Current Challenges for UMA Sponsors

This post is a summary of a session from the MMI’s 2011 Annual Convention.

The moderator for this session was Lee Chertavian, Chairman & CEO, Placemark Investments. The panelists were Marilee Ferone, Executive Director, UBS Financial Services, Roger Paradiso, President, Chief Investment Officer, Morgan Stanley Smith Barney and Russell W. Tipper, Director, Third Party Discretionary Programs, Managed Solutions Group Merrill Lynch.

According to Dover Research, UMA asset growth was over 100% last year, yet at $123 billion, it makes up only 6% of
total managed account assets. 88% of sponsors report that UMA will receive the greatest amount of funding next year.

There was a lot of debate in the industry regarding overlay management program types between active, hybrid and passive, Lee commented. Back in 2007, sponsors were evenly distributed between the three, but by 2010, the vast majority (80%) had shifted to active overlay, using model portfolios.

There’s been a tremendous change in manager’s attitudes regarding model-based delivery. Among the top 25 model
managers, over 40% weren’t providing models just five years ago.

82% of respondents said that UMH was important, although the technology is still in its infancy.

UBS Strategic Wealth Portfolios

The UBS program is passive-only, with no models and no active overlay, Marilee informed us. It’s nondiscretionary,
except for the sleeve that the money manager controls. It has $6 billion in AUM, with an average account size of $1.3 million.

UBS provides a lot of flexibility for advisors to select investments from an open architecture with over 200 SMA managers to choose from along with 3,100 mutual funds and 300 ETFs. Hedge funds were available when the program started a few years ago, but demand died off due to their limited liquidity. Asset growth in 2010 was nearly 60%, Marilee reported.

Merrill Lynch

Merrill Lynch launched their UMA in 2007, Russ noted. It now has $22 billion in AUM and 42,000 accounts (average account size = $523,000) and is entirely model-based. They allow managers to retain discretion depending on the market that they’re trading in. Merrill sees UMA as a platform for delivering advice and leveraging their investment partners.

They offer a full spectrum and provide flexibility for advisors where they can implement a stand-alone SMA or a model containing mutual funds, equities and ETFs. Merrill’s core offering is focused on SMA, ETFs and funds with 40% of the business in stand-alone SMA and the other 60% in models. In most cases, they leverage the firm models and don’t allow swapping of strategies. Russ stressed that they want their platform to provide advisors choice and flexibility.

Morgan Stanley Smith Barney

We look at UMA as a solution-based platform, Roger stated. It’s open architecture and designed around the way the advisor and client want to engage. The platform offers over 250 SMA products using model-based delivery, over 300 40 Act vehicles, and over 150 ETFs.

Advisors can create custom asset allocation structures and their own models, which they can use as completion strategies. There are also asset allocations driven by the Global Investment Committee, which created eight models for advisors to choose from. In addition, they can select either strategic or tactical allocations.

Roger listed three client engagement models that are available:

  • Client Discretion (traditional)
  • FA Discretion
  • Consulting Group (CG) Discretion

The CG Discretion uses MSSB asset allocation models and handles manager selection ($25K minimums for all mutual
fund/ETF version and $500K for hybrid version where the firm creates a custom investment selection).  The personal level of the program allows advisors to select from options including tax-managed strategies, restrictions, and transitions.

The one constant, no matter what the engagement model, is the Private Portfolio Group acts as the overlay portfolio manager. A key aspect is the proprietary technology that they’ve built over the past 15 years. There are over 250
people on the team with an average experience of 12 years.

What fixed income options do your programs offer? Do you support muni bond laddering?

The UBS program does not support direct purchase of bonds. They provide the ability for FAs to choose a fixed income allocation that is fulfilled using ETFs or mutual funds. FAs have asked for muni bond laddering, Marilee said, but they haven’t built it out yet.

Merrill advisors have access to top industry fixed income talent, according to Russ. On the taxable side, their overlay manager does the full implementation and in the municipal space, they give managers discretion. Their FA’s have asked for muni bond ladders, but there are issues such as determining the proper minimum account size and the amount of alpha that muni managers can bring.

MSSB offers a dual-discretion model, where they oversee everything, but the fixed income managers do their own trading.

What changes did your firm make to your front-end to add financial planning to your UMA platform?

Merrill has a front-end financial planning engine that’s fully integrated into their advisor desktops, Russ pointed out. However, it doesn’t have the ability to go from idea to execution. In other words, it doesn’t connect to the portfolio
construction or UMA implementation process. Their next generation UMA platform will integrate financial planning
into so it will be an end-to-end process.

Roger confirmed that MSSB is in the same boat. They need to make the connection between the financial plan and
implementation. They should follow through with the plan over the client’s lifetime, but it’s extremely challenging.

How have you changed performance reporting to better support UMA?

UBS provides all standard performance reports, including monthly and quarterly that go down to the sleeve level including attribution analysis. Merrill leverages a single platform across their entire business, so clients receive a similar report whether they’re in an FA-directed, client-directed or discretionary account. They’ve made enhancements to the platform to show sleeve level performance and attribution and historical changes over time.

Financial Crisis Failures and 
Improving Risk Management

This is a summary of a session from the FRA’s Performance & Risk Measurement Symposium that was held in Boston on April 23-24, 2009.

Speaking in this session was James E. Hollis, CFA, Managing Director of Cutter Associates.

Jim provided a well-researched overview of the recent financial crisis as well as some tangential, but interesting facts about the economy.

Roots of the Financial Crisis

Jim quoted from an article by Nassim Taleb, “Ten principles for a Black Swan-proof world“:

People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.

While Jim used this point to highlight the financial industry’s role, the author was in fact, indicting everyone who was involved (universities, regulators, central bankers, government officials, and various organizations staffed with economists).  Members of Congress who facilitated the crisis, such as Rep. Barney Frank, D-Mass., have paid no penalty and suffered no punishment at all for their negligence and I brought this up to Jim in the Q&A. (Take a look at this article by the Boston Globe’s Jeff Jacoby, “Frank’s fingerprints are all over the financial fiasco” for a terrific overview of the Frank’s role in the economic debacle of the century.)

Performance measurement without risk is meaningless, Jim cautioned.  (from “Risk Adjusted Investment Performance Measurement” by Financial Counselors of VA)

“No attempt to measure investment performance is complete without measuring the risk taken to achieve the result.”

How many smart investors ignored this rule when they overloaded on credit default swaps and CDO’s?   They also forgot that “the market risk of an investment cannot be reduced by diversification since it is shared to a greater or less degree by all investments in the market.”  (ditto)  Performance professionals need to have a solid understanding of risk management, according to Jim.

Where has all the bailout money gone?  Jim pointed out that most of the $80 billion in bailout money provided to AIG went into the pockets of global banks such as Goldman Sachs, JPMorgan Chase, Société Générale and Deutsche Bank.  The burning question is why were AIG’s trading partners, including foreign banks, let off the hook while US taxpayers footed the bill?  (see “Inquiry Asks Why A.I.G. Paid Banks” in the New York Times for the gory details)

I disagreed with Jim when he said that the roots of the crisis goes back to the Reagan/Thatcher era of laissez-faire attitude towards regulation.  My opinion is that it was government intervention in the markets that encouraged the poor investment decisions that led to the credit crunch.  Fred L. Smith Jr. from the Competitive Enterprise Institute summed it up quite well when he wrote the following in a letter to the WSJ:

A driving force behind all this has been radical egalitarianism — the idea that something that can be afforded by some should be made available to everyone… Under the egalitarian promotional housing policies of the last few decades, banks became institutions that would loan you money even if you were unlikely to be able repay it. The moral hazard problems created by our bipartisan egalitarians (the Community Reinvestment Act, the mandates on Fannie Mae and Freddie Mac) enticed far too many Americans into purchasing homes priced beyond their means. There is a critical distinction between the democratizing tendency of the market and the coercive egalitarian policies of politics.

I’m a supporter of the subjective theory of value that asserts that the seller and buyer of products or services are the only ones able to determine the value.  When the government decides to impose prices on the marketplace, only disaster can result.

The SEC & Bernie Madoff

Jim next presented some interesting aspects of the Bernie Madoff scandal.  He referenced a document submitted to the SEC in November 2005 (three years before he admitted to his Ponzi scheme), which was obtained by the WSJ, “The World’s Largest Hedge Fund is a Fraud”.  The author of the document was Harry Markopolos, an independent fraud investigator and derivatives expert, who originally alerted the SEC to Madoff’s scam back in May 1999!  The fact that the SEC has been ineffective and bumbling throughout both Democratic and Republican administrations shows what a low priority it was for both parties to hire competent staff and provide the necessary funding.

Paul Kiel wrote a nice piece on the Markopolous document, over at

Performance Attribution Best Practices

Jim provided a helpful list of best practices regarding performance attribution.

Jim presented the results of a survey done by his firm regarding the attribution capabilities across the industry.

Survey on Benchmarks

Jim presented the results of a survey done by his firm regarding the use of benchmarks.