Launching a Successful UMA Program: The Role of the Financial Advisor

August 12, 2011 | Share Besides the ability to customize UMA programs to suit any firm's business model, the relative speed with which a program can be launched is a key factor driving the boom. However, to be successful, UMAs need to be thoughtfully designed and implemented. Principals have to consider the client needs, evaluate in-house competencies, determine what components to outsource, how to interact with managers, and the subject of this post: the Role of the Financial Advisor.

We discussed this topic at a recent industry event and the central question revolves around the level of control firms want to retain versus convey to their advisors. For example, does a firm want to allow its advisors to:

• Determine asset allocation targets?
• Choose the investment vehicles? (e.g., mutual funds, ETFs, or separate account strategies)
• Pick individual securities within a UMA sleeve?

We've seen wide variety of approaches to this issue and have identified five scenarios for advisors from most restrictive to most customizable. Each can be effective but come with certain benefits and drawbacks that are essential to understand when developing a UMA program:

• The Packaged Product - With this approach, the advisor selects from a set of pre-designed investment options and has no ability to customize. The program provides the advisors with a range of asset allocations with preset managers/strategies for each investment style. Considerations:
  
  • Greatest control over advisors.
  • Approach enables advisors to focus on client relationships.
  • Limited customization, although some firms have developed extensive menus of asset allocation options.
• Product or Manager Selection – This approach enables the advisor to select from a range of managers/strategies for each investment style, but the customization is still limited. Considerations:
  
  • Advisors retain the ability to focus their time on their clients.
  • Since Advisors will recommend specific managers and strategies, clients may ask about the performance of those selections. This in turn may create the need to provide the advisor performance information on the manager or sleeve.
  • Firms should still offer the Packaged Product option so advisors don't have to worry about manager selection if they don't want to.
• Customizable Asset Allocation – Here the advisor can add value by developing customized asset allocations for clients. Investments are then selected from a pre-defined list approved by the firm. Considerations:
  
  • The increased flexibility requires advanced compliance tools to monitor the asset allocation recommendations produced by the advisors.
  • Rebalancing, asset allocation changes and other trades all must be funneled through an approval process with an audit trail and done so efficiently so as not to disrupt trading.
• Advisor as Sleeve Manager – This approach allows the advisor to select from pre-defined asset allocation, choose investment solutions and managers for each sleeve from firm-approved list, and manage a sleeve themselves. Considerations:
  
  • Advisors do not have discretionary control over the entire portfolio.
  • From a compliance perspective, advisors are picking and trading securities, so again, it's critical to make sure they are adhering to a firm approved security list.
  • Firms should control the types of securities and implement specific controls, such as concentration rules.
• Advisor as Overlay Portfolio Manager – Offering the highest level of customization and therefore advisor control, this approach allows the advisor to define the asset allocation, choose which products/managers to use, and manage their own sleeves. Considerations:
  
  • The major concern is that advisors have significant control over a client's portfolio and therefore could create weightings or implement trades that violate a firm's investment policy. Firm must have adequate policies defined and means to enforce and monitor compliance.
  • This is attractive to advisors who have built their book around an ability to add value acting as the "overlay portfolio manager". These advisors are also likely to be more sophisticated with larger books of business and/or relationships with higher net worth clients.

The key takeaways are that UMA programs can be designed to suit any firm's business model and audience. However, it's crucial to build the program around how advisors manage their relationships with clients and the role they play in managing portfolios.