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Omnibus Part III: Omnibus-Light and the Future
http://www.savingforcollege.com/articles/omnibus-part-iii-alternatives-to-omnibus-951

Posted: 2016-09-23

by Brian Boswell

FINANCIAL PROFESSIONAL CONTENT

This article assumes you have a basic understanding of what omnibus is and the challenges facing omnibus based on the preceding articles located here:

  1. Omnibus: What it is and why advisors should care
  2. Omnibus Part II: Challenges to implementation

Between the logistics to implementation, legal challenges and costs, it's impressive that seven broker-dealers and ten 529 plans have already implemented omnibus relationships. Fortunately, a firm doesn't need to have the scale of a wirehouse to get most of the functionality of an omnibus operating environment. There is an alternative available, affectionately dubbed "omnibus-light" during the 2016 529 Conference by Morgan Stanley Director of Distribution John Hesse. Full-service omnibus implementation may be the core of future 529 subaccounting, but omni-light has the potential bridge many gaps.

Omni-light

Right now the vast majority of transactions in advisor-sold 529 plans occur via the NSCC (National Securities Clearing Corporation). The NSCC, "provides clearing, settlement, risk management, central counterparty services and a guarantee of completion for certain transactions for virtually all broker-to-broker trades involving equities, corporate and municipal debt, American depositary receipts, exchange-traded funds, and unit investment trusts." according to their site. Every major wirehouse, national, and regional broker-dealer clears at least some portion of their business via the NSCC today, and smaller broker-dealers that use a firm like First Clearing or Pershing for their clearing and settlement services also use the NSCC by proxy.

The NSCC acts as an interpreter between broker-dealers and asset managers whose myriad systems speak different languages internally. By creating a common language for transactions, the NSCC processes buy and sell orders, updates account information, provides balance information, and much more between these parties and their various systems. Part of the NSCC standards includes file layouts for processing 529 transactions.

The whole reason omnibus is a big issue is because it makes life easier for advisors. With omnibus, it is possible for advisors to open and manage 529 business in a manner similar to other retail products. An advisor could theoretically open a new 529 account for an existing client and fund it within their own system without completing any physical paperwork. It also expedites the entire process. Rather than waiting days or even weeks for a physical application and check to make its way to the 529 plan provider, open, and appear eventually in the broker-dealer's systems (assuming also that all the paperwork is in good order), opening an account in an omnibus environment settles in one or three days, depending on what the 529 plan supports.

Omni-light would not change much in terms of the tasks for which each party is responsible in the relationship between 529 plan provider and broker-dealer. Under omni-light, accounts are still held and administered at the 529 plan provider. Account opening and funding, one of the main benefits of omnibus subaccounting, is available via the NSCC right now. The processing of accounts could move to a T+1 or T+3 settlement with initial purchases made via the broker-dealer in their internal systems sans paperwork.

For 529 plans to take advantage of omni-light, two things need to happen:

  1. The 529 plan provider would need to allow the broker-dealer to open and fund their accounts online without physical paperwork. Conservative firms may balk at not having physical documentation including both advisor and client wet signatures for all disclosures, but this is becoming less of an issue as there are generally dealer selling agreements in place protecting and indemnifying the respective parties. As more firms become accustomed to online account processing the desire for paperwork has diminished. After all, why should a client be able to open a 529 account themselves online with a direct plan, yet have to sign paperwork when using an advisor?
  2. The technology team at the broker-dealer needs to set up its system to adhere to NSCC feed standards in order to pass and process the requisite information. The broker-dealer and 529 administrator would also need to coordinate and test. Costs to implement should be minimal for most firms. The biggest expense would be the time each firm would spend on implementation and testing.

For most firms, allowing the 529 plan to continue to produce tax documentation is a boon: It's less processing, paperwork, maintenance, and expense for the broker-dealer. In theory, if the broker-dealer really had a desire to take over tax reporting, it could replicate the same statement functionality it would have in an omnibus environment by feeding the NSCC data into its system, and asking that the 529 plan suppress statements to its clients (though this may require some legal wrangling). In practice, it requires exploration in terms of implementation, logistically.

At first glance omni-light seems like a no-brainer, but there are several reasons why every firm hasn't rushed out to support this; some of which overlaps with the same challenges that have plagued full-service omnibus:

  • Just as with omnibus, securing the internal resources to approve, develop, and implement such a project can be a challenge. Sometimes, simply getting the right people in the room is an impediment. Raymond James VP 529 Plans & Education Savings Mariann Carson stated during the 2016 529 Conference that, "(implementation of full-service omnibus) involved many, many, many more departments that originally thought."
  • There is little precedent. While most firms use the NSCC for ongoing trading and account updates, meaning their twice-per-year exchange or updating client addresses, most do not allow account opening and initial funding. Sometimes it's difficult to get internal buy-in simply because it's new.
  • 529 providers would need to get comfortable with their distribution partners, the broker-dealers, completing the account opening process without using a physical application. Because the 529 plan wants to ensure the client has read and understands disclosure that may be specific to the respective state, there may be some reluctance to allow this change in process.
  • In theory, the cost to implement omni-light would be minimal. The majority of firms are already processing their 529 business in a NSCC environment now. However, as with any novel undertaking, there may be hidden costs depending on the infrastructure of the respective broker-dealer.

The future of 529 administration

Despite the benefits of omni-light, full-service omnibus will continue to be a large part of the future of 529 recordkeeping administration. Omnibus provides a superior user environment for advisors and a better service experience for clients. It gives complete control of the processing environment to the broker-dealer. It is also the standard operating environment for the vast majority of advisor-distributed retail funds and other managed products.

Hopefully, however, some firms will take the initiative to adopt omni-light where full-service omnibus may not be desirable or even possible. Advisors that can offer multiple nationally-sold 529 plans are going to lean heavily towards the one(s) that allows them to skip the paperwork and integrate their client's 529 accounts with the rest of their business, providing serious incentive to all stakeholders to seek some path to improved 529 account administration at the advisor level.

FINANCIAL PROFESSIONAL CONTENT

This article assumes you have a basic understanding of what omnibus is and the challenges facing omnibus based on the preceding articles located here:

  1. Omnibus: What it is and why advisors should care
  2. Omnibus Part II: Challenges to implementation

Between the logistics to implementation, legal challenges and costs, it's impressive that seven broker-dealers and ten 529 plans have already implemented omnibus relationships. Fortunately, a firm doesn't need to have the scale of a wirehouse to get most of the functionality of an omnibus operating environment. There is an alternative available, affectionately dubbed "omnibus-light" during the 2016 529 Conference by Morgan Stanley Director of Distribution John Hesse. Full-service omnibus implementation may be the core of future 529 subaccounting, but omni-light has the potential bridge many gaps.

Omni-light

Right now the vast majority of transactions in advisor-sold 529 plans occur via the NSCC (National Securities Clearing Corporation). The NSCC, "provides clearing, settlement, risk management, central counterparty services and a guarantee of completion for certain transactions for virtually all broker-to-broker trades involving equities, corporate and municipal debt, American depositary receipts, exchange-traded funds, and unit investment trusts." according to their site. Every major wirehouse, national, and regional broker-dealer clears at least some portion of their business via the NSCC today, and smaller broker-dealers that use a firm like First Clearing or Pershing for their clearing and settlement services also use the NSCC by proxy.

The NSCC acts as an interpreter between broker-dealers and asset managers whose myriad systems speak different languages internally. By creating a common language for transactions, the NSCC processes buy and sell orders, updates account information, provides balance information, and much more between these parties and their various systems. Part of the NSCC standards includes file layouts for processing 529 transactions.

The whole reason omnibus is a big issue is because it makes life easier for advisors. With omnibus, it is possible for advisors to open and manage 529 business in a manner similar to other retail products. An advisor could theoretically open a new 529 account for an existing client and fund it within their own system without completing any physical paperwork. It also expedites the entire process. Rather than waiting days or even weeks for a physical application and check to make its way to the 529 plan provider, open, and appear eventually in the broker-dealer's systems (assuming also that all the paperwork is in good order), opening an account in an omnibus environment settles in one or three days, depending on what the 529 plan supports.

Omni-light would not change much in terms of the tasks for which each party is responsible in the relationship between 529 plan provider and broker-dealer. Under omni-light, accounts are still held and administered at the 529 plan provider. Account opening and funding, one of the main benefits of omnibus subaccounting, is available via the NSCC right now. The processing of accounts could move to a T+1 or T+3 settlement with initial purchases made via the broker-dealer in their internal systems sans paperwork.

For 529 plans to take advantage of omni-light, two things need to happen:

  1. The 529 plan provider would need to allow the broker-dealer to open and fund their accounts online without physical paperwork. Conservative firms may balk at not having physical documentation including both advisor and client wet signatures for all disclosures, but this is becoming less of an issue as there are generally dealer selling agreements in place protecting and indemnifying the respective parties. As more firms become accustomed to online account processing the desire for paperwork has diminished. After all, why should a client be able to open a 529 account themselves online with a direct plan, yet have to sign paperwork when using an advisor?
  2. The technology team at the broker-dealer needs to set up its system to adhere to NSCC feed standards in order to pass and process the requisite information. The broker-dealer and 529 administrator would also need to coordinate and test. Costs to implement should be minimal for most firms. The biggest expense would be the time each firm would spend on implementation and testing.

For most firms, allowing the 529 plan to continue to produce tax documentation is a boon: It's less processing, paperwork, maintenance, and expense for the broker-dealer. In theory, if the broker-dealer really had a desire to take over tax reporting, it could replicate the same statement functionality it would have in an omnibus environment by feeding the NSCC data into its system, and asking that the 529 plan suppress statements to its clients (though this may require some legal wrangling). In practice, it requires exploration in terms of implementation, logistically.

At first glance omni-light seems like a no-brainer, but there are several reasons why every firm hasn't rushed out to support this; some of which overlaps with the same challenges that have plagued full-service omnibus:

  • Just as with omnibus, securing the internal resources to approve, develop, and implement such a project can be a challenge. Sometimes, simply getting the right people in the room is an impediment. Raymond James VP 529 Plans & Education Savings Mariann Carson stated during the 2016 529 Conference that, "(implementation of full-service omnibus) involved many, many, many more departments that originally thought."
  • There is little precedent. While most firms use the NSCC for ongoing trading and account updates, meaning their twice-per-year exchange or updating client addresses, most do not allow account opening and initial funding. Sometimes it's difficult to get internal buy-in simply because it's new.
  • 529 providers would need to get comfortable with their distribution partners, the broker-dealers, completing the account opening process without using a physical application. Because the 529 plan wants to ensure the client has read and understands disclosure that may be specific to the respective state, there may be some reluctance to allow this change in process.
  • In theory, the cost to implement omni-light would be minimal. The majority of firms are already processing their 529 business in a NSCC environment now. However, as with any novel undertaking, there may be hidden costs depending on the infrastructure of the respective broker-dealer.

The future of 529 administration

Despite the benefits of omni-light, full-service omnibus will continue to be a large part of the future of 529 recordkeeping administration. Omnibus provides a superior user environment for advisors and a better service experience for clients. It gives complete control of the processing environment to the broker-dealer. It is also the standard operating environment for the vast majority of advisor-distributed retail funds and other managed products.

Hopefully, however, some firms will take the initiative to adopt omni-light where full-service omnibus may not be desirable or even possible. Advisors that can offer multiple nationally-sold 529 plans are going to lean heavily towards the one(s) that allows them to skip the paperwork and integrate their client's 529 accounts with the rest of their business, providing serious incentive to all stakeholders to seek some path to improved 529 account administration at the advisor level.

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