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August 1, 2013

Retail Wranglers

By Mary Schroeder

Describing how the firm handles the retail accounts, Hiles explains that each trader is responsible for different relationships with sponsors. "Maybe someone will have UBS and someone will have Merrill Lynch and then [those sponsors] have different technologies. So it's impossible for one or a couple of people to do it. Being a midlevel-size firm, we do all this at our own desks. A larger firm might farm it out. Our firm directly executes and fills the orders and maintains the relationships itself."

Said Hiles, "Institutional stuff is much easier. You have more control of the order because you are dealing with a centralized party. You're either working the order on your desk or sending to a sales trader or single point of contact. Or a little bit of both. For the retail trading a lot of different counterparties, and coordinating all the different counterparties can be a challenge."

 

Trading authority

The model for retail accounts has changed in recent years, shifting from SMAs to products such as UMAs following a move by Merrill Lynch several years ago, says Alois Pirker, director of Aite Group's wealth management practice. That in turn led to a removal of trading authority from money managers and trading instead being handled centrally by the sponsor, Pirker said.

The model was adopted by other sponsors, and those sponsors cut the fee to the asset manager by as much as 15 basis points because the asset managers were no longer doing the trading, Pirker said.

The new arrangement makes it possible for sponsors to better customize client portfolios, Pirker said. For instance, a client may own a lot of IBM stock and give instructions that he or she doesn't want to buy any more if a money manager makes that decision, he said. Or a client may want to avoid so-called "sin stocks." Or a client may want his or her portfolio optimized to avoid added taxes, Pirker said.

When the sponsor gets the trading instructions from the asset manager, such as "Buy stock XYZ to 2 percent of the portfolio" or "Sell ABC stock to zero," the sponsor feeds the sponsor and client restrictions and holdings, as well as the trading instructions into a black box that produces optimized trading instructions, Pirker said.

Hostetler acknowledged that the fees for UMAs are lower than those for SMAs. The fee varies depending on the product, "but overall, it can be as much as a 15 basis point difference," he said.

 

Institutional trading

At Cambiar, the work is comparatively easier on the institutional side. The desk has fewer systems to worry about and more latitude about how it trades.

The portfolio managers often give the traders a fair amount of discretion in executing trades, says Hiles. That's because the traders work very closely with the PMs to understand what they are thinking. "When an order comes up, we try to get an understanding of the PM's objective as far as what's an ideal entry price, what sort of timing they would like, what's upcoming and what their expectations for us are," he said. For their part, the traders provide color and opinions, he says.

"We're not strictly benchmarked. We get a lot of discretion for trading in how we work the orders. We have a better understanding than a typical trading desk of why we are buying x and selling y," he said.

"It's more qualitative than quantitative here," Hiles said.

 

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