Since the markets began recovering about four years ago mutual fund advisory assets have exploded. Now Charles Schwab is looking to capture its share by using remote processing technology to shave costs for consumers.
Schwab, which did not make an executive available for comment, is using the platform to offer ongoing advisory services and to deliver tailored investor guidance.
The broker is hoping to take advantage of a growing market for mutual fund advisory services. The number of funds have grown 153 percent from 2002 to 2006, according to Cerulli Associates, while assets under management in mutual fund advisory products have grown from $130 billion to $319.5 billion during that four-year span.
The broker is releasing eight mutual fund wrap portfolios via CheckFree APL, which will power portfolio management and monitoring services for Schwab Managed Portfolios.
Schwab will leverage the technology to design, monitor and adjust diversified portfolios of mutual funds in response to market changes. The newly introduced managed portfolios include four taxable and four non-taxable wrap products with ready-made investment strategies ranging from moderately conservative to aggressive. "There are different risk tolerances or aversions built into the funds," says Hilary Fiorella, a vp for CheckFree Investment Services.
CheckFree APL is a separately managed accounts platform that provides remote processing services to sponsor firms, money managers and financial advisors for the automation of investment management, trading, portfolio performance and investor reporting. The platform enables about 100 of the largest Wall Street sponsor firms and 150 separate account managers to interface with each other and operate in a straight through processing environment. Institutional money managers also use the product to enter and maintain account data, manage trades and measure portfolio performance.
For Schwab, which was already using CheckFree APL for some of its other investment products, there are additional benefits to launching APL beyond making inroads into an expanding market. One benefit is reducing expenses, allowing the broker to deliver services to customers for a net fee of 50 bps, which is about one third the average program fee for similar offerings. The product allows Schwab to add more choices for investors without adding personnel and increasing costs.
"CheckFree APL automates a lot of what had been manual processes," Fiorella says. "By automating these processes you drive out human labor costs, and you can roll out the products quickly to the market at less expense. You're then able to deliver these products to investors quickly and get more assets from them."
Fiorella says that in the investment management space many firms still do a number of things manually using telephones and fax machines. But not fully automating all areas of their firms drives up the cost of providing services. She points to tasks such as account openings, which are often still paper-based and involve documents being sent through traditional mail. Some trades remain manual, and statements and performance reporting remain old school in many corners of the mutual fund advisory industry.
The CheckFree exec adds there's additional opportunity for savings by automating fee payments to money managers who are managing investor assets on behalf of Schwab. "There's a chance here to automate a process that otherwise would be getting done on a spreadsheet. There are lots of opportunities to drive down errors and the cost of doing business in this space."
Denise Valentine, a senior analyst at Celent, suggests other reasons for the lower costs. One is that CheckFree APL is a fairly established, mature product, and can be rolled out at a discount for mutual fund advisory products. "You can take a guess that it will be cheaper than some newfangled product that's out there," she says.
Valentine also says that having the right tech platform in place is a vital part of supporting separately managed accounts. "In the separately managed account area, the accounts are small, in the tens of thousands or hundreds of thousands of dollars in size, so it's important to have unique tech systems that are scalable supporting them."
