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Financial Planning > Tax Planning

Serving Affluent Investors With Robo, UMA Models: Celent

By Danielle Andrus

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Are robo-UMAs the next innovation in product design? William Trout, senior analyst with Celent’s Wealth Management practice, examined in a new report the potential to combine the robo model with unified managed accounts as a way to serve affluent clients’ needs.

Customization on most robo platforms is limited to asset allocation across a handful of “buckets,” from conservative to aggressive, the report noted.

UMAs provide more customization, but also cost more. They’re operationally complex and run on legacy architecture, according to Trout.

(Related: Envestnet Wants to Help Advisors Beat Robos at Their Own Game)

The consumer-focused robos elevated the importance of consumer experience in investing. Experience, along with lower costs and fee transparency, are defining characteristics of the robo model, but Trout believes future iterations of robo-advisors may feature a fourth characteristic: tax optimization. This is a key area where robo-advisors services and UMAs overlap.

“Today, the line between robo and UMA technology is blurring. Best in class, tax-optimized portfolio management is no longer the patrimony of the high-end advisor,” he wrote.

Tax management is “philosophically aligned” with achieving investors’ goals, and is a core function of rebalancing, although UMAs and robos go about it in different ways, according to Trout. UMAs use asset allocation to utilize tax savings, while robos look for tax efficiencies in ETFs.

“While the robo advisors did not introduce the concept of automated tax management, they have democratized it,” he wrote.

UMAs’ complexity means they are “sold to rather than bought by clients,” according to Trout, while robo adoption has been driven by investor demand.

Overlay technology in UMAs introduced digitization that helped reduce some of their complexity.

However, “Juxtaposition of the UMA story with the transformational robo narrative should not obscure the fact that most robo-advisors have a long ways to go in terms of service model evolution,” he wrote. Hybrid robos have done a better job than strictly digital platforms of developing an outcome-oriented approach, according to Trout. He predicts more firms will follow Fidelity’s example and acquire or partner with technology firms that can introduce strategic financial planning to their platforms.

— Read JPMorgan Moves Ahead on Robo-Advisor, but Doesn’t Call It That on ThinkAdvisor.

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