Over the last few decades, the wealth management industry has gravitated towards separately managed accounts or SMAs. High-net-worth clients, in particular, embraced these instruments because they provided a path to invest more like institutions, with more specialized managers tasked with creating models to make it easier for advisors to manage distinct asset types.
Despite the many benefits, this approach was initially quite unwieldy, tormented by a few critical shortcomings, including inefficient reporting systems and high fees. The development of “sleeves” (or sub-accounts) and “model-based” SMA’s over time have helped alleviate some of the problems, but issues remain.
Specifically, SMAs make it more challenging to offer holistic planning services given the systems in place. Indeed, because advisors typically manage sleeves separately from other internal investments or overlay strategies, it means getting a comprehensive view of a client’s entire portfolio requires more effort. That is a problem in an era when goals-based financial planning has become more entrenched.
Many advisors have turned to unified managed accounts (UMAs) and even unified managed household accounts (UMHAs) to consolidate accounting, reporting and rebalancing functions to help address these issues. UMAs and UMHAs can provide a fully integrated perspective across all a client’s or household’s investments – managed separately or as an overlay – and allow advisors to track client progress towards achieving high-level objectives.
The popularity of UMAs has been so widespread that the debate today swirling around them is more about whether advisors need to use sleeves at all. In other words, is it worth trading maximum operational efficiency and optimal overlay management for the ability to track the monitor the performance of specialized managers?
UMA TECHNOLOGY SUPPORT
With the number of advisors relying on UMAs and UMHAs to serve high-value relationships increasing every day, it is incumbent upon broker-dealers and RIAs to have the technology tools in place to support this approach – with or without the use of sleeves. Unfortunately, that is not happening on a wide enough scale.
Tools that give advisors the ability to manage separate UMA sleeves are one thing. But it is another thing entirely for advisors to fully aggregate across disparate investment types, traditional and alternative, and take a top-down management approach to all these accounts – ensuring tax efficiency and alignment with clients’ overall financial plans.
Without that functionality, advisors must operate more granularly and work “off-platform” – a cumbersome, multi-layered and fragmented process that can sometimes result in mistakes that have profound investment and tax planning implications for clients. Crucially, this “tools gap” also cripples goals-based planning, which, by definition, must be holistic.
Because households often include many family members (most of whom have different objectives), technology platforms should help advisors manage their client’s investments at multiple levels – household, mandate and account – instead of just at the sleeve level.
In fact, using a top-down approach could free an advisor from having to consider what is happening at the sleeve level at all, at least for some clients.
Nearly every firm wants to attract and retain advisors who work with high-net-worth clients. One of the future challenges will be to provide such advisors with the tools they need to define and tailor their solutions to increasingly discerning investors.
In the absence of such solutions, advisors are forced to spend too much time fidgeting with outdated systems and working “off-platform.” This approach – where trades happen in a vacuum without the advisor seeing how they relate to one another – only invites trouble.
The simple fact is that most technology platforms have not kept pace with how advisors – especially high-net-worth advisors – work with their clients and oversee investments. It’s up to broker-dealers and RIAs to provide up-to-date tools that make the work of these professionals more manageable.
Dr. Andy Aziz is the executive vice president of business development at d1g1t, a Toronto-based enterprise wealth management platform.