Practice Management

UMAs can boost advisers' efficiency

A checklist for outsourcing investment management while maintaining 'artistic control'

May 30, 2010 @ 12:01 am

By Michael Stier

Eighty-six percent of advisers surveyed recently by Fidelity Investments plan to expand their business this year. But how?

One way, of course, is to offload some business operations and focus on what they do best. Although there are a number of outsourcing solutions available to assist advisers with back-office and reporting tasks, outsourcing the critical and complex process of investment management is difficult because traditional options (namely managed-account platforms) typically address only a portion of an adviser's business.

The advent of a truly comprehensive investment management outsourcing solution capable of accommodating an adviser's entire book is a relatively recent option. Through unified management accounts, advisers can offload the entire operational aspect of investment management, while maintaining full “artistic control” of the client's investment strategy.

Although many advisers are familiar with UMAs, few fully appreciate their operational efficiencies and how they can be used in a comprehensive investment management solution. Three aspects of UMAs make the benefits possible:

• They are single accounts that can house multiple investment objectives and investment vehicles, including mutual funds, separately managed accounts, exchange-traded funds, cash and fixed-income instruments.

• They provide access to an array of large and boutique asset managers, which produce investment strategies in model portfolio form that can be crafted by the adviser, along with proprietary strategies, into complete asset allocation plans for clients.

• They use third-party overlay portfolio managers, which implement a client's asset allocation plan in the UMA. Overlay managers possess the expertise and technology required to coordinate investment recommendations from multiple managers, incorporate client restrictions or mandates and implement adviser investment management preferences.

These UMA features allow a service delivery solution of substantial breadth and depth, and can easily accommodate a firm's swelling assets and advisers.

It is little wonder that research from Dover Financial Research LLC and the Money Management Institute suggests that 30% to 50% of SMA assets will convert to UMAs over the next five years. Research from Celent, in fact, projects that UMA assets will reach $327 billion by 2013 (a 35% compound annual growth rate).

When advisers consider using UMAs, they should ask themselves the following five questions:

Will my firm's operational burden truly be offloaded? A comprehensive investment management solution should assume the bulk of an adviser's operational burden. The “unified” in UMA should refer to a unifying solution that includes integrated client reporting, investment management and portfolio accounting. It also should be a performance-reporting solution that unifies all assets in the client household, not just the UMAs. It could also be the single investment management platform that serves an adviser's entire book of business, regardless of custodian. What's more, it should provide one set of paperwork in order to implement a client's total asset allocation strategy, as well as be the one place to accommodate all clients' social or stock restrictions. Finally, it should be the one point of administration for all manager relationships, monitoring, re-balancing, cash flows, tax-related events and manager model changes.

Can we still develop our own investment strategies? Make sure that the outsourcing partner can accommodate internally developed strategies within the UMA, along with any outside manager models.

Does outsourcing reduce my investment management costs? The cost of model-based strategies is typically much less than the cost of the same manager available through a separately managed account or mutual fund. Do the cost comparison.

Will my clients' experience improve? Clients value a single, integrated source of household reporting and online inquiry for all the accounts managed by their adviser. Additionally, clients appreciate an investment service that accommodates personalization and provides access to exclusive managers.

Will the overlay manager look to maximize after-tax returns? UMAs facilitate the integrated view needed for the year-round monitoring of events that have a tax impact, allowing the overlay manager to take steps to eliminate or defer them until their effects are minimized or neutralized.

Michael Stier is president and chief executive of Adhesion Wealth Advisor Solutions Inc., whose WealthADV platform is used by registered investment advisers.

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