Envestnet’s ENV2 Platform Delivers New UMA Features

Sliced bread.  The electric light bulb.  Indoor plumbing.  Unified Manged Accounts (UMA’s) were supposed to be better than these revolutionary inventions and a whole lot more.  They still have not lived up to their hype, but UMA’s have become a standard offering for all managed account platforms.

In this summary of a session from Envestnet’s 2014 Advisor Summit, a panel of experts provides updated information about the Envestnet UMA program including how the program has changed over time, coordinating and updating UMA models, building performance composites and other exciting, new features.

Moderator: Jeff Nicholas, Senior VP, Product Management, Envestnet
Panel: Daren Evans, Sr. Research Analyst, Hightower Associates
Joel Floum, VP, Investment Advisory Programs, US Bancorp Investments
Jim McCormick, Principal, Pryor McCormick Investments

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RIAs Take Advantage of Discretion to Launch UMAs and Improve Efficiency

This is a summary from a session of the MMI Tech and Ops Conference with a panel made up of Registered Investment Advisors (RIAs).  The discussions centered around the use of Unified Managed Accounts (UMAs) and the advantages of discretionary versus non-discretionary accounts.

Moderator:

Roger Paradiso, Director/CIO, Managing Director, Morgan Stanley Smith Barney

Panelists:

Dan Sherman, SVP, Family Wealth Director, Morgan Stanley Smith Barney.  Dec 1990, Sherman Group.  They manage over $1 bil in house and advise $2 bil out of house with a seven person team, using a top down method and proprietary financial planning process.

Mark Rogozinski, President, Rockit Solutions, LLC.  They are a back office solution for single and multi-family offices and trust companies.  They are a wholly-owned subsidiary of Rockefeller Financial with around $30 bil in AUM.  Mark has been at RockIt for two years.

Tim Flynn, RIA, President, Tim Flynn LLC.  Currently transitioning from traditional, corporate RIA to a hybrid RIA.  Boutique shop in NYC.  5 people, 3 registered reps and 2 support.  Currently managing $425 mm AUM internally, and $350 mm away, consulting primarily to retirement plans.

Are you using UMA programs and if so, what features do you think are the most useful to your clients?

Rogozinski theorized that all the advantages of UMAs evaporated during the financial crisis, specifically around overlay management and tax efficiency.  Their clients started getting out of UMAs and back into SMAs since there were no longer any embedded gains, which would prohibit them from moving.  Another factor was new technology that Rockit introduced that allows their clients to become their own overlay managers.

In the RIA space, Rockit implemented a new UMA strategy, which is very cost effective and tax efficient, Rogozinski reported.  The new system allows them to service smaller clients at lower thresholds and offer more separate account managers on their platform.  Many firms sold all their UMA assets and switched to mutual funds, since there were no embedded gains after the market crisis.  It’s a very cyclical business and five years from now will probably return to UMAs when the market goes back up and creates new embedded gains, he projected.

Flynn built his practice with open architecture and non-discretionary accounts.   Then he realized that it was expensive and didn’t scale very well.  About 18 months ago, he began to shift his focus to UMAs through two platforms available from his broker-dealer.  UMAs allow him to deploy assets differently, he can run more assets with a smaller staff footprint.  These products have enabled him to become more competitive.

Dan Sherman has seven people on his team at Morgan Stanley, four of whom are partners.   They use a top down financial planning perspective that eventually ends up with an asset management end product.  According to Sherman, they have shifted the bulk of their capital appreciation assets onto their UMA platform.  These assets include more than just equity, but not traditional fixed income.  On the fixed income side, they run a traditional transaction-based business, he said.

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The Pros & Cons of Overlay Portfolio Management Outsourcing

Excerpts from the 2009 MMI Technology & Operations Conference.

The speaker for this session was Randy Bullard, Executive VP, Institutional Business Development, Placemark Investments.

What is Overlay Management?

Randy began by breaking down Overlay Portfolio Management (OPM) into two main components:

  • Administrative/Operational Functions – Mostly accounting tasks such as simple asset class rebalancing, managing cash flows, wash sale prevention, and tax management.
  • Investment Management Functions – Involves more human and quantitative portfolio management judgment, such as making balanced decisions, risk vs tax value for a client.

Variables to Consider

OPM is a classic insource/outsource decision. Randy provided a few variables to think about:

  • Scalability – At what point do you get to scale? When does it make sense to insource it? It’s usually around $2 bil in AUM for most firms to go economically right-side up, Randy asserted. Assuming they have appropriate staffing levels and delivering fairly robust functionality. Up until the $2 bil threshold, you tend to be upside down.
  • Capability – The more investment management-oriented functions within OPM are very much a quantitative investment management discipline. If your firm doesn’t have that in-house or isn’t prepared to staff it, then you should consider outsourcing.
  • Firms should be honest when estimating startup costs.
  • Firms should understand the costs of compromise. A number of those programs launched with 5 models and very little or no customization capability, no tax management, flexibility or other advanced feature sets. These are all now initial costs of entry in order to grow assets.