UMAs Need More Standardization

A report issued by Dover Financial Research LLC, a firm in the managed accounts industry, says the evolution of model portfolios might have been in the right direction, but now the industry is facing gross inconsistency.

With model portfolios, an overlay portfolio manager (OPM) takes over trading and administration and the investment manager constructs the portfolio. Model portfolios were designed initially to make it easier for industry participants to customize and balance portfolios, provide tax-management expertise, and facilitate communications between sponsors and investment managers, Dover Financial said. However, the company doesn’t think the system is working as it should, requiring more standardization and automation.

“The added complexity of having a third-party involved poses a set of new challenges related to communications and processes, and affects a number of issues: how quickly decisions regarding an investor’s portfolio can be completed; how costs can be contained; and how levels of market, investment and operational risk can be reduced,’ said Jean Sullivan, managing principal of Dover Financial Research, in a press release.

UMA assets under management have grown to $127 billion, and investment managers and sponsor firms are projecting they will likely increase to $355 billion in the next five years, according to Dover. Investment managers and sponsors expect between 30% and 50% of SMA assets—now at $519 billion—will convert to UMA model portfolio programs within five years.

Dover said there is growing concern that fiduciary responsibility, customization trends, and increased utilization of tax management capabilities will drive an increase in communications associated with account openings, maintenance, and reconciliation. But meanwhile, communication is becoming difficult to maintain.

The company proposes that the industry leverage current industry standardization efforts across UMA platforms to facilitate account openings, maintenance and reconciliation, as well as account conversion and set-up from SMA to UMA programs. The company also pushes for a single automated interface that simultaneously uploads models to all relevant programs, as well as standard communications to validate and confirm model changes, execution price and trading instructions.

The full report is available here.