Omnibus What it Is and Why Advisors Should Care

Financial Professional Content Omnibus is a word a lot of people in the asset management industry toss around, but not a lot of people understand. Yet, it has far-reaching impacts for advisors and their clients. Here is what you need to know when it comes to omnibus in order to begin to understand its impact on 529s. This is part one of a two-part series. Omnibus accounting (omnibus) moves the recordkeeping aspect of an investment from the asset manager to the BD (broker-dealer) by taking what would be many participants in said asset and making them into a single account held by the BD. The broker-dealer could be any financial intermediary, but we'll use a BD for the sake of simplicity. If it sounds confusing, that's because it is. Omnibus is a complicated process to implement, and moving the recordkeeping function from the asset manager to the broker-dealer has many compliance and legal hurdles. But the end result is simplicity for the client- and their advisor. How omnibus works Omnibus is the process of taking a large number of accounts and creating from those a single account. To understand what this means, let's explain it in terms of mutual funds, since they are a structure with which most financial professionals are already familiar. For this example, we'll use two fictional firms - Acme Mutual Funds and Really Big Advisors (RBA). If I am Acme Mutual Funds I can offer my fund directly to the public assuming I meet all 1940 Act Requirements and I've filed all the relevant paperwork with the appropriate legal entities, etcetera, etcetera. But what if I want Really Big Advisors (RBA) to offer my Acme funds to their RBA clients, or if I want my fund to be listed in a fund supermarket such as those hosted by TD Ameritrade or Fidelity? It would be a burdensome process for those advisors or firms to establish an account with me for each client. Imagine having to fill out a new account application with each existing client to purchase an Acme Fund, sending in deposits, and getting duplicate account statements sent to the advisor of record- it would be a logistical nightmare for everyone involved. So instead, Acme enters into an agreement directly with RBA. RBA agrees to take on all of the administrative work, to track participant accounts and aggregate all the trades across their clients, and in turn Acme sees only one account and, therefore, one client - RBA - instead of many individual fund participants. Acme cannot see the individual participant's information in any way, and therefore cannot audit those accounts directly. There will also be technical work that needs to happen on both sides so that RBA can take over statement and tax reporting for Acme, for which we at Acme may pay a sub-TA (transaction agent) fee, a term often used interchangeably with "revenue sharing."i Incidentally, if you've read about sub-TA fees being scrutinized by regulators, this is to what they are referring. i Revenue Sharing is actually a much broader term that can refer to any number of fees being exchanged between asset manager and distribution partner. Sub-TA fees are often but not always lumped into this term depending on who is doing the talking and how much they understand about the asset management industry. The benefits of omnibus Now that Acme has an omnibus account for each of its funds with RBA, RBA advisors and clients get certain benefits that every investor has come to expect. They can transfer assets between accounts and investments online. The client receives a single statement from RBA instead of a statement from RBA and Acme. Advisors can open and fund an existing client account with Acme via RBA without having to fill out all of their information, since it already exists in the RBA system. Plus, all of this happens much, much faster than if the client had to fill out all of this paperwork and send it with a check into Acme in order to purchase a mutual fund. By opening the account at RBA and funding it with an existing RBA account, RBA can in-turn aggregate it with its omnibus account immediately, effectively purchasing and opening the position at the day's closing price. The drawbacks of omnibus Having omnibus accounts yields great benefits in terms of convenience to everyone, but that convenience comes at a price. Namely, omnibus processing increases costs to the asset manager. In the example above, Acme Mutual Funds incurs the cost of compensating RBA for taking on the account and the trading administration burden. These costs, known as Sub-TA fees, can range from 10 to 35 basis points depending on the size and complexity of the assets, transactions, trading arrangement, and - yes- sometimes greed of the parties. These costs are always borne by the investors, typically being baked into existing fees and disclosed separately- if at all. By its nature, omnibus also adds a layer of complexity to all involved financial transactions. Because every RBA account that contains Acme Funds is rolled into a single omnibus account, I - as Acme - have no idea who is investing in my funds. As a result, there is an additional level of compliance requirements heaped on RBA, more potential for fraud by said intermediary (the advisor and/or their employer) and their clients, and the necessity of legal documents to cover both parties in said arrangement, which means legal costs, time, and effort to implement and maintain the relationship. Lastly, there aren't a lot of options for asset managers or distributors who want to administer omnibus accounts. In fact, there are only a handful of widely-used platforms, known as sub-TA platforms. Getting into these platforms and how they work is beyond the scope of this document. The important thing to know is how omnibus works at a high level, and subsequently why omnibus is such a hot topic in the 529 space today. Still, the benefits in terms of convenience and business flow outweigh the drawbacks, which is what makes implementing omnibus accounting so important to asset managers that want to gain access to wider distribution. In the second part of this article we will explore this pressure on the 529 savings plan industry, legislative and logistical impediments, and how the industry in responding. RELATED: Omnibus Part II: Challenges to implementation Financial Professional Content Omnibus is a word a lot of people in the asset management industry toss around, but not a lot of people understand. Yet, it has far-reaching impacts for advisors and their clients. Here is what you need to know when it comes to omnibus in order to begin to understand its impact on 529s. This is part one of a two-part series. Omnibus accounting (omnibus) moves the recordkeeping aspect of an investment from the asset manager to the BD (broker-dealer) by taking what would be many participants in said asset and making them into a single account held by the BD. The broker-dealer could be any financial intermediary, but we'll use a BD for the sake of simplicity. If it sounds confusing, that's because it is. Omnibus is a complicated process to implement, and moving the recordkeeping function from the asset manager to the broker-dealer has many compliance and legal hurdles. But the end result is simplicity for the client- and their advisor. How omnibus works Omnibus is the process of taking a large number of accounts and creating from those a single account. To understand what this means, let's explain it in terms of mutual funds, since they are a structure with which most financial professionals are already familiar. For this example, we'll use two fictional firms - Acme Mutual Funds and Really Big Advisors (RBA). If I am Acme Mutual Funds I can offer my fund directly to the public assuming I meet all 1940 Act Requirements and I've filed all the relevant paperwork with the appropriate legal entities, etcetera, etcetera. But what if I want Really Big Advisors (RBA) to offer my Acme funds to their RBA clients, or if I want my fund to be listed in a fund supermarket such as those hosted by TD Ameritrade or Fidelity? It would be a burdensome process for those advisors or firms to establish an account with me for each client. Imagine having to fill out a new account application with each existing client to purchase an Acme Fund, sending in deposits, and getting duplicate account statements sent to the advisor of record- it would be a logistical nightmare for everyone involved. So instead, Acme enters into an agreement directly with RBA. RBA agrees to take on all of the administrative work, to track participant accounts and aggregate all the trades across their clients, and in turn Acme sees only one account and, therefore, one client - RBA - instead of many individual fund participants. Acme cannot see the individual participant's information in any way, and therefore cannot audit those accounts directly. There will also be technical work that needs to happen on both sides so that RBA can take over statement and tax reporting for Acme, for which we at Acme may pay a sub-TA (transaction agent) fee, a term often used interchangeably with "revenue sharing."i Incidentally, if you've read about sub-TA fees being scrutinized by regulators, this is to what they are referring. i Revenue Sharing is actually a much broader term that can refer to any number of fees being exchanged between asset manager and distribution partner. Sub-TA fees are often but not always lumped into this term depending on who is doing the talking and how much they understand about the asset management industry. The benefits of omnibus Now that Acme has an omnibus account for each of its funds with RBA, RBA advisors and clients get certain benefits that every investor has come to expect. They can transfer assets between accounts and investments online. The client receives a single statement from RBA instead of a statement from RBA and Acme. Advisors can open and fund an existing client account with Acme via RBA without having to fill out all of their information, since it already exists in the RBA system. Plus, all of this happens much, much faster than if the client had to fill out all of this paperwork and send it with a check into Acme in order to purchase a mutual fund. By opening the account at RBA and funding it with an existing RBA account, RBA can in-turn aggregate it with its omnibus account immediately, effectively purchasing and opening the position at the day's closing price. The drawbacks of omnibus Having omnibus accounts yields great benefits in terms of convenience to everyone, but that convenience comes at a price. Namely, omnibus processing increases costs to the asset manager. In the example above, Acme Mutual Funds incurs the cost of compensating RBA for taking on the account and the trading administration burden. These costs, known as Sub-TA fees, can range from 10 to 35 basis points depending on the size and complexity of the assets, transactions, trading arrangement, and - yes- sometimes greed of the parties. These costs are always borne by the investors, typically being baked into existing fees and disclosed separately- if at all. By its nature, omnibus also adds a layer of complexity to all involved financial transactions. Because every RBA account that contains Acme Funds is rolled into a single omnibus account, I - as Acme - have no idea who is investing in my funds. As a result, there is an additional level of compliance requirements heaped on RBA, more potential for fraud by said intermediary (the advisor and/or their employer) and their clients, and the necessity of legal documents to cover both parties in said arrangement, which means legal costs, time, and effort to implement and maintain the relationship. Lastly, there aren't a lot of options for asset managers or distributors who want to administer omnibus accounts. In fact, there are only a handful of widely-used platforms, known as sub-TA platforms. Getting into these platforms and how they work is beyond the scope of this document. The important thing to know is how omnibus works at a high level, and subsequently why omnibus is such a hot topic in the 529 space today. Still, the benefits in terms of convenience and business flow outweigh the drawbacks, which is what makes implementing omnibus accounting so important to asset managers that want to gain access to wider distribution. In the second part of this article we will explore this pressure on the 529 savings plan industry, legislative and logistical impediments, and how the industry in responding. RELATED: Omnibus Part II: Challenges to implementation