Investors in externally managed and subadvised accounts could save about $1 billion a year in commissions paid to brokerage firms by their fund managers.
So says UAT Inc. In late February the Denver firm launched a web-based system called iPerX that it said can potentially triple the rate of commissions recaptured.
Where existing service providers recapture 25% of commission paid out to broker-dealers, UAT said its system recaptures 75%.
Externally or subadvised accounts are pools of assets managed by a firm other than the one holding the assets. About 13% of mutual fund assets are externally managed, versus 42% of variable annuity assets, according to Financial Research Corp.
"Money managers overseeing these assets can increase the efficiency of their trading desk as they gain an automated algorithm that saves their institutional clients millions annually for the benefit of the underlying individuals in these products," said Tom Warren, president of UAT, which has five patents for its technology and business methodology.
Here is how IPerX works: At its core is an algorithm that allows money managers to categorize their orders using a real-time rules-based process as either high-touch or low-touch based on their potential market impact. The big savings are in putting "low-touch" orders into low-cost venues. That's because the low-touch, low-impact orders can account for 75% of an account's order flow. That flow, which can be largely automated, gets routed to designated low-cost agency brokers to maximize commission savings.
Warren said that it is because of iPerX's ability to separate low-touch from high-touch orders that money managers are able so save so much on commissions. UAT has agreements with several agency broker-dealers that can execute those orders cheaply — for as little as 0.8 cents a share. Because it is not a registered broker-dealer, UAT makes fees based on a percentage — it won't disclose what that is — of the total value of the assets in the subadvised account.
What do incumbent commission management firms think? "If it sounds too good to be true, it usually is," said David Choate, senior vice president at Capital Institutional Services, an agency brokerage and commission management specialist in Dallas.
For one, Choate said, commission recapture is a misnomer when it comes to iPerX: "UAT is attempting to make its program sound familiar to prospective clients, but it's really not commission recapture but trade recapture."
Semantics aside, Choate disputes UAT's premise that the cost savings can be achieved by UAT's broker-dealer partners executing part of the block-order.
UAT, for instance, believes that any order that represents 4% or less of the average daily volume of a stock can be and should be handled in an automated or "low-touch" way.
Four percent seems "very high" given the fact that a trade involving 20% of the average daily volume of a stock can take the entire day to process, Choate said. He recommends a cap of 1%. "A 4% order can easily be a two-hour execution process, and I don't know many traders who would put an order in a box for two hours and walk away," Choate said.
Warren insists that large agency brokers agree with his analysis that a 4% ADV is a guidepost for dividing high- and low-touch orders. If the money manager doesn't agree, it can always change the parameters.
Warren said that if his technology sounds "too good to be true," it's because the firm's goal was to make it simple to understand and use. "It has taken five years of work to receive five patents as well as establish the business relationships on our end to make this seamless to implement and bulletproof to our clients," he said.
