Eight Things Advisors Need to Know About UMAs

Certain questions are critical for advisors to discuss with prospective firms, before leaving a wirehouse or other broker-dealer.

Unified Managed Accounts have garnered an impressive amount of assets since they were rolled out at major wirehouses beginning in 2002. Cerulli data as of the fourth quarter 2010 show that wirehouses manage some $73 billion in UMA assets, with a year-over-year growth rate of 60.5%.

Both wirehouse executives and industry consultants view them as game-changing upgrades of the client experience and are enthusiastic about the simplicity of an omnibus account that offers “best of breed” products from across the investment spectrum. Best of all, UMAs enable investors to receive the customized tax treatment that Separately Managed Accounts, or SMAs, promised but so often failed to deliver.

UMAs typically contain SMAs, mutual funds and ETFs in one account. Overlay managers can screen accounts for duplicate stock positions. Accounts can then be managed in a more tax-efficient manner.

Sometimes, managers with contrasting styles have reason to own the same stock.  Suppose that a growth and a value manager both own the same stock, and one manager holds a losing position.  The overlay manager can then sell that position for tax-loss harvesting purposes.   

Many advisors who use only SMAs simply never provide their clients with this important service.

At least one major wirehouse is actively urging its advisors to use the UMA as opposed to the SMA for new fee-based dollars because of these “next generation” features. UMA adoption by advisors however, hasn’t been as rapid as was first predicted by industry pundits. That’s because advisors remain a fiercely independent, skeptical lot. 

Many advisors erroneously view UMAs as a cookie-cutter firm-based product of dubious portability. They mistakenly view them as today’s version of the proprietary mutual fund. UMA holdings, in fact, are portable, as I've written about before.

More fundamentally, many advisors figure that if the firm is urging them to do UMAs, there must be a catch. These advisors are cautiously dabbling with UMAs, trying them out with select and often smaller accounts.   

When advisors who use UMAs consider changing firms, they must carefully scrutinize the offering of a prospective firm. Not all UMAs are created equal, and in-depth advisor due diligence is imperative.

Two of the major wirehouses offer well-crafted, robust programs. A third has what consultants call a “multi-style account.” The menu is limited to SMAs only. The offering is a good one, but it is not a true UMA.

The fourth wirehouse has an earlier-generation product offering with limited choices that sit on antiquated technology. Not surprisingly, it has garnered relatively few assets.

UMAs may differ both in the assets classes that go into them, in the choices available in each sleeve and in a myriad of other ways. UMAs typically offer five to eight choices per sleeve that have been vetted by the firm’s research department.

Commodities and  real estate are asset classes that have been added in recent years.  In the future, more alternatives and ‘40 Act funds will make their way onto UMA platforms. 

A general rule of thumb is that the more an advisor can customize a UMA offering to the needs of their clients, the better the FA can service clients and affirm his or her own unique value.

Here are some questions that thoughtful advisors should discuss with product specialists at prospective firms about UMAs:

  1. Can advisors craft the client’s asset allocation or are they wedded to firm models?
  2. What asset classes are included in the UMAs, and what is the menu for the choices per sleeve?
  3. If the managers (at the old and new broker-dealers) don’t line up exactly, what managers are available, and can you add your own managers? (This will become an increasingly important issue, since some sophisticated advisors will want to do their own research and use their own managers.) 
  4. If you are managing a portfolio in a particular style box, can it be included as a choice in one of the sleeves?
  5. Can the advisor control the frequency of rebalancing? Advisors need the flexibility to respond to fundamental shifts in the market. For example, at the end of 2008, many advisors moved into equities after the market crashed.
  6. What input does the advisor have with respect to pricing? UMA pricing right now seems to be akin to that of SMAs: 2.2% down to 75 basis points, depending upon the size of the account.
  7. It’s critical to test drive the prospective firm’s technology. Advisors also need to review the questionnaires used by the prospective firm for their pertinence and check out the associated proposals for their flexibility. Can performance be measured by appropriate benchmarks? Are there choices in how to illustrate performance? Are these easy to execute at the desktop level?
  8. What analytics are available to measure and explain performance?

One final note: Some firms use outside vendors like Placemark and Parametric to do the overlay management. They may also handle the trading and operations in addition to the tax management. 

These firms are highly regarded in the asset-management industry. There is no drawback to the advisor in this scenario, as opposed to UMAs run entirely by the firm.

For many advisors, the right UMA platform can greatly enhance their business and offer their clients important benefits. Since UMA platform’s can differ greatly, it’s important that an advisor thoroughly review the UMA offering of a prospective firm.  

As author Samuel Butler famously quipped, “Look before you leap because as you sow you are likely to reap.”

Page 2 of 2
Single page view Reprints Discuss this story
This is where the comments go.