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September 2, 2013

Wrap Powerhouse

With $66 billion in assets, Morgan Stanley's managed account desk ranks largest, making it an influential player on the Street

By Alan Rubenfeld

The technology revolution has had an incredible and indelible impact on the institutional investment landscape for the past 20 years. While most of Wall Street (and this magazine) usually focuses on how technology has revolutionized the execution process and how trading has become faster, cheaper and more efficient, what is often overlooked is its impact on back-office processing, which in turn has enabled an explosive accumulation of assets by the wealth management industry.

Up until about 10 years ago, clients of retail brokers, also known as wealth managers, were forced to maintain a separate account for each money manager that managed funds on behalf of their clients. This limited the customers' investment alternatives, because a broker's back office could not efficiently handle multiple accounts, thus limiting available investment alternatives.

However, the advent of the Unified Managed Account and model delivery system has enabled wealth advisors to create for their clients a diversified portfolio of stocks, bonds, ETFs and other vehicles by placing these assets into a single managed account, creating almost an unlimited choice of investment options for the average investor. Previously, if an investor chose to maintain a diversified portfolio of stocks, bonds and mutual funds, he or she needed to open separate accounts for each asset. The UMA removed this hurdle and combined all the assets into one account.

See Chart: UMA Growth

The introduction of the UMA platform, also known as a wrap account, has contributed to the massive asset growth by wirehouses, Registered Investment Advisors and other managers who predominately cater to individuals and high-net-worth financial investors. Today, a financial advisor can often choose from more than 100 different external managers, providing his or her client with a range of investment alternatives.

But what is often overlooked is how these portfolios are executed and where the trading is taking place. The UMA revolution has led to the creation of a group of trading desks that specialize in these large asset pools. Most of the major wirehouses now have dedicated trading desks to trade this outside manager flow. Where formerly the investment manager's own trading desk would execute the order, today the trading responsibility is often outsourced to the actual owner of the assets. The largest of these desks resides in the Private Portfolio Group of Morgan Stanley Wealth Management.

Formed in 2009 as a joint venture between the wirehouse units of Morgan Stanley and Citigroup, the company was originally called Morgan Stanley Smith Barney, a retail brokerage juggernaut with 17,000 registered representatives. Citi announced shortly after the formation of the group that it would eventually sell its stake in the venture to Morgan Stanley. In September of last year, Morgan Stanley announced the joint venture would be renamed Morgan Stanley Wealth Management and that it would purchase the portion of the venture it did not own by 2015. Then, in June, Morgan Stanley completed the purchase after receiving approval from the Federal Reserve.