Uniform data standards vital to enhanced, next-generation client service. Randy Bullard is head of business development for Placemark Investments, a Dallas and Wellesley, Mass.-based overlay portfolio manager.

Unified managed accounts (UMAs) have been around for about four years. They combine the rebalancing and cash-management features of discretionary mutual-fund wraps with the individual-security ownership and customization capabilities of traditional separately managed accounts (SMAs). UMAs significantly benefit SMA sponsors – be they regional broker-dealers, wirehouses, banks, or third-party platform providers – in a number of ways.

Broader diversification because UMAs generally support SMA portfolios well below the typical $100,000 account minimum, and can include mutual funds and exchange-traded funds, when and as appropriate.
Improved client service because UMAs generally provide more robust rebalancing, cash management, and other account services that were often unavailable or discouraged in traditional SMA and mutual-fund wraps.
Improved operational efficiency for sponsors and managers by eliminating some infrastructure redundancies and streamlining interactions.
Reduced compliance risk because UMA owners are typically more broadly diversified than traditional SMA owners and receive more consistent services.
Improved features and functionality such as tax optimization, using client-directed cash flows to rebalance the account, and managing the tax and risk impact of external holdings provides new value for advisors and clients.

Given the complex wealth needs of most affluent investors, however, the UMA is still a fairly narrow product offering. By their very nature UMAs focus on delivering improved services and features at an account level. But few if any clients have all or even the bulk of their assets in a single account. Many clients can’t or won’t consolidate their assets even with a single advisor. Taxable and non-taxable accounts, real-estate holdings, limited partnerships, stock options, self-directed and advisor discretionary brokerage assets, as well as the complexities of clients’ wealth profiles, tax law, and trust and estate requirements will always require that clients have multiple legal registrations, usually spread across multiple unaffiliated financial institutions.

Although UMAs provide a rationale for consolidating a client’s assets and delivering improved services on those assets, the legal and operational reality is that the UMA can never be more than a partial solution to the complex needs of most clients.

That’s where the unified managed household (UMH) comes in.

Unified managed household|image1|Source: The Money Management Institute and Dover Financial Research

But for all the UMH’s potential to confer superior value by delivering integrated services across the totality of the client’s assets, it remains a concept. Meanwhile the business models and supporting technologies to deliver UMA solutions are established and available to sponsors, and the investments that sponsors are making in the development of their UMA programs are bearing fruit.

The underlying question then is whether the money and energy already directed toward delivering UMAs can be used to develop broader and more efficient UMH programs in the near future. To answer that question, it’s useful to consider the three core services mentioned in the Money Management Institute’s (MMI) draft definition of the UMH.

Financial planning and proposal development: A single, integrated financial planning system that supports household-level asset allocation, income and liability planning and more advanced wealth management solutions across registrations, product types, and sponsoring firms.
Coordinated investment management: The investment management processes and technologies to make customized investment decisions for each client in the context of their household-level investment policy implemented across registrations, product types, and sponsoring firms.
Performance reporting and analytics: The operating procedures and technologies necessary to produce statements, performance reports, and perform appropriate analytics incorporating a client’s holdings across registrations, product types, and sponsoring firms.

The UMH framework provides a roadmap for further evolution and development in these three areas. As sponsors develop new UMH programs, they should be delivering some meaningful level of functionality in each area – a household-level integrated planning solution, an investment management solution, and a presentation and reporting solution.

Sponsors and vendors have developed technologies and processes to support household-level financial planning, as well as the capability to consolidate holdings and performance reports across multiple registrations within a single firm. But sponsors have generally relied on disconnected product offerings to provide the underlying investment solutions.

To meet an investor’s household-level investment objectives, the underlying investment products must be coordinated and managed to address the client’s evolving household-level investment objectives. Managing a client’s assets must incorporate changing client objectives as well as the evolving performance, holdings, and risk-return characteristics of the investment products themselves.

Networking 

The basic structure of the UMH is a network that supports the flow of continuously changing client and product information and processes that facilitate cross-product, cross-registration, and even cross-sponsor coordination of specific investment decisions to deliver the greatest possible value to each client.

In other words the UMH calls for “overlay” management – a process for managing each portfolio individually and differently based on the client’s evolving investment objectives, taxes, and risk circumstances as well as the evolving performance, risk and tax characteristics of the client’s assets. The goal of any overlay management process should be to deliver superior client value through customization and coordination of the investment decisions across a client’s household assets.

Perhaps the simplest example of a UMH-level investment consideration is wash-sale avoidance. Wash sales are often triggered during index reconstitution periods, when individual stocks are shifted among different indices – for instance, from growth to value. Money managers often unknowingly create wash sales for their clients as stocks depart from, or arrive into, their universes.

Now imagine the typical affluent client that has multiple accounts with various discretionary parties – self-directed brokerage accounts, broker discretionary accounts, separate accounts run by third-party managers – spread across multiple advisors and institutions. The appropriate action would be to prevent household-level wash sales as a matter of course.

Any discretionary authority that would have otherwise purchased or sold the security creating the wash sale should instead make a different decision, specific to that individual client, as to the most appropriate new investment. Multiply that scenario by hundreds of transactions across multiple registrations and firms, and the complexity of avoiding something as seemingly simple as a wash sale becomes apparent. Given that tax impact is a household-level calculation, the complexity of UMH-level investment management grows exponentially when tax implications of all investment decisions are taken into consideration.

Not ready

Realizing the full potential of UMHs calls for processes and controls based on evolving household-level investment requirements to improve the underlying investment solutions the client receives. The business models and infrastructure to support UMH-level investment management are still immature. The only programs that give sponsors some basic client- or household-level integrated investment management capabilities are their relatively new UMA programs.

UMAs are the first broadly implemented investment solutions that deliver a degree of client-level customization across product types and asset classes. Some UMA programs even incorporate rudimentary UMH functions such as integrating tax considerations across a client’s multiple registrations within a single sponsor or custodian. UMA programs have spurred the development of overlay management and tax optimization technologies that will provide the core capabilities of household-level integrated investment decision. These new UMA programs will be the natural starting point for developing more robust UMH programs.

UMH-level investment management will evolve through three natural stages as the entire industry improves investment processes and data networks:

Single-firm UMH management: Some of today’s overlay managers and overlay-management technologies support household-level investment decision-making. These solutions are invariably limited to the subset of assets the client has placed under the discretionary authority of the overlay manager, generally held at a single custodian. Some overlay managers and technologies have the ability to integrate information – such as tax events – on assets held in other registrations or at other firms, but this capability is generally limited by the sponsors’ and advisors’ abilities to provide and maintain such data.
Cross-firm UMH communication and coordination: The financial industry will soon need processes and infrastructure to facilitate the automated sharing of household-level information including tax and risk data on a client’s investments and changes in household investment policy. This infrastructure must be based on vendor- and technology-neutral open standards to garner full support. A firm’s ability to participate in such an information exchange, and their ability to utilize this information when providing UMH-level investment decisions, depends upon the inputs and information sharing capabilities of other industry players. Point to point – or firm to firm – information sharing is only an interim step.
Integrated UMH-level management: To realize the UMH’s potential, the client’s investment decision-making must be delivered through an integrated client-centric process that spans sponsors, custodians, and product providers. Sponsors and intermediaries need to develop technologies and infrastructure to facilitate information flows, decision-making, and implementation systems to support such a process. All firms will have to adapt to new business models, focusing on their value-adding activities and participating with other firms in the delivery of superior investment solutions for clients.

Conceptual UMH network|image2|Source: Placemark Investments

Few firms can deliver on even the first stage of this UMH-level investment management capability. The industry collaboration and investments necessary to support an evolution to a fully integrated decision-support network are daunting. But there is precedent for it.

Collaboration

The historical developments in trading systems for supporting the equity markets is one example, and the development of infrastructure to support the broad adoption and distribution of mutual funds is another good proxy for how the investment industry will need to collaborate on creating new systems and infrastructure to support the delivery of an integrated UMH communications network.

A logical body to begin this task would be the MMI’s Data Standards sub-committee. This group, which includes representatives from the SMA industry’s leading vendors, investment managers and sponsors, has historically focused on developing data communications standards to support account opening and other operational processes for SMAs.

Expanding the scope of those standards to facilitate broader communication around dynamic security, transaction, account, and household-level data on a diverse group of investment products would be one way to begin such an effort. Given the broad array of investment products and account types the UMH framework covers, however, the MMI would have to work actively with other trade groups and third parties to make such an industry-wide UMH network a reality. –FWR

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