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UMAs: A Key Way to Reach the Mass Affluent


By Brian Bono, CFA, Senior Investment Analyst, Brinker Capital, and Noreen Beaman, CPA, EVP, Strategic Planning, Brinker Capital

Investing "science"-the proven principles of asset allocation, diversification and rebalancing-is no longer the exclusive purview of institutional investors. Today's wealthier and more sophisticated individual investors demand access to these disciplines.

To deliver this access, sponsors of separately managed accounts need comprehensive, easy-to-use solutions that can adapt to fit a wide range of individual investor needs. No investing vehicle introduced to date prepares financial advisers better to meet this client challenge than the unified managed account (UMA).

The UMA is deliberately designed to make complex institutional-type investing seem easy for financial advisers and their clients. Simple on the surface, its myriad details are managed behind the scenes by the sponsor.

Introduced just a few years ago, UMAs are gradually winning acceptance. While their early growth was constrained by some confusion over what they are, who they best serve and whether or not they are worth their price, their benefits are quickly becoming clear to the marketplace and drawing new sponsors into the field.

While not all are exactly the same, UMAs are vehicles that align the client's objectives with appropriate investments almost automatically, once the client and financial adviser agree on a strategic direction. The UMA enables a client's asset allocation to be implemented and periodically rebalanced in a single account using a combination of investments such as mutual funds, exchange-traded funds, separately managed accounts and alternative investments. Their architecture is more open and flexible than either traditional mutual fund wrap programs or multi-disciplined programs that let investors allocate among a small, select group of separate account managers.

UMAs often use an overlay manager to coordinate the transactions within the account, monitor and maintain the desired asset allocation, manage the tax losses and produce a single client statement and 1099. The range of investment choices and level of customization are usually determined by the UMA sponsor, which is typically a financial services firm with core strengths in asset management, operations and sales.

UMAs have been created to appeal to people with significant investable assets, a large market sometimes referred to as "the mass affluent," and to the advisers who serve them. As a rule of thumb, UMAs are the "just right" solution when mutual funds are "too small" and separately managed accounts are "too big." The UMA serves the client who needs a level of tax management that mutual funds alone cannot offer but who does not yet have enough assets to achieve adequate diversification with separately managed accounts.

Although some UMA programs have minimums as low as $150,000, we believe the "sweet spot" of the market for this product falls among investors with assets between $500,000 and $2 million to invest.

As for advisers, UMAs are well suited for those who are building a business based on independent, fee-based advice.

The biggest benefit of a UMA for clients and financial advisers is the ease of use. A financial planning and investing study published in 2006 by ING found that 73% of consumers would switch to a financial services firm with a reputation for making the financial planning process easier. For the majority of respondents, "easier" meant more knowledgeable representatives, clear explanations, responsiveness and quality service.

UMAs also let advisers combine investments in ways that earlier vehicles do not. They also have an adequate range of asset allocation strategies to enable them to serve a broad range of clients both now and when their financial needs and goals change over time.

For the investor, UMAs involve a single annual asset-based fee that may be assessed in quarterly or semi-annual increments. This fee covers the adviser's personalized counsel and due diligence in selecting a high-quality program, as well as the sponsor's fee, which in turn covers the cost of the overlay manager, the separate account managers, the asset allocation creation and monitoring, as well as transaction costs. A client's net cost may also include management fees for any mutual funds or ETFs that are part of the implementation.

Because these programs enable advisers to effectively outsource many of the most labor-intensive asset management functions, and because of the economies of scale inherent at the sponsor level, UMAs' fee structures are typically not much higher than fees for a mutual fund wrap program or a separately managed account service, even though UMAs offer more benefits and flexibility than either alternative on its own.

UMAs may not be right for every client or even for every adviser. However, they are likely to be part of the future trend in financial services as the pressures of consolidation and competition make it harder for advisers without large asset bases to stay in business. Advisers seeking to grow their business among the "mass affluent" may well find a good UMA program to be a powerful ally in the quest to survive and thrive.

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