Since their introduction in the 1990s, unified managed accounts have seemed like an attractive tool for portfolio management. The promise was that advisors could better customize a client’s portfolio, especially for high-net-worth and ultra-high-net-worth clients, by bringing diverse assets into a single account that could be more efficiently and effectively managed.
UMAs differ from separately managed accounts in that SMAs focus on one specific investment strategy. While both SMAs and UMAs can be customized to an investor’s preferences, UMAs consolidate multiple investment vehicles and strategies into a single account including SMAs, mutual funds and ETFs, etc.
Yet today, despite clear benefits, the promise of UMAs has only been partially realized. According to Cerulli, 22% of managed account assets were in UMAs as of 2022. This represented significant growth—that number was just 4.1% in 2008—but given the apparent advantages of UMAs, why isn’t it even higher?
It’s because many advisors use UMAs with limited capabilities, meaning sleeve-level reporting and rebalancing take a lot of manual effort. Still, the growth in usage of UMAs despite those shortcomings shows there is an appetite for what UMAs promise. With more education on what to look for in a UMA and how to use it effectively, many advisors and firms will find them a useful tool that will benefit both their business and their clients.
How Can UMAs Benefit Advisors?
Take this scenario many advisors will recognize: A client has multiple accounts and wants to withdraw $50,000 for a major purchase. After the withdrawal, the portfolio may be unbalanced—perhaps the funds came from a conservative investment, and now the client’s risk exposure in the left assets is too high. So now the advisor needs to go to each account, run reports, add up the component investments and find places to reallocate to bring the whole into order.
A UMA allows different investments to be housed in separate sleeves, yet lets an advisor manage them as one. For example, the advisor can apply rebalancing across all the sleeves to ensure the overall portfolio aligns with the clients’ preferred investment strategy.
Not All UMAs Are Created Equal: What Advisors and Firms Should Look For
The most obvious issue with many UMAs is that they don’t truly unify all assets. The term “UMA” is not validated by a third party, so in some cases platforms offer UMAs that only allow sleeves made up of exchange listed securities such as ETFs or stocks. Accounts for fixed income or alternatives are still separate, negating some of the value of a UMA.
Another challenge: Some so-called UMAs don’t allow sleeve-level reporting. If a client wants to see how one sleeve is performing, the advisor still must manually tally the investments of that sleeve to provide a report.
Unfortunately, if advisors have a bad experience with limited-utility UMAs or hear others complain, they may write off the concept altogether. In reality, robust UMA solutions are available today, and the development of UMAs that can incorporate more types of investments, such as alternatives, will only make them better.
As advisors and firms consider utilizing UMAs for clients, they need to fully understand the capabilities of each platform they are evaluating and compare them carefully. Here are five things to look for in a UMA:
They need to be multi-discretionary. Third-party managers need to be able to manage their own sleeves, while the overlay manager can make or approve reallocations across sleeves for rebalancing.
They need to seamlessly integrate multiple asset classes. Not just equities and ETFs, but fixed income as well.
They need to be tax-managed across all sleeves. Complex transactions have complex tax implications, and they need to be managed holistically.
They need to support sleeve-level reporting and billing. UMA platforms without advanced reporting and billing capabilities make more work for advisors.
They should demonstrate a road map to incorporating private markets and other alternatives. A UMA with these features will let advisors better serve high-net-worth investors and may allow advisors to offer these investments cost-effectively to a broader client base.
Why UMAs Are Heating Up and What They Offer for the Future
The increased popularity of UMAs is being driven by a variety of trends in the wealth management universe.
First, investors are becoming more sophisticated, especially in the high-net worth space. They are more likely to have complex portfolios and effective management requires the right tools. UMAs provide investors with a simplified view of their holdings.
Second, advisors are under pressure to do more for their clients. Applying third-party strategies allows them to outsource some of their work to experts while they maintain oversight and provide advice beyond investments. Adding these layers, however, also adds complexity, so tools like UMAs enable more efficient rebalancing, reporting, billing and tax management.
Third, the consolidation in the wealth management industry, particularly the rollup of RIAs, is creating firms that inherit the management of all kinds of assets in all kinds of accounts. By offering UMAs, these roll-up firms can provide their advisors with a single platform that can be used by all.
In the future, more advisors and firms will use UMAs, benefiting from greatly improved efficiencies while offering each investor personalized service. This could potentially lead to better outcomes for advisors and investors alike.