UMAs Poised for Tremendous Growth
November 20, 2006
NEW YORK-Just as exchange-traded funds have taken the fund industry by storm over the past few years, industry executives expect unified managed accounts to be the next wildly popular investment choice due to their simplicity, automatic rebalancing and diversification.
"Everyone is talking about UMAs, and there is no question that the business is growing," said Lawrence Sinsimer, managing director of managed accounts at Eaton Vance Distributors of Boston, during Financial Research Associates' Unified Managed Accounts conference here last week.
Within three to five years, the industry will fully embrace product-neutral platforms, said David Haywood, vice president and senior consultant at Financial Research Corp. of Boston. Two major platforms will emerge: mutual fund wraps, which will be on the lower end, and on the high end will be UMAs, he predicted.
A UMA is a not a product, but a single account with an overlay manager. It is asset-allocation driven and combines investment vehicles such as exchange-traded funds, mutual funds, separately managed accounts and alternative investments, all in one portfolio. Each client typically fills out a questionnaire so that their portfolio can be customized according to their investment goals, appetite for risk and tax considerations.
The asset allocation is fulfilled using investment sleeves, which are usually connected to asset classes, indexes and styles, explained Vincent Lepore, vice president and product manager of separately managed and unified managed accounts at HSBC of New York. Each sleeve has cash residuals and performance calculations.
UMAs have many advantages. Asset allocation is driven by return objectives and risk tolerance. The overall investment process is simplified with one account, which means less paperwork since the client receives only one performance report, Lepore said. The UMA provides opportunity to moderate volatility and risk by using complementary asset classes. Additionally, it provides diversification with some tax efficiencies, he said. And the portfolios are automatically rebalanced.
The UMA bridges the market between mutual fund wraps and SMAs. Typically, investors with assets under $250,000 invest in mutual fund wraps; investors with $250,000 to $1 million invest in UMAs; and those with more than $1 million typically gravitate to SMAs. The average assets in a UMA account are $600,000 and the average UMA has 4.5 sleeves.
As with any investment, there are challenges to overcome with the UMA. For one, the industry is trying to work out how to represent fees in a UMA. "Performance fees are a work in progress," Lepore said.
Once a company decides to get into the business, they need to assess if they want to outsource the overlay function completely or bring some services in house. Broker/dealers are used to outsourcing investment management functions, while banks are not and don't like sending checks out the door, said Peter Green, senior vice president of the managed accounts consulting group at Prudential Investments of Newark, N.J. Outsourcing is the better model for most firms, speakers agreed.
Another hurdle the UMA must overcome is convincing investment managers that their products should be placed in UMAs. Many investment firms resist being included in a UMA platform because they believe their brand is de-emphasized, if not fully buried, in the portfolio. Some managers think that also lessens their pricing power, Haywood said.
Technology is a key component of establishing a UMA platform, and it is very expensive to build in-house. Even if a company has a SMA platform, the technology for a UMA platform requires more asset classes, complex standards and some manual work, said Bala Subramanian vice president of technology investment services at Standard & Poor's of New York.
While many firms want to keep technology costs down, it is unavoidable with UMAs since they are very heavily technology driven, Subramanian commented.
More players and connectivity are very important for the UMA industry. Not in the respect of just linking platforms together through software, but having employees within different divisions communicating and working with each other, Subramanian said.
Looking forward, the industry will see consolidation within the technology providers' space, as only a few dominant players will remain, Subramanian predicted. The cost of building a UMA technology platform is so high, that it will not support smaller providers in the industry. As basic functions become commoditized, there will be tremendous opportunity for value-added services, he said.
One of the best places that technology can help within UMAs is in reporting. "Compliance is a huge risk, and it is a big burden on the sponsor to get everyone to comply," said Joseph Mrak, vice president of product development at CheckFree of Atlanta. There are many moving parts to the UMA, such as billing, trading and best execution, and a company has to have all of this under control, as regulators are going to take greater scrutiny of UMAs, said Christine Rogers, vice president of BISYS Fund Services of Roseland, N.J.
To remain competitive, many investment companies will move into the UMA space in the next 12 to 18 months, which will require a quick adoption curve, said Randy Bullard, executive vice president at Placemark Investments of Wellesley, Mass. "If you don't have a UMA yet, it's go time to get one because there is a lot of momentum surrounding them now."
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