s happening.
Craig: So the next question. Everyone loves, hearing about other firms’ problems, we kind of enjoy that hearing how other firms have made mistakes and how we can avoid those. So can you share a few examples of big problems you’ve seen at other current clients or past clients, no names of course, there were due to poorly organized or managed client data?
Rob: We have seen a lot of things over the years.
Craig: You’ve seen a lot.
Horrendous Tax Lot Data
Rob: I’ve seen a lot. I will say, some areas have gotten better. For the longest time we were seeing just horrendous tax lot information. And I’m not even talking about the trading systems that might not even be the core system of record, the systems of record themselves did not have good cost basis information. Now, you and I both remember the cost basis legislation, that was a while ago, right. Since then, at least there is a source of good accurate cost basis information. But to this day, we see situations where firms have layered on a portfolio management or rebalancing or trading system on top of a core system of record. We still see cases where firms do not have good or accurate cost basis and tax lot data when we’re doing a conversion. So there’s always something to delve into.
Rob: There sometimes is this false comfort that again, being on this side of the cost basis legislation, oh, hey, I have good, clean, accurate information from a tax law perspective. That might be true in your system of record. But if you’ve layered on other systems, or third parties to handle trading activities for you, you need to make sure that they too have accurate tax lot information and it’s getting reconciled periodically. We’re still seeing a bit of that.
Rob: Client restrictions again, growing up in retail, separately managed accounts, there’s always been this ability to accept client r
estrictions and customization requests. There are some approaches, some systems out there where it’s freeform text to describe or capture client restrictions. There are data entry errors, people fat finger information all the time. It’s easy to do. So we still see cases where restrictions have been mis entered, miscalculated, misapplied, or they’re not being monitored. There’s a range of situations we’ve seen out there regarding client customization requests either not being accurately captured, or not being fully implemented and adhered to over time for whatever the reason might be.
Rob: The other area I guess I would raise, at least from a conversion point of view and a data hygiene point of view are performance composites. Everyone is convinced they have super accurate performance composites and it’s not always true, I’ll just say. And it’s a lot of things have to come together. When you start talking about performance composites and membership especially in a retail setting where you have cash flows occurring at any time, you have client customization. There’s enough unique aspects occurring in a retail managed account setting where there’s just a lot to manage and maintain and monitor to have accurate performance composites
and we don’t always see fully accurate performance composites as part of the conversion.
Craig: Are you talking about manager composites or account composites?
Rob: Think of them as strategy composites. It might be tied to a third party manager might be tied to internal strategy that you want to market the performance of. Anytime you start thinking about a consistent strategy that’s being implemented and you want to market it, and, put performance information regarding that strategy out there, call it what you will, right but you want really a gift compliant performance composite, backing up and he stated numbers that you have. And again, we just take issues when it comes to managing those composites over time.
Craig: So they think they’re composites are accurate, but they’re wrong because their data is not clean or for other reasons?
Rob: It’s usually for other reasons, and there are different types of composites, right, you might have an overall composite that is capturing everything, every single account that’s tracking a particular strategy, those are usually fine. It’s the ones where the client activities, the CFA will allow you to exclude certain accounts for periods of the performance time period. And it’s those situations where accounts aren’t accurately moving into and out of the composite for whatever reason. And that’s where that version of the composite calculation is off. Now, is it material or not? That varies. Do you restate it or not? That varies, a lot can go into it. But performance composites remains one of those areas where there’s just a lot to track and maintain if you’re not doing it in an automated way it just gets messy.
Best Practices Managing Client Data
Craig: So working backwards from our list of horrendous problems. What are some of the best practices that you can share around client data? Let’s talk about composites, what are some best practices that firms should use to make sure their composites are accurate?
Rob: The single biggest thing there is take a rules based approach to managing composite membership. So what are your rules re
garding cash activities, cash flows? If there are large flows into or out of an account, define those thresholds and then make sure you have a rules based system to monitor account activity and automatically move client accounts into and out of the composite.
Rob: Same with restrictions. Client restrictions can have an impact on the portfolio’s performance positive or negative frankly, depending on the threshold of that restriction and its impact in allowing the account, the portfolio, to track your optimal strategy, your ideal strategy, define your policy for that restriction impact and whether or not you’re going to move an account into or out of a particular composite. And again, make sure you have a rules based approach to managing the membership of accounts are moving into or out of the composite based on the restrictions. Restrictions can change over time. And the impact of those restrictions can change over time. So you need a rules based system and you need some automation in place to move accounts into and out of composites.
Rob: And then in the other areas, back to some of the even some of the tax lot data which we continue to see. To me it should go without saying you should be reconciling cost basis and tax law data full stop. If it’s moving around, if external systems outside of the core system of record are relying on that information, you should be radically reconciling that data. Especially if you have you know a retail setting you have taxable accounts, the tax lots matter. The cost basis matters. You might be marketing and providing tax aware or tax optimized services. And if you don’t have good tax lot data, how do you know the intended trades, the intended outcomes for clients from a tax perspective that you want to happen are indeed happening? So you got to be reconciling that data, full stop.
Craig: Reconciling is always good advice, at least daily is the best frequency.
Rob: Certainly for tax lots and other things, you know, back to the restriction example right and thinking about other client information. It’s just good practice to reconcile or synchronize all the client information that you have periodically.
Rob: Now, not everything needs to be done daily. You need to think about the frequency that particular sets of information may be changing and the impact of the risk to the firm and having bad information. I mean, if you miss an address update, maybe you mail an envelope to the wrong place, I guess there’s a Gramm-Leach-Bliley consideration there. So, right so all this stuff has an implication but because we’re so close to trading in particular, that has to be daily. It has to be.
Getting Your Client Data in Order Now
Craig: What are some tips or strategies around organizing and managing client data you’d recommend that other firms implement now? You go into a lot of companies you see what they’re doing you do your discovery, you find these problems. So before you even get there, what are some things that enterprise wealth firms could be doing now to get their client data in order?
Rob: What as we think about it, what they could be doing now, we just touched on the biggest one, reconciliation. If you don’t have a reconciliation policy, basically for all of your information you do need to take a little time and think about what is that information and what is my reconciliation policy and what processes and procedures do I need to make sure that I fundamentally have accurate data. You need accurate data to operate. So if you haven’t done that across the board, in a macro sense, and even in a granular sense, especially again, as we think about trading information you should do that immediately.
Rob: The other thing as we think about organizing client information, and what firms can be doing now I talked a little bit about UMAs earlier, if you don’t have a sleeve level system of record I would recommend that you implement one now. There are inherent benefits in doing as much as you can in a single custodial account braking you can you can be far more nimble when it comes to asset allocation adjustments, specific position adjustments, there’s less paperwork, there’s less cost, there’s a lot of benefit to doing what you can in a single custodial account. But to do that you do need to track and manage and maintain sleeves.
Rob: Now most core custody systems, trust accounting systems, other systems of record they don’t have a notion of sleeves. So to be able to layer on and support the different diversified investment solutions your clients want, or need, do it at scale while maintaining the benefits of a single custodial platform and a single custodial account. You need to be able to support true sleeve wide accounting.
Craig: Is it really necessary, couldn’t you just do strategy level?
Rob: What you could but then some things break down. So I’ll give you a scenario –
Sleeves vs Strategies: What’s the Difference?
Craig: Because most firms put one strategy per sleeve anyway. So what’s the difference?
Rob: Well, so you have strategies, some of this is vernacular. As I think about an asset allocation policy, I want a diverse portfolio. I might have an equity manager, maybe I’ll let my advisor manage some funds or ETFs and a particular sleeve, and I have a fixed income manager, you know, I want to custom bond portfolio or sleeve within a single custodial account. You need to diligently track the exact holdings, the exact cash balance as well as the access controls for who can do what in each portion of that broader portfolio. So when you start thinking about how do I coordinate the activities between an external equity manager what the advisor may be doing, and a third party fixed income manager, they all need to make sure little things or not so little things like cash that they have to support, their portion of that portfolio is accurate and synchronized and isn’t going to slosh around underneath them.
Rob: We see constantly firms will kind of they have a half baked approach to trying to manage sleeves, and it might be at the asset allocation or the sector level or by style. And cash is one of those hairy little things that doesn’t neatly conform to that type of hack if you will, in trying to support a UMA and things very quickly break down once you start trying to coordinate trading activities, tax optimization, and thinking about fixed income strategies where it may take time to move into or out of a position. If cash is sloshing around, you have very little ability to coordinate all the trading activity.
Rob: The other point I would say on all this back to kind of gifts composites. Now when it comes to performance and Performance Management, you may not necessarily need to or want to put a sleeve level performance return in front of your own client. Maybe not even the financial advisor, although most financial advisors tend to want to know how a given manager strategy that they’ve slotted into a portfolio is doing. So client that’s up to you, the advisor probably. But your manager research and oversight team. They should know exactly the quality of the input that they’re getting from their third party manager partners. How do you do that if you’re leveraging third party manager strategies in UMA and you can’t accurately track and measure the performance of the sleeves where their strategies are being used? And if cash is sloshing around with things like cash, you fundamentally can’t do it. So I would say from an oversight perspective, thinking about home offices, it’s table stakes. The other audiences, the other actors in the UMA process, the advisor, I would say yes should know, client that’s a firm decision.
Craig: And there you go. We were talking a little bit earlier about data quality. So is there some generic recommendation you have for firms about how they can better manage their data quality?
Rob: We already talked about reconciliation. Generally speaking, and I think most enterprises, not all enterprises, the large firms that we all walk into already have this philosophy. You really should be only entering and capturing information, new information once. So whatever your core system of record is, for the piece of client information, be it a portfolio, client preferences, a CRM, a planning tool, only capture that information once and then make sure it can be published downstream to any other systems audiences etc that might need it. Make sure you can only edit it in one place too.
Rob: I talked before, we touched on UFHs and unified manage households and households groups and things like that. Wherever we can source household information, even household and account group information from an external system, that is our preference. That said, because some of these concepts are unique to what we do, we have tools to help clients define what an account grouping methodology might be, again, tied to an investment goal or something like that.
Rob: Now you have this issue of when I’m editing account group information. So make sure that when you’re sourcing information, managing information, you capture it once, publish it wherever it needs to go, only make sure you can edit it in one place. Otherwise, you run the risk of discrepancies. Versions can kind of run amok, so only have one place to capture and edit information, whatever it is, I would view as an overall best practice.
Rob: And then beyond that, from just an overall architecture point of view, some of these are just fundamentals and should go without saying but I’ll say them anyway. We’ve harped on reconciliation, so make sure your data is accurate, whatever it is, make sure it’s timely. Whatever it is, make sure you’re getting timely updates back to tax lot information, cash withdrawal requests, that might be coming in from one place but need to be known downstream. Make sure all the data is timely.
Rob: Lastly, and maybe most importantly, make sure it’s available and it’s readily available. Once you have a single source that needs to publish or make available client information of all types, there might be demands on that system by client, client user, user interfaces by downstream systems. A lot of firms are developing API’s to access various pieces of information. Those API’s can get slammed so you need to be mindful of making sure information is readily available, so it doesn’t impact the client experience or the downstream function or process.
Rob: We think a lot about trading and high scale trading. We need to make sure that tax lot information transaction information, client restriction information, all that stuff is readily available, so that when we need to get trades to market based on whatever the changes might be occurring, nothing’s getting in the way and they could fly out the door.
Craig: Nothing getting in the way. That’s a good model. Don’t get anything in the way of our data.
Rob: As long as it’s accurate, right? I mean, if it’s not accurate, you might want other checks in place.
Craig: Nothing getting in the way that’s pretty good motto for data. Don’t let anything get in the way. We’ve covered a lot of ground, Rob, what did I ask you that you’d like to share about this topic?
Rob: A couple things kind of come to mind and they’re tangents or they’re subsets of a couple things that we did touch on. One area is the capturing of ESG tastes and preferences so I mentioned earlier, investment preferences, investor preferences, customization requests and things like that. ESG is a growing area of interest, obviously. It’s going to be an evolving area, I think for quite some time, and we’re seeing some firms out there developing some interesting and innovating approaches to trying to discern what truly our clients ESG preferences and tastes. We’re seeing some interesting innovations when it comes to surveys and how do you pose questions to clients. You need to do some A/B testing right? There’s a whole area of behavioral science in other industries that we’re starting to see applied when it comes to ESG tastes and preferences. Firms need to be thinking about that. It’s a growing area of investor interest, how do you truly try to understand clients ESG preferences, but then how do you also try to explain to a client what the implications might be of their ESG tastes and preferences and their investment portfolios.
Rob: So there’s at least two sites that we think will continue to evolve quite rapidly. Again, the questions and surveys, trying to unearth investor tastes and preferences, and then the communication side of that what it might mean what are the implications of implementing that in a client portfolio so your audience should keep an eye on that.
Rob: The other I touched on at the outset, I think, as we were talking about held away assets and the overall client situation, digital assets, right cryptos and all the different types of digital assets, their proliferation of digital asset types, custodians, exchanges, sources really to pull all this information together. So from a data architecture point of view, and the clients we work with the wealth managers, they’re striving to maintain a holistic view of the client’s wealth picture and for an increasing number of us. That is going to include digital, so you need to be thinking about how you pull that information together. There’s a separate decision about what you want to do with it. What do you want, how you want to advise on that, what you may or may not want to manage. But at the very least, you’re going to want to understand what the client’s digital wealth picture looks like.
Craig: Is Vestmark supporting cryptocurrency?
Rob: We are and then we’re just thinking through along with our clients, what do they want to do? And again, that’s why I kind of started out there. At the very least you want to understand what a client’s digital wealth picture looks like. Then from there, what do you do? What do you advise, right? There’s compliance considerations or regulatory considerations. So that’s where we will continue to look. How do we help our firms not just understand but also then also advise and manage on those those digital holdings, crypto holdings in a manner that’s best suited to their firm? That’s going to be an evolving area for us but something all your audience needs to be thinking about if they’re not already.
Craig: That’s a good topic for a whole nother podcast how you guys are doing digital but we’ve run out of time. You’ve said it all. You’ve covered all of our ground, Rob been very generous with your time and information and sharing your experience. Let everyone know where they can find out more information about Vestmark.
Rob: Vestmark.com.
Craig: Thanks so much.
Rob: Alright, great. Thank you, Craig.
