UMAs Gain Momentum as Powerful Advice Tools

Let’s Look at the Choices

The UMA has become an attractive alternative to a variety of packaged managed account programs, including SMA, and mutual fund/ETF wrap products. Here’s a brief look at how they stack up:

• Mutual Funds: Are easy to invest in and available for any sized account, but they don’t allow customization, are highly tax-inefficient, sometimes require high investment minimums, and can carry hefty fees.

• SMAs: Enable customization and ownership of individual securities, and can offer access to strategies from mutual fund, ETF, and institutional managers. They enable certain tax efficiencies; however, they also often create administrative burdens since each SMA is a unique client account and, as such, they each receive their own set of statements, tax documents, and rebalancing guidelines and depending on the technology and custody solutions, may not easily offer a holistic view of the client’s overall allocation.

• UMAs: Offer access to multiple managers and strategies and investment vehicles in a single account, and can accommodate larger account sizes. They can be tailored using more precise levels of personalization, including custom tax constraints, ESG (environmental, social, and governance) screens, and security-level buy and sell restrictions to accommodate legacy holdings.

Cost & Tax Efficiencies

Like SMAs, UMA portfolios can also enable tax alpha for clients through tax-loss harvesting and the sale of tax-advantageous security lots, etc., but unlike their SMA cousins, UMAs only require a single set of paperwork for all investments in the account — a potentially major time/cost-saver.

From a cost perspective, UMAs can potentially be more economical than SMAs and mutual funds. According to the Investment Company Institute, the average mutual fund’s expense ratio is 109 basis points, which is passed on directly to investors. The average balanced portfolio with some exposure to conventional, dual-contract SMAs can drop that overall expense ratio to around 80 basis points. Our analysis of the models currently on our Adhesion eXchange marketplace found that a similar, model-based UMA has the potential to cut that fee to around 54 basis points per year — 34 basis points in product costs and 20 basis points in overlay and tax management fees. (Based on the average fee for all Large Cap and Fixed Income models on the Adhesion eXchange as of 9/30/19. It also assumes traditional 60/40 balanced allocation.)

Our findings also reveal that, on average, by incorporating index-replication strategies, that same balanced portfolio has the potential to cut product costs by an additional 12 basis points, leading to total annual expenses of 41 basis points.

Advanced UMA offerings are available through open-architecture tech platforms that automate rebalancing and tax-loss harvesting and optimize these processes with rules-based, customized parameters. These platforms also tend to offer access to more asset managers than most individual advisors enjoy, therefore offering a wider variety of choice —while also assuming responsibility for manager due diligence and monitoring.

For advisors looking to help clients improve investment outcomes and achieve long-term financial goals, as well as meet their own objectives for practice efficiency and growth, UMAs are no longer the wave of the future. They may be the answer to today’s demands.

Barrett Ayers is President of Adhesion Wealth, a provider of SaaS technology solutions enabling RIAs and wealth managers to deliver highly tailored SMA and UMA portfolios at scale. Adhesion Wealth is a wholly owned subsidiary of Vestmark.