Published on August 31, 2010 – FUNDfire – An Information Service of Money-Media, a Financial Times Company- written by Andrew Klausner, Founder and Principal of AK Advisory Partners LLC.
The growth of unified managed account (UMA) programs has been far slower than many industry experts had predicted when the investment vehicles were first introduced. Assets under management in the investment vehicles stood at $79.5 billion at the end of the first quarter, compared to $566.2 billion in separately managed accounts (SMAs) and $317 billion in programs where the advisor acts as the portfolio manager, according to Cerulli Associates. What are the reasons why the UMA has so far failed to live up to its potential?
To start with, a current focus of many UMAs – to provide a model-based investment solution – goes against two important trends:
1) The bias of top-end advisors to migrate away from “packaged products.”
2) The desire for top-end advisors to position themselves at the center of relationships and to provide many of the services that UMAs do – namely rebalancing and tax-advantaged investing.
The events of the last two years have only increased the importance of advisors retaining control of their client relationships. This has only made the road even tougher for UMAs.
I mention top-end advisors because they generally have larger clients and far greater assets under management. In fact, UMAs are more appealing to smaller accounts, where access to a diversified portfolio of individually managed accounts is not available. However, in this space for smaller accounts, UMAs are competing with – and at a cost disadvantage to – emerging exchange-traded-fund programs and established mutual fund wrap programs at most brokerages.
Another reason for the disappointing growth of UMAs is that the industry has not been able to truly make these accounts as all-encompassing as first hoped. For example, alternative investments and other less-liquid investments still do not work in the typical UMA structure. If advisors still have to do their own work to provide comprehensive client-level reporting, a main rationale for investing in UMAs disappears.
A further twist is that what some consider to be the next generation of managed accounts – the unified managed household (UMH) – is really a client-level reporting vehicle rather than an investment vehicle per-se. If, as I believe, this type of total-client reporting and functionality is what top-end advisors really desire, the growth and development of the UMH bodes poorly for the future of UMAs as well.
In order to differentiate themselves and attract larger clients, advisors must be able to demonstrate their value-add on an ongoing basis. Packaged products are a commodity, and while they have their place, successful advisors don’t build their practices on a foundation of such offerings.
In addition, the industry has not done itself any favors by selling UMAs as a primarily model-based solution and by melding their SMA programs into UMAs, as some firms have been doing recently. Pushing UMAs as a by-product of reducing the number of products you offer may increase assets under management in these programs. However, it will not really make the UMA the product the industry has long touted. UMAs seem stuck between SMAs and the next generation UMHs with no place to go.
