Unified Managed Accounts: Seven Best Practices
Unified Managed Accounts: Seven Best Practices
Seven Best Practices in Unified Managed Accounts (UMA)
By Richard Keltner, Director of Product Management at Tegra118
Wealth management firms are using a variety of solutions to set up unified managed accounts across multiple programs and asset classes. According to Cerulli Associates, the industry’s long-term direction is towards consolidation of assets into flexible unified management accounts (UMA), following in the footsteps of Merrill Lynch and Morgan Stanley. When UMAs were introduced in 2004, they were hailed as “the next big thing”.
Sixteen years later, UMA assets have reached $1.18 trillion, with a 5-year compound annual growth rate of 23.4% through 1Q2020 (Source: Cerulli Associates).
By unifying managed accounts properly across an array of programs, wealth and asset management firms essentially achieve the flexibility to serve investors at all wealth levels. They are suited to mutual funds and ETFs for the mass market, as well as separate account sleeves and alternatives for high-net-worth investors. Unified managed accounts (UMA) allow firms to offer comprehensive and holistic advice—yet building and implementing a UMA that fits a firm’s existing investment workflows is a substantial exercise, and some firms are hesitant because they believe a UMA is inflexible and difficult to manage.
Fortunately, some smart strategies can help ensure a UMA platform’s success. Here are seven best practices from our experts:
1. Invest Time for Initial Configuration
It’s important to design for success from the start. When setting up, spend the necessary time to ensure you can support all aspects of the planned UMA platform, with advisor reports designed for the best user experience. Also consider client restrictions—which are often overlooked. Restrictions can block the portfolio re-balancer from generating “buy” orders and cause accounts to appear on the drift report. And ensure your operations team works with advisors to fully understand clients’ needs.
2. Build a Truly Holistic View of Client Holdings
Developing a full view of a client’s assets will make for easier, more accurate reporting. Choose a technology solution that includes held-away accounts across different custodians, which can be incorporated into UMA reports without the need to manually build spreadsheets. Place these held-away assets into separate, reporting-only accounts that can combine with the UMA for client-facing reporting. Your operations teams will be able to include held-away assets for asset allocation reporting, but exclude them from rebalancing, client billing, and performance reporting.
3. Tap Into “Smart Automation”
Robust UMAs have Smart Automation built into portfolio rebalancing engines, to reduce manual work and minimize trading costs. Some examples of Smart Automation include automated monitoring of tolerance bands to focus on drift outliers at multiple levels (position, cash, or sleeve), automated reinvestment of proceeds, and automated anniversary rebalancing. Operations teams should regularly review rebalancing options and settings to ensure they’re leveraging the technology to best support the program.
4. Leverage Tax Management
Tax efficiency is a key benefit of a UMA program. Tax lot selections and automated wash sales shouldn’t be overlooked. Setting a target gain or loss, or using sleeve netting, may only come into play periodically and that can lead advisors to underestimate their importance, especially when serving high-net-worth clients with significant potential tax exposure.
5. Ensure Efficient Cash Management
Maximizing cash management features requires research and coordination between operations and advisors as the teams work consolidate managed accounts effectively. Avoid the use of a distinct sleeve for any and all cash within the master model, which will require continued manual intervention. Instead, create cash targets within the underlying sub-models where monitoring and execution can be automated. If using third-party managers to trade sleeves, monitor cash balances daily and coordinate communications when trading. Talk to your UMA provider to learn more about their cash management features and take advantage of their full benefits.
6. Create Unified Reporting
Unified, clear, and transparent reporting that balances a high-level overview with granular asset allocations and returns is critical for end-investors. That holds true even if a firm doesn’t manage all of a client’s assets, or if the firm needs to classify certain investments (like REITs) differently within their accounting system. A granular, detailed view may be useful for the client, but it’s crucial for advisors. Without it, advisors can’t conduct robust analysis or gain actionable insight into specific sectors and sub-asset classes across client portfolios. The reports generated with the unified management accounts would present a holistic view of all investment decisions and give advisors the information they need to make manager changes or switch models to better match a client’s investment mandate.
7. Choose the Right Technology Platform
For forward-thinking wealth management firms, the ability to consolidate managed accounts effectively builds the engine for growth. Implementing UMA programs optimally requires choosing the right technology platform and following best practices. Top-of-the-line solutions offer a balance between firm-wide standardization and client-level configurability. Operations teams that invest time in understanding the capabilities of the software will help ensure that advisors – and clients – can tap into the true power of their UMA.
Learn more about the evolution of wealth management technology in this interview with Tegra118 CFO, Andrew Schwartz.