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This is an overview of a session from the MMI 2012 Tech & Ops Conference held in Jersey City, NJ.


  • Jay Link, Managing Director, Managed Solutions Group, Merrill Lynch


  • Andrew Clipper, Managing Director, Head of Wealth Management Services, NA, Citi
  • John Capelli, Managing Director, COO, Managed Account Advisors, Merrill Lynch
  • Rob Klapprodt, President and Co-Founder, Vestmark

Are UMA/UMH and Rep as PM essentially the same thing?

While there are similarities between the Merrill UMA and Rep as PM programs as far as the end investor is concerned there are important differences, Capelli emphasized. UMA’s can include investment management delivered strategies, for example. Also, while Rep as PM can use mutual funds and ETFs to provide exposure to lower correlation asset classes, such as emerging markets, a UMA can deliver them at a lower cost using individual securities, he said.

If the goal is to create a portfolio across all of an investor’s assets, those assets are usually spread out across numerous legal entities and accounts, Clipper observed. The UMA/UMH structure is the best delivery mechanism for a holistic approach. On the OpenWealth platform, they separate out portfolio administration (i.e. rebalancing, asset location, cash management) from the intellectual property (i.e. the models). The portfolio administration is all handled in a central location, while the intellectual property can be added anywhere along the value chain, he said.

What has prevented advisors from fully accepting UMA’s and UMH’s?Embrace

Clipper believes that the reluctance of advisors to embrace UMA’s is primarily due to the way models are provided to the financial advisor community. Citi advisors see their core competency as asset allocation, product selection and rebalancing and they are reluctant to throw their portfolios “over the wall” to be managed by a third party overlay manager, he said.

Lack of customization options and complexity are two factors keeping many Merrill advisors from implementing UMA’s, Capelli explained. The UMA portfolios offered by Merrill have traditionally followed a top-down approach, with the research department or some central entity within the firm designating the asset allocation model and clients being mapped to it based on their risk tolerance level. However, an off-the-shelf solutions doesn’t fit all clients and their current UMA offerings don’t allow the advisor to make changes.

Advisors in Merrill programs also believe that the catalogue of investment offerings is too complex. While they like the breadth of choice of investment strategies, they don’t always like the way they’re configured and would prefer if fewer choices were presented, he reported.

Klapprodt proposed the following three reasons for why advisors have not embraced UMA’s:

  1. Lack of Advisor Education. Many advisor believe their perceived value to the end client is in determining the asset allocation and selecting managers and/or individual securities. Advisor participation in the investment process is often around selecting securities and they tend to gravitate to products where they have more control.
  2. Lack of Marketing. Some firms decide to deploy a UMA program just to bring a particular advisor team on board. They then neglect to promote the solution throughout the firm or to clients.
  3. High Investment Minimums. He has seen a number of cases where lowering investment minimums increased the flow of assets into his client’s UMA programs. This is only pertains to the overall UMA account minimums. You can’t lower the minimums for all asset classes or styles, such as customized bond sleeves, he noted.

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How will the market share dynamics change between Rep as PM and Rep as Advisor?Growth in UMAs 2005-2012

Capelli proposed that over the next three years or so, the market share of rep-directed programs will decrease, even as the industry continues to drive assets into fee-based programs. This will be caused by new abilities that advisors will have to to construct total solutions using other products, such as UMA. The market share of UMA will grow, FAs will have new tools to manage client relationships with a holistic view towards the client’s objectives.

Firms will respond to the growth in rep-directed programs by creating more opportunities for advisors to participate in UMA investment processes, Klapprodt predicted. This will continue to blur the lines between Rep as PM, Rep as Advisor and UMA programs, especially as new pseudo-UMA programs are launched that may not be labeled as UMA, he said.

What is the number one feature request from advisors that you’ve heard recently?

A lot of advisors feel that multi-custodial support has become a critical part of their business model in order to facilitate gathering assets from new clients with minimal resistance, Clipper mentioned. real-time data, not screen scraping or aggregators. Held away assets. contradiction? HH-level tax optimization. understand the difference between asset allocation vs asset location. holding actual investor tax returns vs assumed tax rates based on their tax bracket will improve your decision making in their portfolio

Will assets in UMA programs return to pre-financial crisis levels based on their recent performance?

Most SMA pre-crisis programs were long-only strategies without much flexibility for advisors, Capelli described. 90% of the SMA strategies on Merrill’s platform are outperforming the market, but advisors still look at them as being stuck in the long-only style box. Advisors want features such as options overlay strategies with downside risk protection, constant cash allocations that allows an advisor to take money off the table, and 40-Act funds that function like alternative investments. Assets will not come back to UMA accounts based on performance alone. Advisors will wait until these features are available, he warned.

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What are some ways that firms can improve oversight of rep-directed programs?

Many firms didn’t have monitoring programs in place before the financial crisis so they didn’t have a clear picture of how their rep-directed programs were performing, Klapprodt explained. Some of their clients now configure the Vestmark system to send alerts to Rep as PM advisors if they see that they’re underperforming their benchmark or peer group. They can also send a message to an advisor if they deviate from firm-provided asset allocation guidelines or are holding securities that have a sell rating, he said.

Another option is to increase the frequency of automated rebalancing in order to reduce drift and keep performance closer to the model, Clipper suggested.

Merrill a full due diligence program, Capelli added, and their investment management guidance unit is constantly monitoring third party managers in order to identify those that are underperforming.

Link noted that it is difficult to scale this manual supervision process. It’s one thing to monitor 250 or so money managers, but much more difficult to do the same thing for 4,500 advisors each running three different models, he said.


Panelists’ Overviews

Link leads Merrill’s FA-directed programs including Rep as Advisor and Rep as PM. According to a report by Dover Research, over the past five years the combined managed solutions market share of Rep as PM and UMA programs has increased from 15% to 31%. However, the growth rate of UMA and UMH is still relatively small.

Clipper is responsible for wealth management services at Citi Transaction Services, which is the part of the bank that supports other financial institutions. He is responsible for the OpenWealth platform, which provides sponsors and distributors with an end-to-end wealth management platform. It supports household-level rebalancing, performance reporting as well as full tax optimization. The platform was launched in 2009 and is approaching $100 billion in assets. Last year they released a new version of the product called Advisor-Controlled UMA/UMH.

Managed Account Advisors (MAA) is a 40 Act registered investment advisor within Merrill Lynch, starting out as the Merrill Lynch Consult SMA platform. They are an overlay portfolio managers for programs in both the Merrill and the US Trust business channels. MAA has approximately 220,000 accounts under management, $109 billion in AUM across 250 different individual investment management strategies and 550 in-house constructed multi-strategy portfolios.

Vestmark is a wealth management technology provider, they have approximately $200 billion in assets currently being run on their system across a broad spectrum of fee-based advisory programs.

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