As a warm-up to its Morningstar Investment Conference in Chicago June 20-22, the company hosted (in person in Chicago and through conference calls) the Morningstar Insight Forum on June 20, during which experts discussed a number of investment topics including exchange traded funds, separate accounts, and hedge funds.
Of particular interest was a session about separate accounts led by Steve Deutsch, director of separate accounts at Morningstar. Deutsch wondered, “Have we reached ‘The Tipping Point’ for separate accounts?” referring to the best-selling book The Tipping Point: How Little Things Can Make a Big Difference, by Malcolm Gladwell.
Separately managed accounts (SMAs) have been called at different times and in different places asset-based fee accounts, wrap accounts, privately managed accounts, and individually managed accounts. Now they may be marketed under a new moniker, the unified managed account (UMA). All this confusion over names and no real agreement on performance presentation may be part of the reason why these accounts are not as popular as they were projected to be even with the march toward a fee-based approach to asset management. According to Morningstar, only about 20% of advisors offer SMAs. Of the approximately $576 billion invested in retail SMAs, Deutsch says 80% of the assets are held by Merrill Lynch, Smith Barney, UBS, Prudential, and Morgan Stanley. These are retail accounts of under $1 million; the average account size is $283,000, and they carry a charge of 28-53 basis points.
Why is there a feeling of unrealized promise with SMAs? Apparently some of the greatest selling points are underutilized: customization and tax efficiency. Deutsch says only 25% of SMAs are customized, and pointed to a Cerulli Associates study that found that only 30% of taxable accounts get any special tax treatment.
Some in the industry hope that unified managed accounts (UMAs) will be the answer. That’s a place where “separate accounts, mutual funds, hedge funds, and ETFs can happily exist in one portfolio,” says Deutsch.
Working With an Overlay Manager
Randy Bullard, president of Placemark Investments in Wellesley, Massachusetts, and Dallas, is an overlay manager who spoke during the session. He deals with program sponsors–wirehouses, large regional broker/dealers, and some individual broker/dealers. His firm sets up, manages, and deploys UMAs, a product that’s been around for about two years. A UMA might contain two or more separate accounts, ETFs, commodities, hedge funds, and individual securities, allowing managers to “mix and match,” he says, “to best meet a variety of client needs.” Overlay managers implement asset allocation, rebalancing, risk analysis, cash management restrictions, investment restrictions if necessary, and tax optimization based on client circumstances. Several firms are now using UMAs instead of wrap accounts, targeting clients with $200,000 to $5 million; UMAs are “cost neutral,” says Bullard, compared with traditional SMAs.
Another panelist, Robert Jorgensen, co-founder of Ascentia Capital Partners, LLC, in Reno, and author of the book Individually Managed Accounts: An Investor’s Guide, says he began using individually managed accounts in 1984. “To reduce risk,” he says, “Modern Portfolio Theory teaches us to integrate non-correlated investments into a client’s portfolio.” He says the trend is to move into the UMA stocks, bonds, commodities, currencies, mutual funds and hedge funds that use long/short strategies, and other alternative investments.