Unlocking Real Value Blog

What’s Rationale for Picking SMAs over UMAs?

Published on October 5, 2010 – FUNDfire – An Information Service of Money-Media, a Financial Times Company- written by Andrew Klausner, Founder and Principal of AK Advisory Partners LLC.

The debate over whether unified managed accounts (UMAs) are going to replace separately managed accounts (SMAs) has been raging for a number of years. There is no direct resolution to the debate. There are enough differences between the two that there will be room for both types of investment vehicles. Both products will continue to survive and garner the assets of high-net-worth individuals. This entire debate reminds me of the one that began soon after SMAs were introduced, and revolved around whether mutual funds or SMAs were more appropriate for the wealthy. The answer turned out to be that both were, and still are, depending on the individual circumstances being considered.

Below is my perspective on why SMAs and UMAs each have their unique advantages and disadvantages, depending on the specific advisor and client on hand.

For advisors, the decision of which vehicle to use – or whether to use both – in their practices is related to their overall business philosophy. Some advisors consider their role and value-added proposition as selecting the managers to be used in SMA portfolios and then managing both the rebalancing of accounts as well as providing tax-efficient management. They are thus reluctant to abdicate these duties to someone else, such as situations where those duties are outsourced to a sponsor’s UMA team or a third-party overlay manager.

Some advisors also prefer individually managed accounts over mutual funds or exchange-traded funds (ETFs) as a general investment philosophy. These advisors presumably have a client-servicing model that eases any paperwork or coordination issues that maintaining multiple investment vehicles and accounts poses. On the other side, some advisors are attracted to UMAs because the pre-selected models reduce the amount of the work that they must do.

For clients, there are three primary differences between SMAs and UMAs. First, many UMAs have ETFs and mutual funds as part of their portfolio makeup. Thus, in many cases, the investment minimum within each investment sleeve is usually much lower than the standard $100,000 to $250,000 level in the SMA world. As a result, clients with fewer investable assets can invest in UMAs and achieve diversification more easily. Secondly, because all of the different investment sleeves in a UMA are in a single client account, there is less paperwork, both initially and on an ongoing basis. Third, UMAs typically include, or have options for, automatic rebalancing and tax-optimized investing. Therefore, the relationship size and the overall importance of these other issues to a particular client will help the advisor determine which vehicle to recommend.

(I haven’t really discussed managers because while there was reluctance on the part of some managers to participate in UMAs when they were first introduced, a lot of this resistance has disappeared as UMAs have become more common. There are enough quality managers in the universes of both UMAs and SMAs.)

In reality, UMAs and SMAs both have a place in the business. An advisor who utilizes SMAs exclusively, for example, and who has high client minimums, might occasionally have a client with fewer investable assets. In that case, the advisor might opt to use a UMA for that client. Or, some clients might themselves have preferences for one or the other based on previous experiences. They might have used SMAs for decades and feel comfortable with the simplicity and customization that such investment vehicles provide. There are enough different clients and client profiles that neither of these investment vehicles are likely to disappear – in the same way advisors still use mutual funds for their wealthy clients after all of these years.

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