From the October 2007 issue of Boomer Market Advisor • Subscribe!

"Good enough" won't be good enough for much longer

In "UMAs in the Broker/Dealer -- What Will It Take?" (July 2007) Len Reinhart highlighted several key points about advisors' practices resulting from the accelerated shift from commissions to fees. Reinhart certainly has a firm grasp on the issues our industry needs to address, as well as the value proposition of unified managed accounts for main street investors.

However, there is one point with which I disagree. In his piece, Reinhart says, "I don't think SMAs are going away. But the smaller account marketplace, maybe under $500,000, will evolve to the UMA. Those people will want UMAs so they can get better diversification for their $200,000. Over time, it will be exactly the opposite of the trend that we have seen up until now, one in which people try to bring the minimum account size down on SMAs. I think you're going to see it go up. You're going to see UMAs come in underneath and take the majority of the smaller business."

I've seen advisors and clients gravitate to the diversification that SMAs can offer, even for accounts as low as $25,000. Newer firms in the market do not have the IT legacy issues of a wirehouse, which has allowed us to create an efficient platform that offers true diversification, regardless of account size. And, as we work to educate independent advisors about the increased acceptance of SMAs among main street investors, I believe the result will be steady increases in assets, sales and accounts, with the average account size and account minimum remaining fairly consistent.

The advantages of investing in separate accounts have never been in question. Historically, however, a key obstacle has been the exclusive nature of the product due to high minimum investment requirements. The key to future success is the consistent combination of the inherent power of SMAs within a platform that is also simple and easy to administer for the financial advisor. And as an industry, we must not exclude, nor impact, the integrity of the investment solution due to account size. Let's use tax season as a prime example. Advisors spend countless hours on reactive, administrative duties. However, there is no easy answer to the common question, "What can I do to minimize my tax situation?" But through tax harvesting within an SMA, there now is a solution for any account that is greater than $25,000 -- individualized and customized tax treatment that optimizes each client's personal tax situation.

Another challenge for the SMA sector, the UMA sector and, quite frankly, the financial services industry as a whole, will be our ability to help advisors shift from commissions to fees. Furthermore, how we handle contextual issues such as platform efficiency, transparency, disclosure, advisor objectivity and investor confidence will also help determine the future health and success of our market. Helping advisors understand the business implications of shifting to a fee-based practice, and helping them communicate the value of a fee-based practice to their clients, will not only position advisors as truly objective financial experts, but will also help grow both the UMA and SMA product categories.

We look at SMAs and UMAs in terms of critical mass. Both products have a long way to go to catch mutual fund utilization rates, for example. The biggest hurdle for SMAs and UMAs is overcoming their perceived complexity, as well as convincing advisors to re-evaluate the advice they give to clients and the way they run their businesses. After all, many believe that if their practice isn't broken, why fix it?

But sticking to a product, a business model or an investment philosophy because it might be more generally accepted, or maybe a little easier to explain to the client only sets us up for stagnation. I encourage advisors, broker/dealers and investors to embrace change -- real strategic change -- not change for change's sake. Whether it's UMAs or SMAs, the choice is up to the individual investor based on their personal preferences. But the business model change that UMAs and SMAs personify is the key to long-term growth, increasing investor confidence and delivering on the value proposition that true asset diversification can provide across all financial profiles.

Advisor education, business model evolution and asset diversification through product innovation are the building blocks for the future of our industry. Embrace the opportunity. "Good enough" won't be good enough for very much longer.

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