UMAs Gain Momentum as Powerful Advice Tools

The ubiquity of information, greater savviness of investors, relentless white noise of prescriptive “advice,” and the longest bull market run in history make our sector ripe for disruption.

Many advisors are still struggling to take on all tasks related to researching and identifying securities, determining optimal asset allocation, monitoring it all on a regular basis, rebalancing portfolios as demanded by clients’ ever-changing financial needs, and re-papering to suit account changes. Fortunately, there is a solution that has the potential to allow advisors to offer their clients cost-effective, personalized access to institutional asset managers while simultaneously helping their practices reach new levels of scalability and efficiency.

That solution is the unified managed account (UMA). While you’re probably already familiar with the separately managed account portfolio and its benefits, you might have discounted UMAs when earlier versions fell short of fulfilling their promise. But the next generation of UMAs have capabilities that have the potential to take financial advice to the next level in terms of cost efficiencies and ease of delivery for both advisors and their clients.

Why Choose a UMA/?

As the demand for transparency, fee compression, and after-tax returns top the list of advisor concerns regarding client portfolio solutions, the acceptance and implementation of UMAs is rapidly growing (as per Cerulli’s 2Q 2019 issue of The Cerulli Edge), and for good reason. With the right tech provider, an open structure and intuitive user interface can allow advisors to shift between managed account programs, asset allocations, and strategist selections without administrative or operational friction.

A single-solution UMA platform gives advisors easy access to robust portfolio management and trading capabilities, with more flexibility in overlay programs. The user experience and more efficient workflow can result in enhanced services that support decision-making, order generation, and cash management, as well as the management and routing of proposed orders. Trading, re-allocating between managers, and investing new money can become more efficient, decreasing time to market.

The UMA playbook is relatively simple: 1) listen, 2) provide an easy to understand plan, and 3) communicate clearly. A unified, single-solution approach like this can help provide much-needed relief, off-loading the tasks of managing a complex multitude of varied account silos (often with an equally complex multitude of legacy tech systems) so advisors can spend more time on what they do best — providing holistic advisory solutions for their clients, and growing their business in the process.

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.