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WealthADV from Adhesion Technologies

Managed account outsourcing for independent planners.

Joel P. Bruckenstein, 04/10/2008

I've rarely written about Adhesion Technologies over the past seven years of writing about technology (although my colleague David Drucker did pen a piece about the firm in Virtual Office News in 2005). I've steered clear of Adhesion because I had a hard time understanding exactly what its core business was. At various points in time, it seemed to be focused on technology, outsourced portfolio management, and account aggregation. There was also a period of time when the firm appeared to have little interest serving the typical RIA firm; the thrust of its marketing message at that time was clearly aimed at larger financial institutions. Because I wasn't sure what Adhesion's value proposition was, and because I wasn't sure that it was interested in servicing my readers, I chose not to write about the firm.

Over the past several years, however, I sense that Adhesion Technologies had evolved into a more focused enterprise that now clearly targets independent RIA firms. According to Barrett W. Ayers, senior vice president of product management: "Our WealthADV platform is cost effective and scalable. While we serve a few independent broker/dealers, our clients are primarily fee based and fee only advisors. Some of our clients fall into the $50-$75 million AUM range, while others have between $2 billion and $3 billion AUM."

Adhesion offers two core services: The Op Center and the Investing Center. Each center is appealing in its own right, but the WealthADV platform should be most enticing to those who plan to use both centers. Those who do can avail themselves of an almost fully integrated turnkey investment platform that sports a number of unique features. I say "almost fully integrated" because one feature currently missing that most turnkey solutions include is a proposal generation tool.

When I last looked at WealthADV a few years ago, my recollection is that it included such a tool. I asked Adhesion about this and was told that the omission of a proposal builder is a temporary condition. A new, improved one is currently in the works and should be available soon. Assuming it arrives on schedule, I'll withdraw the "almost" qualifier.

The ideal advisor/client for the Adhesion Technologies platform is one who will make use of the full suite of products, so let's assume for the moment that you are interested in going that route. If you are, you will most likely be outsourcing a good portion of investment/portfolio related tasks to Adhesion, which will free you up to spend more time interacting with clients and growing your business, but there could be exceptions, which I'll get to shortly.

In a typical scenario, the advisors will assess a client's risk tolerance and/or income need and then assign a client to one of a number of model portfolios that the firm maintains. In creating model portfolios, the advisor would first decide which asset classes to hold in the account and in what proportion. To keep this example simple, let's say that the model we assign to our sample client is model A, composed of 75% equities, 20% bonds, and 5% cash.  

Next, we would select the appropriate investments that correspond to each of the asset classes. We can assign one or more investment to each asset class. So, for example, the equity portion of the portfolio could be composed of 25% Vanguard's Total Market Stock Market ETF, 40% a domestic equity SMA, and 35% a foreign equity SMA.

When using Adhesion Technologies Investment Center, assets are held in a Unified Managed Account (UMA). This means that we can mix and match separately managed accounts, mutual funds, and ETFs within a single account and offer a consolidated report that includes all household assets.

The advisor is also responsible for setting firmwide parameters and restrictions, including rebalancing policies. So, for example, you might say tat you never want one sector to comprise more than 25% of the total equity portfolio of you might set a policy that requires that the portfolio be rebalances whenever an asset class strays more than 10% from its target weighting.

WealthADV becomes the subadvisor and takes over from there. The firm monitors the portfolio, implements portfolio changes as directed by the separate account managers through block trading and execution, rebalances according to policy, fills periodic liquidation requests, deals directly with the separate account managers, and administers the billing process based upon a schedule created by the advisor. A pro-active tax management overlay is available as an option at a reasonable cost.

The UMA approach offers a number of advantages over the traditional separately managed account (SMA). I'll just mention a few. The first is substantially less paperwork. If you employ multiple managers and strategies through SMA's, you generally have to complete new paperwork for each SMA. With UMA's there is a single application. When using multiple SMA's, implementing client-centric restrictions across multiple managers is difficult; it is much less of a problem with UMA's. Other factors, such as risk control and tax management also favor UMA's; and let's not forget cost.

UMA's can offer cost savings, and Adhesion delivers them better than most. One satisfied user I spoke with, Gregory D. Gardner, CFP of The Gardner Group in Dallas, told me: "I've looked at UMA's from other providers and Adhesion Technologies is less expensive, while delivering a quality product."

Before we move on to the Op Center, I mentioned earlier that there was an exception to the "outsource investment management" rule. The exception would be if your firm has specific investment expertise in one or more market sectors and as a result you wanted to act a separate account manager yourselves. Let's say, for example that you wanted to manage all or a portion of your clients' US equity exposure through an SMA. Your firm could act as the SMA manager within the overall UMA structure 

I was only able to spend a relatively short period of time examining the Op Center's capabilities using demo accounts, but what I saw impressed me. WealthADV is an online application, so all backup, security, and redundancy issues are handled by Adhesion Technologies. The advisor, of course, would be responsible for ensuring redundant Internet connections, but beyond that, there would be no hardware or software to worry about.  

WealthADV collects the data from B/D's and custodians, scrubs the data, reconciles it and posts it. They are also responsible for the tax lot accounting, the generation of performance measurements, fee billing and manual pricing (if necessary, at an additional cost). All data is then posted to the online advisor dashboard.  

The dashboard offers a great deal of flexibility. You can view assets at the household level, the account level or the asset level. You can also view groupings across accounts and households. Performance can be viewed at the household and account level, but it can also easily be viewed by UMA, by SMA, by mutual fund, etc. In addition to the above mentioned break-downs, you can view reports by asset class, sub asset class, styles and sectors. 

Adhesion Technologies has made some astute decisions with regard to their portfolio accounting and performance reporting. They use Schwab's PortfolioCenter for portfolio accounting (for example tracking tax lots) but they calculate performance using their own proprietary performance engine. "This is one of their competitive advantages", says Gardner. Why?  Well, first of all, one of the major impediments to changing portfolio accounting systems is the data conversion. If an advisor currently using PortfolioCenter in-house wants to switch to an outsource provider that uses some other application, the conversion process will require time and an additional outlay. A move from PortfolioCenter to WealthADV does not require a conversion since Wealth ADV already uses PortfolioCenter. Since PortfolioCenter is probably the most widely used portfolio management and accounting system among Adhesion prospects, compatibility with PortfolioCenter is a big plus. 

On the other hand, by using their own performance engine, Adhesion can offer fast, responsive daily time weighted returns online that take into account all cash flows. In addition, those who use the Investing Center as well as the Ops Center can have up to the minute reports. They do not have to wait for daily downloads from the custodians to reflect portfolio changes.

Client deliverables are excellent. They are aesthetically pleasing, with nice layouts and ample graphics. Of equal importance, they can be customized and branded by the individual advisory firm. A report wizard allows the advisor to create different report sets for different clients. The intelligent scheduler will automatically generate and distribute recurring reports as programmed by the advisor.  

Like many online reporting services, WealthADV offers online client reporting. Advisors can generate reports to an online portal. When a new report is generated, the system will email a notification to the client, who can then log on the portal to view the report. PAGEBREAK

If you like what you hear so far, the next obvious question is: How much does it cost? The answer varies based upon whether or not you use the Investing Center, the number of accounts, and a number of other factors. If you strictly want the Ops Center, your firm pays a monthly fee that starts at $2,500 per month. If you make use of both the Investing Center and the Ops Center for all your clients, you'll pay a greatly reduced monthly Ops fee that could scale to zero. Your clients will pay an administration fee as part of their UMA charge that will range between 5-10 bp. In addition, they might pay up to an additional 10 bp for the optional tax overlay. 

Since the pricing can be complex, I asked Adhesion to create a few different pricing scenarios to demonstrate how it might look for a few varying conditions.  Again, there are two components of the offering: a) Op-Center which is the back office service, web-based dashboard for performance, inquiry, analytics and electronic client performance reporting; and b) Investing Center which is the fully integrated UMA platform with Overlay Portfolio Management.   

Below, Scenario 1 represents a firm that has 100% of their accounts enrolled in Investing Center but only using proprietary, internally-developed strategies (no third party SMA managers); Scenario 2 represents a firm that has no accounts enrolled in Investing Center and only using Op-Center; Scenario C shows a firm that enrolls only half of their accounts in Investing Center using 3rd party money managers.  In these scenarios, 100% of the accounts are enrolled in Op-Center. 

 

 

Scenario 1

Scenario 2

Scenario 3

 RIA firm AUM

 $     75,000,000

 $   100,375,000

 $   350,000,000

 # Client Accounts

400

365

778

 Average Acct size

 $         187,500

$           275,000

 $          450,000

 

 

 

 

 Monthly Op-Center fee to RIA firm

 $          190

 $            2,920

 $             3,200

 Investing Center fee rate to client account, annualized

10 bps

n/a

48 bps

 Investing Center (UMA Platform) assumptions

100% of accounts managed in Investing Center using, RIA- proprietary models containing all mutual funds (e.g., DFA).  Passively managed.

No client accounts managed through Investing Center

50% of accounts managed in Investing Center UMA are using multiple 3rd party equity managers. Active overlay management.

As you can see, when it comes to reporting only, as illustrated by Scenario #2, Adhesion is probably more expensive than some other third party reporting firms, but according to Ayers, with volume discounts Adhesion is more competitive at higher asset levels for the Ops Center only. In addition, he would argue that his product is superior to those of some competitors. Those who use third party managers almost exclusively will find that WealthADV's pricing is very attractive when compared to the competition.

 

So who should consider using WealthADV?  I'd say an ideal candidate would be an advisor currently working at a wirehouse or B/D who is thinking of going totally independent. The odds are that you will be able to offer a comparable or better UMA at a significantly lower cost to the client. Another good candidate would be an advisor who currently invests client' assets in a mutual fund wrap account. By transitioning to a UMA you can offer additional investment vehicles, create efficiencies, offer consolidated reports and improve tax efficiency. Finally, those who want to offer their own proprietary investment models to their clients as part, or all of an investment strategy would do well here. In addition, some advisors will find the Op Center only offering attractive, but that needs to be evaluated on a case by case basis. 

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