The march of progress is sometimes thwarted by the pursuit of solutions that are elegant in principle but elusive in reality.
Alchemists tried to turn lead into gold. Physicists dream of cold fusion. Technologists envision an electronic device that will combine the best of the PC and TV. The world of managed accounts has its own ambitious goal: the unified managed household, or UMH, which would be a combination of multiple custodial accounts into a single account; which is not only an investor’s total investment portfolio, but all of the assets of the family, under the management of a single financial advisor.
For wealth managers, the big question is this: is the UMH a realistic goal that will become a reality over time? Or is it a holy grail that will capture imaginations but remain unrealized, draining resources that would better be spent elsewhere?
Tackling this question requires clarity of definitions. The Money Management Institute, the industry group for the managed accounts industry, released a white paper last summer that aimed to define the UMH concept. The conclusion, based on a survey of and interviews with industry executives, is that the UMH must be viewed as a capability, not as a platform, technology or service. According to the MMI paper, the industry consensus is that a UMH must give the financial advisors the capability to efficiently “assess and address the holistic investment needs and objectives of multiple, related individuals within a household that considers all the investment resources of the household, as well as the breadth of investment vehicles and account structures available to it.” Further, the UMH must offer an investment roadmap as well as handle implementation and ongoing monitoring of the entire basket of household investments.
Even MMI’s proposed definition – it clocks in at 72 words – may not go far enough for some in the industry, who argue that the UMH must also account for a household’s liabilities as well as its investments and other assets.
MMI’s effort to define the UMH deserves credit, because the concept remains fuzzy within the industry. A number of financial institutions, for example, are already marketing managed solutions under the UMH name. But they fall short of MMI’s definition in both degree and kind. Current offerings, while delivering impressive 360-degree capabilities for investment vehicles, aren’t truly comprehensive, integrated or automated. Indeed, short of a well-staffed family office or customized services offered to extremely high net worth individuals, there is no solution on the market today that encompasses every asset across the household under the management of a single financial advisor.- Such a solution would need to encompassconsolidated household reporting; integrated planning; investment management; rebalancing across all account types; and consolidated tax, income, cash management and estate planning. –
There are several major obstacles to the creation and implementation of a true UMH capability. Technology is often cited as the biggest barrier. There are indeed significant technology hurdles that need to be overcome, including developing new reporting and planning capabilities and integrating data from disparate legacy systems and multiple financial services firms. But the industry has overcome more formidable technological challenges. The path to a technology infrastructure to support the UMH may be complex, incremental, time consuming and costly, but it’s not difficult to see.
A potentially greater barrier is the human element. The knowledge and skill set required of financial advisors who would manage a UMH is extensive. Relatively few of today’s financial advisors have the expertise to deliver counsel, plan and implement every aspect of a household’s finances; from investments, savings, real estate and insurance to retirement and estate planning. A team approach, which includes multiple financial advisors bringing different experience to the table, may be required.
The growing complexity of investment vehicles and household financial planning creates its own challenge. The concept of the UMH was in part a response to the evolution of investment options, such as ETFs, hedge funds and alternative investments. A UMH must keep pace with this evolution and change that will continue to add complexity to a household’s financial picture over time.
Regulatory issues are also a factor. The UMH will require financial firms who hold different assets in the account to cooperate and share information. To achieve this, the existing regulatory framework will need to be changed. The first major obstacle is that no firm is obligated to share client information. This becomes particularly difficult for assets held away, held in trust or for retirement assets held in 401Ks or pension plans. The value of a true UMH is the visibility across all holdings and the ability to make decisions and execute tactics across the household portfolio. At present, while there may be visibility, there are limited management capabilities. Sharing account data is not something financial firms are likely to share, unless they are compelled to do so.
Taken together, the human capital, technological and legal barriers create another formidable and potentially overriding challenge: cost. Quite simply, building and offering a UMH capability is expensive. The model requires highly trained and capable financial advisors, who will demand a premium in terms of compensation. Building new technology on top of legacy systems has costs. Each investment vehicle in the UMH will also come with its own fees.
Some industry participants are talking about offering the UMH to householders with assets of $500,000 or higher. We think it’s likely that we will see a phased approach, in which different solutions will be offered to investors at different asset levels. While a full-blown UMH may require an entry point of $1 million, there will be valuable solutions available to investors with fewer household assets.
So there are barriers – but they are not insurmountable. The work of the MMI in defining the vision of a UMH is the first of many necessary steps. Because this vision is so compelling, and the potential benefits to clients so great, its emergence is not a question of if, but rather when. There needs to be a concerted focus on moving the industry to accepting the obligations they have to their clients to permit the evolution to full UMH capabilities. The industry needs to take the lead in enabling companies to share client information - before the government mandates it. Ultimately, our mission is to better serve our clients, and the UMH gives us the opportunity to do so. The sooner the industry can recognize this opportunity, the better we will be able to overcome the challenges.
Cheryl Nash is a senior vice president of strategic marketing and business development for Investment Services at Fiserv. She received the prestigious 2009 Pioneer Award from the Money Management Institute.
