LAS VEGAS - Unified managed accounts (UMAs) are quickly becoming a popular and viable option for Baby Boomers looking for more diversification in retirement, but the plans still have a lot of work to do in order to overcome certain hang-ups.
For one thing, there is still a lot of confusion among average investors about what UMAs are and why they are beneficial, but once investors understand them, they seem to want to have them.
UMAs are intended to consolidate all of a client's assets-mutual funds, hedge funds, exchange-traded funds, separately managed accounts (SMAs), annuities, stocks, bonds, etc.-into one account. The hope is that by having an automated process with everything under one umbrella, investors will be able to lower the investment fees they pay by cutting out all the middlemen and minimize their taxes in the process.
"SMAs grew quietly for 25 years. That's a long time for the industry to sit out there and build and develop," said Gary Jones, vice president for industry operations at the Money Management Institute, speaking at the Financial Research Associates' 7th Annual Managed Accounts and UMA Summit, held here.
"We need to move away from legacy systems," said David Gardner, a principal at SMART Consulting LLC, and external project director at DTCC Wealth Management Services. "As an industry, we spent the last 25 years building single managed accounts. That lack of product innovation has hampered growth. With diversity comes opportunity. Our industry should unify our total holdings to provide the best advice."
Since their inception a few years ago, UMAs have been steadily cutting into or absorbing SMA accounts. Assets of UMA programs grew to approximately $48.1 billion as of the second quarter, a 7% gain from the previous quarter, compared to total SMA assets of $722.5 billion, which was a 1.4% decrease from the first quarter, according to data from Cerulli Associates.
Although Abraham Lincoln once said "a house divided against itself cannot stand," many traditional SMA managers still aren't sure if they should embrace or fight their UMA brethren.
Because each SMA can manage just a single category, like mutual funds or ETFs, "the average SMA investor has two to three SMA accounts," said Daniel Seivert, CEO and managing partner at Echelon Partners. "Most investors have holdings across a number of advisers."
UMAs are less labor intensive for managers and are, on average, about 30 to 40 basis points cheaper to deliver to clients than separately managed accounts, said Dave Hanson, chairman and chief executive of the investment management firm Fulton Financial Advisors.
Financial advisers love the bundled pricing of SMAs because they don't have to explain their pricing to clients, but recent poor market performance is making investors' desire for lower fees stronger than ever.
"Client needs are shifting again. It is incumbent on us to adapt to those needs," said Tracy Gallman, senior vice president of advisory product development for LPL Financial Services. She said many investors are shifting their assets to mutual fund-only or ETF accounts, looking for safety and lower fees.
"We need to manage the psychology of investors," Gallman said. "It is incumbent on our industry to design a UMA portfolio that drives to this situation set. If you go too far, you've eroded your simplicities and efficiencies."
"We have to come up with a way to make UMAs easier for clients to use," agreed Frank Campanale, president and CEO of Campanale Consulting Group LLC, and the former president and CEO of Smith Barney Consulting Group. "As an industry, we don't spend enough time asking clients what they want."
Campanale said advisers get excited about things like overlay platforms and custom-tailored products, but the client just cares that the vehicle works. He said some high-net-worth clients are creating their own UMAs.
"The end investor has very little knowledge of what products they're in, and they don't really care," Jones said, so long as it works and their fees are lowered.
"A lot of clients experienced a UMA for a number of years and didn't know it," he said. "Clearly, the SMA product needs to become more cost efficient. We need to make it easier for financial advisers to sell solutions."
At the end of the day, the client doesn't really care, and it's up to the industry to ask the hard questions, said Rob Klapprodt, president of Vestmark.
While UMAs continue to expand, there remain a number of products that should be included but are not, said Ian MacEachern, director of the advisory products group for Wachovia Securities. These include annuities, broker distribution sleeves and individual securities, he said.
"Innovation is dependent on the coordination of all those investment vehicles," he said.
Philosophically, if an adviser's goal is to give comprehensive advice, the more products they can include, the better, speakers said. "Ultimately, the goal should be everything a client has," MacEachern said.
Unified account managers should be careful not to exceed limitations set by the Investment Act of 1940, although the Securities and Exchange Commission hasn't paid much attention to SMAs in the past.
"There are things you can't do with a [UMA] fund in the current regulatory environment," said Jeffrey Holland, director of product development and management for BlackRock.
"There are a lot of things that technology needs to overcome, such as aggregating asset allocations across the portfolio," said Cheryl Nash, senior vice president of business development for Checkfree. "Tools need to be built to move cash across different custodial accounts. And the easiest part is the reporting part."
Nash said 10,000 people turn 60 every day. Technology solutions will need to continue to evolve in order to support clients with longer life spans.
"A retirement income solution without a retirement income guarantee isn't a viable solution," said John Bearce, senior vice president of business development for Natixis Global Associates.
"UMAs are just going to get more complex," Nash said.
"We need to consolidate technology into one master platform that can support mutual funds, ETFs and SMAs. We should seek out efficiencies through automation. The more you can automate, the better off all of us will be," Nash added.
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