Why Some Advisors, SMA Managers Love to Hate UMAs

UMA clients no longer enjoy the same bond with their manager as the old SMA clients held.  In addition, many UMA clients are kind of hazy as to who their managers  even are.

One SMA marketer told me that wirehouses generally don’t provide managers with the names of advisors whose clients are invested in their portfolios. Identifying the right advisors and marketing a particular manager’s portfolios to them is a challenge.

Amongst advisors,  there’s  largely a generational divide when it comes to UMAs .

Those advisors who are over 50 and grew up with SMAs are more likely to stay the course. Many view their own value added as their ability to assemble the right “best of breed “ managers  and to service the client in a high-touch fashion by proactively explaining the rationale behind the manager’s buy-and-sell decisions.

Advisors who entered the business in the last 10 to 15 years mostly recall SMAs as the investments that got pulverized in the 2008 crash.  They are more likely to opt for the convenience of the new UMA format.

In private, some smaller SMA managers recount how their wirehouse “partners” jawboned  them into transitioning their SMA portfolios over to the UMA platform. Home-office gatekeepers made it perfectly clear that UMAs were central to the firm’s strategy, and that while SMA managers could keep existing assets on the firm’s SMA platform, the UMA was to be the focus of the manager’s future marketing efforts at their company.

These boutique SMA managers scoff at the notion that UMAs are in the best interests of clients. Instead, they view the UMA focus as merely a way to reduce their management fees and bolster wirehouse profits. They view their own trading prowess as superior to that of wirehouse home-office staff and a key ingredient in generating alpha. They disdain the use of UMA models as little more than cookie-cutter, commoditized offerings that deprive high net worth investors of the customization to which they are entitled.   

Boutique SMA managers assert that they are far more equipped to deliver the individualized overlay management and tax treatment to a HNW account than a giant wirehouse. For example, some managers say that they provide proactive tax management throughout the year to their HNW accounts. They don’t wait for brokers to call at year’s end to request this service.  

Interestingly, one of the boutique brokerage firms that caters to clients with investible portfolios of $5 million or more has a  wide variety of SMA portfolios for clients but doesn’t offer UMAs.

In fact, it’s head of manager research has been quoted in the press disparaging UMAs and stating that he doesn’t view model based UMAs as a suitable HNW product. (Large mutual funds companies with SMA offerings have hopped on the UMA bandwagon and profess to be “product agnostic.” This is because they are mutual fund distribution companies that view their UMAs as loss leaders.)

It’s good that investments come in many flavors. SMAs are best for some clients, while UMAs are advisable for others.  

No one product is appropriate for all advisors or all clients. Thus, it’s up to advisors to consider the pros and cons of UMAs and determine if they make sense for their clients.