Unified Managed Accounts – The Next Big Thing, But Not As Yet
The novel concept of Unified Managed Account (UMA) packs tremendous potential in its wings, though it is still in its infancy. Unlike a Separately Managed Account (SMA) that helps investors handle a particular type of investments only, UMAs encompass diverse portfolios that contain stocks, bonds, exchange-traded funds, mutual funds and a growing number of alternative investment choices for a single investor account within a sponsor firm.
Being one of the fastest growing segments in the managed accounts realm, UMAs have achieved stellar prominence as the industry is showing a clear drift from SMAs towards UMAs. While the managed accounts industry in USA grew 22% annually for the last 3 years, the UMA segment alone showed 94% growth. UMAs accounted to just 1% of the managed accounts industry in 2004; the size of the chunk grew to 4% in 2007 and is expected to reach 7% by 2012.
So what makes UMA the hot favourite of investors?
In essence, the switch from SMA to UMA implies shifting the focus from product-centricity towards customer-centricity, wherein the customer and his/her usage patterns in their entirety are taken into consideration. Consequently, the performance of the customer’s entire portfolio gets better highlight rather than individual product performances.
UMAs provide several definite advantages to investors, including:
- Portfolio management – possess a diversified portfolio without having to open multiple accounts; low administrative hassles
- Single view – have a single view of assets across investment vehicles
- Performance reporting – get a single statement encompassing all the assets and investments made
- Tax optimization and Risk mitigation – hold multiple assets effectively to optimize tax and mitigate risk
For the sponsor, UMAs enable high client retention and asset accumulation by boosting their relationships with clients and by driving fee-based revenue. But, is achieving these ends as easy as it sounds for the sponsor?
Traditionally, the managed accounts domain is structured in such a way that the asset management firms have separate investment managers and systems for each product types like mutual funds, bonds and ETFs. This model works fine with SMAs, but does not hold good for UMAs. When UMAs came into the picture, the impending challenge brought to existence a specialized stream of Overlay Portfolio Managers (OPM), who would coordinate activities across the string of investment managers. Such an arrangement has helped a great deal in streamlining the front-end operations of the sponsor, whereas the back-end still remains siloed.
Since the managed accounts business is primarily based on fee-based remunerations, fee billing becomes an extremely important function at the sponsor’s back-office. However, most asset management firms still tend to bank on home-grown fee billing systems based on Microsoft Access databases and Microsoft Excel spreadsheets. Analyst firm TowerGroup estimates that approximately 80% of managed account sponsors today use costly and inefficient in-house solutions in their back-office operations.
The long and the short of it is that the sponsors’ hopes of achieving rapid growth in unified managed accounts (UMAs) will be undermined, unless they care to address the immediate needs for greater industry standardization and a fee-based revenue model.
Relationship-based Pricing and Consolidated Billing for Unified Managed Accounts
In order to cope with this challenge, sponsors need to adopt the Unified Fee Billing (UFB) model, which extricates the fee billing processes from their siloed back-office systems and automates and centralizes them across the enterprise. This unified system, in fact, facilitates a drift in perspective from the ‘product’ angle to the ‘customer’ angle. Thus, sponsors can not only have unified billing processes, but also an integrated view of the assets managed for each investor. On another level, UFB enables provision of pricing discounts, charge waivers, specific reward programs and other benefits based on the total value of assets managed, to the investors.
The collateral benefits of the Unified Fee Billing model include effective data management, fee slippage control, better compliance and unified bill generation, to name a few.
In a nutshell, UMA is indeed the next big thing in the asset management domain; but sponsors might as well gear up for the changes it brings along, with a functional UFB-based back-office.