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Certain questions are critical for advisors to discuss with prospective firms, before leaving a wirehouse or other broker-dealer.
Advisor One | May 13, 2011 | By Mark Elzweig
Unified Managed Accounts have garnered an impressive amount of assets since they were rolled out at major wirehouses beginning in 2002. Cerulli data as of the fourth quarter 2010 show that wirehouses manage some $73 billion in UMA assets, with a year-over-year growth rate of 60.5%. Both wirehouse executives and industry consultants view them as game-changing upgrades of theclient experience and are enthusiastic about the simplicity of an omnibus account that offers best of breed products from across the investment spectrum. Best of all, UMAs enable investors to receive the customized tax treatment that Separately Managed Accounts, or SMAs, promised but so often failed to deliver. UMAs typically contain SMAs, mutual funds and ETFs in one account. Overlay managers can screen accounts for duplicate stock positions. Accounts can then be managed in a more tax-efficient manner. Sometimes, managers with contrasting styles have reason to own the same stock. Suppose that a growth and a value manager both own the same stock, and one manager holds a losing position. The overlay manager can then sell that position for tax-loss harvesting purposes. Many advisors who use only SMAs simply never provide their clients with this important service. At least one major wirehouse is actively urging its advisors to use the UMA as opposed to the SMA for new fee-based dollars because of these next generation features. UMA adoption by advisors however, hasnt been as rapid as was first predicted by industry pundits. Thats because advisors remain a fiercely independent, skeptical lot.
UMAs are not cookie-cutter products; they vary from firm to firm
Many advisors erroneously view UMAs as a cookie-cutter firm-based product of dubious portability. They mistakenly view them as todays version of the proprietary mutual fund. UMA holdings, in fact, are portable, as I've written about before. More fundamentally, many advisors figure that if the firm is urging them to do UMAs, there must be a catch. These advisors are cautiously dabbling with UMAs, trying them out with select and often smaller accounts.
When advisors who use UMAs consider changing firms, they must carefully scrutinize the offering of a prospective firm. Not all UMAs are created equal, and in-depth advisor due diligence is imperative. Two of the major wirehouses offer well-crafted, robust programs. A third has what consultants call amulti-style account. The menu is limited to SMAs only. The offering is a good one, but it is not a true UMA. The fourth wirehouse has an earlier-generation product offering with limited choices that sit on antiquated technology. Not surprisingly, it has garnered relatively few assets. UMAs may differ both in the assets classes that go into them, in the choices available in each sleeve and in a myriad of other ways. UMAs typically offer five to eight choices per sleeve that have been vetted by the firms research department. Commodities and real estate are asset classes that have been added in recent years. In the future, more alternatives and 40 Act funds will make their way onto UMA platforms. A general rule of thumb is that the more an advisor can customize a UMA offering to the needs of their clients, the better the FA can service clients and affirm his or her own unique value.
7. Its critical to test drive the prospective firms technology. Advisors also need to review the questionnaires used by the prospective firm for their pertinence and check out the associated proposals for their flexibility. Can performance be measured by appropriate benchmarks? Are there choices in how to illustrate performance? Are these easy to execute at the desktop level? 8. What analytics are available to measure and explain performance? One final note: Some firms use outside vendors like Placemark and Parametric to do the overlay
management. They may also handle the trading and operations in addition to the tax management.
These firms are highly regarded in the asset-management industry. There is no drawback to the advisor in this scenario, as opposed to UMAs run entirely by the firm. For many advisors, the right UMA platform can greatly enhance their business and offer their clients important benefits. Since UMA platforms can differ greatly, its important that an advisor thoroughly review the UMA offering of a prospective firm.
As author Samuel Butler famously quipped, Look before you leap because as you sow you are likely to reap.