From the May 2009 issue of Boomer Market Advisor • Subscribe!

Managed accounts and the boomer meltdown

Hard-learned lesson No. 268 from the financial crisis: Even the most advanced, well-conceived and wisely applied investment product is vulnerable during a market meltdown.

As advisors like Mark Bredin have discovered, when markets spiral downward, few asset classes are spared, even when they reside in an instrument like a managed account. "One of the reasons I like to use managed accounts is that I want to get proper diversification for my clients," he explains. "But there are times when no matter how hard you try to be diversified and reduce volatility, it just doesn't work, managed money or no managed money."

Still, Bredin hasn't soured on separately managed accounts or unified managed accounts, though the client assets he had in those vehicles tended to lose value in lock-step with other equity-based assets. In fact, he and other managed-money experts say the financial crisis has helped underscore the benefits (and vulnerabilities) of SMAs, UMAs and their still-evolving cousin, the unified managed household account, among them:

  • Managed accounts provide transparency. "A real benefit I see to my clients (who use managed accounts) is that they get understandable results. They see exactly where their money is," says Bredin. Clients find the clarity of managed account statements "comforting," particularly in light of the Bernie Madoff mess. "One of the key advantages of the separately managed account, especially now," explains Jim Seuffert, CEO of Pershing Managed Account Solutions, "is that clients can look under the hood of their portfolio and not only see everything they own, but also their tax losses."
  • Harvesting those tax losses can be more straightforward with managed accounts. With SMAs and UMAs, according to Seuffert, tax-loss harvesting is a pretty simple exercise: sell off positions to realize losses, purchase similar ETF positions, hold them for 30 days, then liquidate them and use the proceeds to move back into the original positions.
  • Managed accounts remain a powerful diversification tool. Moving assets into a managed account from a concentrated position in a single stock didn't avert losses, but for many clients, it mitigated the damage, says Bredin, who most often uses SMAs as "portfolio completion vehicles to fill in the blanks where a client needs exposure. It's a tax-efficient way to diversify."
  • During market turmoil, advisors can turn to SMA and UMA managers for support. "The paradigm has changed," says Ron Fiske, executive vice president for Fidelity institutional Wealth Services, "Advisors are relying on (account) managers sort of as adjunct members of their practices. They want investment-specific conversations and guidance, so they are seeking out that mind-sharing. They are even having managers meet directly with clients."
  • Bredin says his managed account provider has been especially helpful in performing due diligence on specific managers with varying styles, so those time-consuming duties don't always fall on him. "They have been very helpful to me in pairing complementary managers."

Still Evolving
Benefits aside, the market downturn has made clear that managed accounts aren't a panacea, according to Robert J. Ellis, senior vice president of the wealth management practice at Celent. They "do not offer significantly superior investment return performance over actively-managed mutual funds, though they remain cheaper," he says. And they "cannot escape the directions of the market, unlike alternative investments and mutual and ETF funds that can short the market."

Bear market or not, there's still plenty of room for innovation in the managed account space, with signs clearly pointing to a shift in emphasis from SMAs to UMAs and beyond that, to the unified managed household account, or UMH.

"We're looking at a ton of different options," says Steve Dunlap, COO at Pershing Managed Account Solutions, "including a hedge fund-SMA hybrid" that incorporates the transparency of a managed account with access to top-performing hedge fund managers.

While SMAs today hold the majority of managed account assets, they are yielding market share to UMAs. Total UMA holdings are expected to grow from $73 billion in 2008 to $327 billion by 2013, according to a 2009 Celent report (co-authored by Ellis), which also notes that 80 percent of responding technology firms expect the UMA to surpass the SMA as the open-architecture wealth management account of choice within the next five years.

What can a UMA offer that an SMA can't? For one, says the Celent report, it provides the open architecture to allocate assets across all financial asset classes. To that end, UMAs also provide a broader choice of asset managers, all of which are typically screened by the program sponsor. Further, the simplified structure of a UMA tends to lower costs to the investor.

UMAs also appeal to advisors, notes Celent, "because they gain complete visibility on all their client's financial assets ... No longer does the advisor have to worry if they have a significant share of the client's wallet."
Bredin says he prefers UMAs to SMAs because they allow him to focus more on advice and analysis than administration.

"There's automatic diversification within the UMA, which means I don't have to lots of time-consuming asset-reallocation conversations, like I do with clients with assets in several (SMAs). There's also the fact that (with a UMA) the due diligence with managers is done by a third party instead of me."

For those reasons, UMAs that provide a single account and a single registration "are simply the best possible solution for high-end mass affluent and high-net-worth clients," asserts Ellis.

Still, a UMA is only as good as its overlay technology -- the system that manages the investment sleeves in the account to maximize their efficiency based on a big-picture plan or model. As the Celent report notes, there's room for overlay tools to improve. "Combining multiple asset classes and coordinating trades across all investment manager sleeves has proven to be a difficult, but not insurmountable, challenge. The difficulty of rebalancing and reporting across the asset and manager classes has also proven difficult."

While still aimed chiefly at ultra-high-net-worth and high-net-worth clients, UMAs are reaching a broader market, due in large part to strides being made with overlay technology. Improved technology "is making it practical to move down market, all the way to the lower reaches of the mass affluent market," observes Dunlap.

Adds Bredin: "It used to be someone needed $1 million in investable assets to get diversification from a few different account managers. Now you can get it with $250,000 or less."

UMAs, according to Celent, are one step short of the "Holy Grail" of retail wealth management: the unified managed household. The UMH broadens the scope of the managed account to encompass "multiple registrations" that reside under one household, explains Seuffert, with additional asset sleeves for real estate, alternative investments and the like.

The ascendance of the UMH is predicated on further improvements to overlay technology, asserts Josh Loban, who oversees Fidelity's managed account platform. "It's not a perfect science today. There is a disparity between where everyone wants the technology to be and where it is today. But I think it's inevitable that we will get there."

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