iPerX

iPerX is a breakthrough commission savings system that more than doubles savings, automates money manager trading and provides real-time governance reporting for sub-advised and externally managed assets.

Challenge

For decades, public and private defined benefit plans, defined contribution plans, mutual funds, not-for-profit funds, variable insurance products, bank trust groups, endowments and foundations have hired external money managers to manage some or all of their investment portfolios. The use of external money managers has enabled these financial organizations to benefit from the expertise and talent of the finest money management firms in the industry.

As a result of these desirable benefits, the externally managed and sub-advised industry has grown to $3.5 trillion dollars in assets. At the same time, however, these organizations have lacked effective controls over their commission costs, which can often add an additional 30% or more to the asset management fee.

A recent Morningstar study concluded that the average U.S. equity fund pays approximately 0.30% of assets or 30 basis points (bps) per year in brokerage commissions.¹ Morningstar further concluded: “This is roughly the equivalent of 30% of the average no-load large-cap fund’s expense ratio. Thus, brokerage commissions can take what looks to be 0.90% paid in expenses each year up to 1.20%.” Morningstar went further to explain “much more startling are the huge fees paid by some individual funds that in some cases approach or exceed the entire expense ratios of many core funds.” Indeed, research indicates that the average “all-in” commission rate paid by U.S. institutions still remains close to 3.0 cents per share. According to a study by Greenwich Associates, the average “all-in” equity commission in the U.S. was 2.90 cents per share in 2009 and 2.78 cents per share in 2010 (a year in which total commission paid dropped 13% due to lower trading volumes)².

High commission costs continue to have significant impact due to the high trading volume of many funds, pension plans and trusts. Based on extensive research and conversations with executing brokers, UAT provides two useful rules of thumb to estimate an institution’s trading volume as follows:

And

Solution

To address high commission rates, many institutions have turned to commission savings programs. These savings are usually directly additive to performance or are used to offset certain operating expenses of an account (an indirect addition to performance). Current savings programs, however, were designed before recent advances in electronic trading and fail to incorporate the latest technological innovations. The result is that most savings efforts are able to generate savings on 20% to 25% of an account’s orders. Thus, current savings program fail to achieve their full potential in generating the maximum possible commission savings.

iPerX employs multi-patented technology to address the most significant shortcoming in commission savings programs — the low participation rates achieved by most programs. iPerX can achieve participation rates of up to 75% of orders, which is triple the current 25% industry norm.

iPerX achieves these high participation rates, and commensurately higher commission savings, by providing a trading algorithm to money managers that, through a single screen, enables the virtual automation of a fund or plan’s savings goals. The iPerX algorithm categorizes orders, using a real-time rules-based process, as “high touch” or “low touch” based on their potential market impact. The low-touch orders, typically up to 75% of an account’s order flow, are auto-routed to a fund or plan’s designated low-cost agency brokers to execute at very low commissions and thereby maximize commission savings. Meanwhile, the money manager’s trading desk is able to “work” the high-touch orders to provide true value-added service on orders with significant expected market impact. Thus, for a money manager, the iPerX algorithm enables savings programs to run on autopilot and eliminate manual handling of savings orders by traders.

At its most basic level for money managers, iPerX increases the efficiency of a money manager’s trading desk. The money managers retain complete control over all order management and trading as well as the iPerX algorithm’s “high touch” vs. “low touch” rules for determining market impact. At a time when many money managers’ trading desks are facing staff reductions, iPerX’s automation is a valuable asset.

As an additional benefit, iPerX’s sophisticated patented technology provides, for the first time, real-time transparency and reporting across holdings, activity, commission costs and commission savings to sub-advised and externally managed accounts. Thus, with a few keystrokes, one can look at real-time holdings, activity, and brokerage costs across a fund or several funds, a money manager or several money managers, a model or the entire model program, a trust or several trusts or quickly query which accounts holds a certain position.

As a web-based solution with no install costs or minimums, iPerX requires no additional personnel or supervisory resources. iPerX is also available for licensing to current providers of commission savings programs, with the added benefit of substantially increased revenues and enhanced services for these providers.

The UAT Cause is to save the sub-advised and externally managed industry $1 billion per year. iPerX is a 21st century solution that accomplishes this goal by automatically lowering commissions, improving performance and providing real-time transparency across the entire sub-advised and externally managed industry.