This post is a summary from a session at the Financial Research Associates 9th Annual Managed Accounts Summit in Boston, MA.
Are managed accounts obsolete?
David informed us that managed solutions today are far from dead and are, in fact, alive and well. But we shouldn’t lump all advisory solutions together, he warned. As reported by Dover Research in the most recent edition of MMI Central (see the table below), Managed solutions reached $2.3 trillion in total AUM as of 2Q 2011. This was a 3.1% increase from 1Q 2011 and a 31.8% increase from 4Q 2010.
Clients are no longer seeking products, but solutions, David advised. They want greater rationalization, efficiencies of holding disparate assets, styles and strategies on a single platform.
Will the UMA kill off the SMA?
SMAs are far from dead, David continued. Third party, actively managed investment strategies provided by professional managers in fee-based accounts are still a viable part of our industry, he insisted.
Third party managed accounts for both sponsors and investment managers had trouble achieving operational scale when they maintained duplicate infrastructures that lacked standardization, according to David. The advent of UMA model portfolio programs provided efficiencies in areas such as investor profiles, account maintenance, custody, and trade execution, which helped firms deal with operating margins that have been declining over the past two decades, he said.
As of 2Q 2011, the SMA market showed a respectable growth rate, relative to the broader equity markets, growing by 2%, with $6 billion in net new flows, which is a positive indicator given the current market environment, David acknowledged.
From 2008 AUM until 2Q 2011 assets have grown steadily in SMA Advisory. During this period, as reported by Dover Research, SMA assets grew from $476 billion to $596 billion, which is a 25% increase. The growth of SMA assets has been in a steady decline since their peak in 2003. UMA market segment grew the fastest (7.7%) of all segments in the last quarter. It was largely attributable to newly launched programs, David said. SMAs aren’t going away, he assured us, they just have found a new home. They’re relocating onto UMA platforms with a lot of new friends living in the sleeves next door such as ETF, mutual funds, fixed income, multi-currency and alternatives.
It’s not SMAs vs UMAs, David argued, since SMAs have always been an available component of a UMA.
Are UMA model portfolios just a way to marginalize manager intellectual capital and compress their fees?
David’s point of view is that managers shouldn’t look at model portfolios in a negative light, they should look at them as a way to unburden themselves from maintaining a duplicate client account infrastructure. Model portfolios, he added, allow managers to do what they do best, which is managing money.
David pointed out that this is an age-old efficiency question with SMAs. As a manager, would you rather compete for a piece of a slower growth pie of SMA Advisory, and accept ever declining margins, or focus on the UMA model portfolio market, which is growing exponentially, although with lower, yet very stable fees, but with less overhead cost?
DTCC projects that the number of models being distributed will grow from 1,100 today to over 13,000 by 2015, David reported. They also project in the same timeframe that half of SMA assets will convert over to UMA platforms. They’re seeing announcements every day as more sponsors commit to wholesale conversions of their existing SMA relationships into UMA model portfolios, David confirmed.
David summarized by saying that UMA model portfolios allow managers infinite scale and efficiency to deliver not only their intellectual capital but also new products with increased profit margins and increased operational efficiencies.