Wealth Biz Buzz

“What’s in a name?”

“What is in a name?  That by which we would call an account, by any other name, smells like a process to thee”

A poor Shakespearean rip-off by all means, but I absolutely hate the name UMA.  It’s not that I have a better moniker, but for me UMA” has always been a misnomer.

Who actually gets to name stuff like this for an entire industry?  A question for another time, but for now, lets just say I don’t think the name accurately describes what is more of a process than an account.  So agrees Michael Stier, the President and CEO of Adhesion Wealth Advisor Solutions, a leading outsourced investment management firm, who recently told me, “for some time now in our sales & marketing collateral and dialog the term “UMA” has been relegated from the ‘headline’ to way back in the implementation details.”

Of course, “Reengineered investment management process using advanced technology and intellectual capital to provide scale, customization, efficient rebalancing and tax harvesting in a single account that combines individual securities, mutual funds and ETFs” doesn’t exactly roll off one’s tongue.

Many industry warriors have followed in Brutus’ wake, falling on their swords when trying to concisely convey exactly what this new-fangled contraption can do.  What is certain is that there is considerable confusion and conjecture about these programs.

Is this much ado about nothing, or is there some real merit that goes beyond the double entendre and secret jargon bandied about by vendors and consultants?  Perhaps the confusion arises because much of the inner workings of a UMA are rooted in sophisticated technology. Hence, those at the forefront of building these platforms are techno-geeks – not necessarily the best emissaries for speaking in plain old(e) English.

Don’t get me wrong; the consultants and vendors leading this charge are some of the brightest folks I’ve met.  They see this as the next logical step in the evolution of investment management for Ultra High Net Worth (“UHNW”) and High Net Worth (“HNW”) investors and from what I see, I wholeheartedly agree.

Gary Carai, Senior Managing Director of Fortigent, a leader in providing outsourced investment management solutions, says he is seeing an absolute sea change in both channels [banks & RIAs] embracing UMA.  “The leading indicator I found to be most telling is whatever the UHNW are doing today, the mass affluent will be doing tomorrow.”

No Refudiating Evolution – “To climb steep hills requires slow pace at first”

It is said that Shakespeare invented over 3,000 words.  Who actually knows what we called an elbow, before the Bard branded the pointed hinge joint as such, or when and why it dawned on him to coin the beginning of the day as dawn.  I guess in the day of frenemy, bromance, overthink, chilax, redonkulous, and Sarah Palin’s famous refudiate (where she compared herself to Shakespeare), we can almost pardon (IMHO) the industry gurus’ use of Overlay technology, sleeves, attribution and hybrid architecture.

As language evolves, so does our industry.  Understanding this evolution can be extremely valuable when positioning your firm to bring the best solutions to your clients, while simultaneously increasing value for your other stakeholders.

Over the past three decades the preferred methodology for building and managing a High Net Worth (“HNW”) portfolio has slowly evolved.  Before the 1980’s and well into the 90’s, stockbrokers built individual portfolios for investors.  These portfolios were typically poorly diversified, driven by research departments with questionable motives and while it was possible to customize each portfolio, it was very impractical.

Moving into the 90’s mutual funds began to grab a foothold as brokers, advisors and clients found their simplicity, diversification and professional management appealing.  The concept of “managing the managers” began to gain traction, albeit, slowed by the unceasing push of proprietary funds.  As the number, diversity and use of funds exploded so did the recognition of their shortcomings, namely, the lack of customization and increasingly obvious tax inefficiencies.

Enter Separately Managed Accounts (“SMAs”).  The fanfare surrounding this new way to leverage top-tier asset managers to provide clients with direct ownership of diversified and customizable portfolios rivaled an opening at the Globe Theatre.  Yet, with all the promise and pageantry SMAs never quite lived up to their billing.

The implicit promises of SMAs failed to materialize on a macro level; specifically, the promises of more customization, of active tax management and of disciplined rebalancing.  While this functionality exists in SMAs, putting them into action is simply overwhelming for advisors working with more than just a few clients.  It is simply not scalable across an entire wealth management practice.

Additionally, the paperwork and operational requirements associated with establishing, managing and rebalancing a portfolio of SMAs is cumbersome, expensive and takes precious time away from interacting with clients.

The introduction and growing acceptance of UMAs represents a fundamental and permanent shift in the preferred way to implement and manage diversified portfolios.  The ease and convenience of housing multiple accounts across multiple asset classes, within a single account represents a breakthrough in improving the operational efficiency of managing diversified portfolios.

Advisors cut down on paperwork, spend less time on implementation and rebalancing issues and can build portfolios customized to specific client objectives and constraints, while engaging in active tax management of the overall account.

In regard to the latter, with record deficits and a dubious two-year reprieve on the current tax structure, we believe taxes are the new wild card in the future of investing.

Harold “Rick” Pitcairn, CIO of Pitcairn, a $3 billion AUM Multi Family Office in Jenkintown, PA, said in a recent interview, “For us the elegant structure of the UMA and the ability to bring 60bps of tax alpha to the table in addition to the active management alpha our managers bring is a real winner for our clients.”

Demystifying UMA – “Confusion Now Hath Made His Masterpiece”

While we may never know if Shakespeare’s works were the efforts of a group of prolific writers or if Francis Bacon was the pen behind the man, we can, here and now, demystify some misconceptions relative to UMA.

Politically and culturally, UMA can be a hot potato.  Change is hard and if the ability to continue business as usual exists, the path of least resistance usually looks pretty appealing.  That path is often paved with the good intentions of executive managers, who by buying into a UMA platform seemingly understand the utter firepower it offers; yet unfortunately position it as merely another alternative investment product for advisors and portfolio managers to use at their discretion

Banks like BB&T, who have been very successful in adopting UMA, eliminated that hurdle by making UMA, “the” investment management platform for HNW investors; adopting a reengineered business structure, not a product rollout.

Many myths are perpetuated by CIOs and portfolio managers, who, afraid of obsolescence, unfairly characterize UMA as eliminating the need for their talents, instead of more accurately, directing their capabilities toward developing stronger models and more comprehensive due diligence of outside money managers.  UMAs also free personnel to focus more on relationship management and business development

Additionally, as discussed in our previous post, these managers have the ability to continue to manage one or more investment “sleeves”, combining their expertise with other best in breed managers on a customizable and scalable, hybrid architecture platform.

The myth of losing control over the assets, long a concern of bank Trust departments, evaporates as UMA, unlike little brother SMA, allows Trust companies to custody the assets in-house.  This eliminates arguments over fiduciary duty and control, as assets never leave the sight of the bank or advisor.  UMAs effectively interface with multiple custodians creating scores of opportunities and efficiencies for banks and RIAs.

Some UMA providers allow portfolio managers and/or advisors to continue to pull the trade triggers, while others take on that responsibility, handling all the trading, albeit on a platform that is driven by multiple client rules and preferences.  This enables relationship managers to focus on finding and keeping new clients, versus spending time on onerous trading and rebalancing.

Another often-misplaced gripe about UMA is the availability of managers on the platform; as money managers must agree to operate as a UMA.  According to Fortigent’s Carai, “This [perception] was real until a few years ago.  When the market dropped managers became distribution hungry.  Our experience now is that there are very few managers unwilling to participate.”

And then there is cost.  A prevalent misconception is that UMA is expensive.  Adhesion charges between ten and thirty basis points depending upon the services provided.  For that, advisors not only get many valuable back office services, but also access to portfolio managers who transmit their buy and sell recommendations for a fraction of the cost than if they had to manage the back office activities of the portfolio.  A manager who might charge 50 to 100 basis points in an SMA structure may go to 25 basis points (or even less) in a UMA environment.  They can do this since they are not actually placing and processing trades, but instead merely selling their intellectual property to the UMA vendor (or advisor/bank/trust company) who executes the trades. This typically results in fees substantially below that of many traditional SMA or wrap programs, which in turn allows the advisor/bank to pass the savings on to the client or recapture them as increased earnings (or a combination of the two).

Fortigent’s Carai agrees, “When you talk about the different component of fees (manager, custodian, Overlay) it sounds like too many mouths to feed.  The reality is in most cases the investor’s all-in fee is lower in UMA.”  He cites an example of a large cap manager they work with, who offers a mutual fund at 125bps, an SMA at 75bps and a UMA sleeve at 30 bps.  We have long concluded that the costs of Overlay are generally absorbed by the cost savings from the manager.

More difficult to gauge is how much more productive the firm becomes when time and resources are redirected from trading and rebalancing activities to client relationship and business development.

“Why, Then, the World is Mine Oyster, Which I with Sword will Open”

Adoption of UMA has been painfully slow, perhaps not surprisingly, as often, new ways of doing business are greeted with a justifiable level of skepticism, and in this case, a considerable amount of confusion and misconception.

“But for my own part, it was Greek to me”.

In a recent Cerulli study the consultancy cited “UMAs are too complicated to use and that end users do not understand the benefits.”  To the former, we say, nay, not so, to the latter, we wholeheartedly agree.  Vendors are trying diligently to get the word out.  This seems to be working, as Cerulli estimates UMA as a $327 billion market by 2013.

In our conversations with UMA providers, we hear tale that their pipelines are full and that business is expected to grow 75% to 100% this year.  It seems that UMA is finally catching on.  Alas, “All’s well that ends well.”

Of  Course, “All that Glitters is Not Gold”

There are downsides. UMAs do not offer a complete portfolio solution for most investors.  Certain alternative investments cannot be placed in UMAs, and even though manager acceptance continues to increase, there are still some asset classes, such as fixed income or emerging markets where it is advantageous to use SMAs or other independent strategies.

Mark Penske, Chairman and CEO of United Advisors, a prominent independent RIA, which recently adopted a UMA platform, points out that the challenges associated with adoption are the same as with any new product or process, as skeptical advisors must overcome the “its too good to be true” syndrome.  He says the key to success is working closely with the Overlay provider and keeping the lines of communication open.  He noted “the set-up period can be difficult, but it’s been pretty smooth sailing once the kinks have been worked out”.

Additionally, there are substantial differences in what the vendors offer, making it difficult to select “the best “partner for you.  This too lends itself to confusion; as example, one vendor may act as the Overlay manager, while another may allow you to do so.  Some vendors provide a turnkey program which includes items such as profiling tools, due diligence, performance reporting, Overlay technology, manager access, while other merely bolt the engine of Overlay technology onto your current platform enabling you to continue to use your existing internal and/or outsourced components.  Pricing fluctuates considerably as well, not only on a pure cost basis, but also on how those expenses are applied.

Therefore, if you were to look at only one vendor’s offering, your perception of UMA would be incomplete, as disparities are great, with no two platforms the same.

For these reasons, we strongly suggest finding an objective resource that can help direct you and your firm to the appropriate solution and help you negotiate often complex contracts; full of subtle, but important nuances.  At a minimum, we recommend developing an RFP for submission to several of the top players.

UMA is clearly not right for every situation, however, we believe that many of the early glitches have long been worked out and it is a solution that most investment management firms should strongly consider (or reconsider).

While “Modest doubt is called the beacon of the wise” we also believe, “Action is eloquence!”

Our thanks to Adhesion Wealth Advisor Solutions, Fortigent and United Advisors for their contributions to this blog entry.