Omnibus Part Ii Challenges to Implementation

FINANCIAL PROFESSIONAL CONTENT This article assumes you have a basic understanding of what omnibus is based on its preceding article located here: Omnibus: What it is and why advisors should care. In a previous article, I discussed what makes omnibus so alluring: Clients receive statements and all tax reporting documents from a single firm and advisors are able to create, open, and administer 529 accounts from within their in-house system. But if omnibus is so great and provides all these unified services, why doesnï ¿ ½t every firm do it? 1. There are logistical challenges Omnibus creates an additional administration layer between the state sponsor and the 529 provider. From the stateï ¿ ½s perspective, assets inside an omnibus account appear as a single account. This means they cannot audit individual accounts without the cooperation of the broker-dealer that has taken over the recordkeeping of those accounts. This makes it difficult, if not impossible, for the state or the plan provider to conduct any sort of antifraud and AML (anti-money laundering) oversight in a systematic and routine way. Instead, those responsibilities are reallocated to the broker-dealer through the omnibus agreement, where the broker-dealer ensures that they will conduct all the required anti-fraud and AML due diligence. This is not to say that the broker-dealer isnï ¿ ½t capable of performing those activities, as they already do so every day for many other products. However, itï ¿ ½s the additional layer and complexity that is cause for concern. The current regulatory culture favors transparency, which omnibus accounting masks by its nature. Just this year the CMFI (Coalition of Mutual Fund Investors) sent comment to the SEC expressing concern over transparency in omnibus accounts and intermediary subaccounting. That being said, when a 529 plan provider is also a sizable broker-dealer, their systems may already be vertically integrated. For example, Merrill Lynchï ¿ ½s Next Gen accounts already sit in their proprietary recordkeeping system, which services and supports their own advisors. ï ¿ ½As the program manager for the Maine NextGen College Investing Planï ¿ ½, Merrill Lynch has always had the NextGen plan integrated (aka, omnibus) on our platform,ï ¿ ½ says Rich Polimeni, Director, Education Savings Programs. 2. There are legal challenges Almost every 529 plan has a state sponsor, and each state has different laws and oversight requirements for its respective 529 plan(s). Some of these laws were created to protect 529 account holders from exactly the kinds of activity made opaque by omnibus: fraud and money-laundering. A state may require annual audits for purposes of reconciling tax credit or deduction claims and grant requests. In other states the laws were simply written in a way that makes implementation challenging without a change in legislation, which is time-consuming. In each case a unique solution to omnibus implementation may be required to meet state legal requirements ï ¿ ½ if they can be met at all ï ¿ ½ further driving up costs and diminishing the appeal of going omnibus to both broker-dealer and 529 plan provider. 3. There are cost challenges In the 529 space, which is a low-margin and relatively low-asset business, getting the resources necessary to implement omnibus requires some internal campaigning at the broker-dealers. Wrestling technology development staff time from projects involving higher-margin products, such as retail and retirement investment accounts, requires a justifiable payoff timeline. For a smaller broker-dealer with only a few hundred or even a few thousand advisors, the cost to implement omnibus is not economically justified. ï ¿ ½It requires significant resources and time for broker-dealers to convert individual 529 accounts to an omnibus structure in a given 529 plan,ï ¿ ½ says Ascensusï ¿ ½s Chief Product Officer, Scott Morrison.ï ¿ ½In many cases the broker-dealer account base will not justify such an investment.ï ¿ ½ However, when you reach the scale of a wirehouse where you have tens of thousands of advisors, there comes a tipping-point where it may be less expensive to oversee and administer 529 business in-house, due to reduced paperwork, administration at the advisor level, and better internal reporting and oversight controls. When you add in how much easier it makes life for the advisor, who can open and fund an account within their own firmï ¿ ½s systems, it makes for a compelling case to secure those internal resources for implementation. Yet it can still be a challenge because it further requires partnerships between the broker-dealer and each 529 provider, legal agreements between both parties that can take months of negotiation, and ï ¿ ½ usually ï ¿ ½ the review and approval of the state sponsor. Further, some state sponsors are more diligent than others, extending the process in terms of time and resources. Given all of these challenges, itï ¿ ½s not surprising that after more than ten years of discussion omnibus implementation only a handful of firms have a live omnibus environment with one or more 529 providers. Several have had delays after starting the process, only to find one or more of the aforementioned challenges insurmountable. In the next newsletter we will look at alternatives to omnibus and what the future may hold for 529 plan administration. FINANCIAL PROFESSIONAL CONTENT This article assumes you have a basic understanding of what omnibus is based on its preceding article located here: Omnibus: What it is and why advisors should care. In a previous article, I discussed what makes omnibus so alluring: Clients receive statements and all tax reporting documents from a single firm and advisors are able to create, open, and administer 529 accounts from within their in-house system. But if omnibus is so great and provides all these unified services, why doesnï ¿ ½t every firm do it? 1. There are logistical challenges Omnibus creates an additional administration layer between the state sponsor and the 529 provider. From the stateï ¿ ½s perspective, assets inside an omnibus account appear as a single account. This means they cannot audit individual accounts without the cooperation of the broker-dealer that has taken over the recordkeeping of those accounts. This makes it difficult, if not impossible, for the state or the plan provider to conduct any sort of antifraud and AML (anti-money laundering) oversight in a systematic and routine way. Instead, those responsibilities are reallocated to the broker-dealer through the omnibus agreement, where the broker-dealer ensures that they will conduct all the required anti-fraud and AML due diligence. This is not to say that the broker-dealer isnï ¿ ½t capable of performing those activities, as they already do so every day for many other products. However, itï ¿ ½s the additional layer and complexity that is cause for concern. The current regulatory culture favors transparency, which omnibus accounting masks by its nature. Just this year the CMFI (Coalition of Mutual Fund Investors) sent comment to the SEC expressing concern over transparency in omnibus accounts and intermediary subaccounting. That being said, when a 529 plan provider is also a sizable broker-dealer, their systems may already be vertically integrated. For example, Merrill Lynchï ¿ ½s Next Gen accounts already sit in their proprietary recordkeeping system, which services and supports their own advisors. ï ¿ ½As the program manager for the Maine NextGen College Investing Planï ¿ ½, Merrill Lynch has always had the NextGen plan integrated (aka, omnibus) on our platform,ï ¿ ½ says Rich Polimeni, Director, Education Savings Programs. 2. There are legal challenges Almost every 529 plan has a state sponsor, and each state has different laws and oversight requirements for its respective 529 plan(s). Some of these laws were created to protect 529 account holders from exactly the kinds of activity made opaque by omnibus: fraud and money-laundering. A state may require annual audits for purposes of reconciling tax credit or deduction claims and grant requests. In other states the laws were simply written in a way that makes implementation challenging without a change in legislation, which is time-consuming. In each case a unique solution to omnibus implementation may be required to meet state legal requirements ï ¿ ½ if they can be met at all ï ¿ ½ further driving up costs and diminishing the appeal of going omnibus to both broker-dealer and 529 plan provider. 3. There are cost challenges In the 529 space, which is a low-margin and relatively low-asset business, getting the resources necessary to implement omnibus requires some internal campaigning at the broker-dealers. Wrestling technology development staff time from projects involving higher-margin products, such as retail and retirement investment accounts, requires a justifiable payoff timeline. For a smaller broker-dealer with only a few hundred or even a few thousand advisors, the cost to implement omnibus is not economically justified. ï ¿ ½It requires significant resources and time for broker-dealers to convert individual 529 accounts to an omnibus structure in a given 529 plan,ï ¿ ½ says Ascensusï ¿ ½s Chief Product Officer, Scott Morrison.ï ¿ ½In many cases the broker-dealer account base will not justify such an investment.ï ¿ ½ However, when you reach the scale of a wirehouse where you have tens of thousands of advisors, there comes a tipping-point where it may be less expensive to oversee and administer 529 business in-house, due to reduced paperwork, administration at the advisor level, and better internal reporting and oversight controls. When you add in how much easier it makes life for the advisor, who can open and fund an account within their own firmï ¿ ½s systems, it makes for a compelling case to secure those internal resources for implementation. Yet it can still be a challenge because it further requires partnerships between the broker-dealer and each 529 provider, legal agreements between both parties that can take months of negotiation, and ï ¿ ½ usually ï ¿ ½ the review and approval of the state sponsor. Further, some state sponsors are more diligent than others, extending the process in terms of time and resources. Given all of these challenges, itï ¿ ½s not surprising that after more than ten years of discussion omnibus implementation only a handful of firms have a live omnibus environment with one or more 529 providers. Several have had delays after starting the process, only to find one or more of the aforementioned challenges insurmountable. In the next newsletter we will look at alternatives to omnibus and what the future may hold for 529 plan administration.