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Mass-Affluent Offices Driving UMA Growth

MIAMI-Unified managed accounts (UMAs) continue to grow at the expense of legacy separately managed accounts (SMAs), according to a presentation at the National Investment Company Service Association's "7th Annual Managed Accounts Technology and Operations Conference" here last week, at the Doral Golf Resort and Spa.

"The shift from SMAs to UMAs and other products is all part of the movement of family office-type services to the mass-affluent market," said Walter Makarucha, a managing director at Odyssey Financial Technologies.

Makarucha said the surge in popularity for UMAs has been an evolutionary process for the wealth management industry. UMAs are platforms for the delivery of financial products that are not tied to a single manufacturer.

The UMA instrument, with its common roots in the world of family practice and the institutional investment world, is being adapted to serve the needs of retail customers.

Makarucha said there is room for significant growth in the sector. He estimated that UMAs as of June 30, 2007 represented only 2% to 3% of the total managed account marketplace.

One of the challenges for the industry as it moves into a UMA-dominated landscape is that it must begin to think of the UMA delivery system not as a single product, but as a process of educating and selling multiple services to potential consumers. This is more of a consulting role than some advisers have employed when selling SMAs or structured managed accounts.

Among the keys to success ticked off by the Odyssey executive for the continued increase in market share by UMAs is the delivery of enhanced tax awareness for the client and the ability of the product to help investors maintain the right asset allocation.

Another likely emphasis that is needed for UMAs is to include meaningful reporting for the individual investor.

"The managed account industry needs to stop taking hand-me-downs from the institutional world," said Candayce Cohen, vice president for industry solutions at consulting firm Northstar.

Without making reporting more useful for retail customers, Cohen said clients will continue to jump from asset class to asset class often to the detriment of the health of their portfolio.

UMAs: The Backstory

The foundation for today's explosive growth in UMAs was laid when the brokerage industry created SMA products in the 1980s.

One advantage of the SMA is that it offered clients a single fee for all services. It was also a wealth management solution that appealed to a broad base of customers because it featured a comparatively low minimum account size, which was normally less than $250,000.

For this relatively low minimum, investors were offered access to third-party managers and access to proprietary products including choices from a menu that included equities, fixed income and mutual fund asset classes.

The equities offerings included exposure to large-cap, mid-cap, small-cap and international funds and individual equities.

The tax-optimized structure of these accounts was another drawing card.

In all, Makarucha said these products were the beginning of the institutionalization of services offered to the retail investor.

But the trend has progressed, he said, with the creation of UMAs. They offer advantages that make them more attractive than SMAs because they can provide the investor with a more holistic approach to wealth management.

Industry experts are divided about the speed and extent of the ascendency of UMAs, with Makarucha being among the most optimistic.

As UMAs have become more popular, it has led to a corresponding change in identification by many asset managers.

The transition can be seen from the fact that as of last November, 6.6% of wealth managers and registered investment advisors have changed their self description from investment generalists into wealth managers according to data from On Wall Street, a sister SourceMedia publication.

And as the high level of professional services migrate from family office practices to a broader customer base who seek family office and institutional types of financial planning, trust services, generational planning and asset management, it enhances the UMA role.

But Mararucha cautioned that in order to continue to grow, UMA providers must address the need for data that is accurate, timely and consolidated from multiple sources. It also must be able to consolidate distribution channels, products and financial services segments, he said.

The data collection requirement can be daunting because the typical mass-affluent customers present the problem of having multiple accounts at a number of financial service firms, who are not always eager to share data with competitors.

Another challenge for UMA providers is to glean as much information about the liabilities side of the net worth calculation as the provider usually has access to on the asset side of this ration.

"We need to see all the assets and the liabilities of the client," he said.

UMA providers must also integrate pension and retirement support into their support of managed assets no matter where they are held.

The UMA platform must provide the financial advisor with a consolidated view of investments, insurance and banking products currently being used by the client. This broad range of financial advice can also include other services such as estate planning, private placements and trust services.

The popularity of the UMA product will have to be able to adjust to what Makarucha called the liquefaction of Baby Boomer assets that will occur in the near future. He said that by 2010, 66% of SMA/UMA assets will be controlled by the "Baby Boomer" generation. As this occurs it will represent a shift from asset accumulation to asset distribution of historic proportions. Within the SMA/UMA universe, this will change the psychology of investors and will require the rebalancing of portfolios.

(c) 2008 Money Management Executive and SourceMedia, Inc. All Rights Reserved.