UMAs mystify investors

UMAs could be called the UFOs of financial products.

Unified managed accounts are such a mystery to investors that 48% of wealthy individuals responding to a recent survey said they had never heard of them.

However, when these same people were asked about a financial product with the attributes of UMAs — the ability to mix several types of investments into one account with a single statement — 46% said they were interested, according to the Spectrem Group study.

In fact, these same people “easily may have them but not realize that’s what they are,” said George Walper, president of the Chicago-based consulting firm.

UMAs are professionally managed investment accounts that can incorporate mutual funds, stocks, bonds and exchange traded funds into a single account. They are an evolution of the separate-accounts industry and are grabbing an increasing share of investor dollars.

Total assets in UMAs stood at about $39 billion at the end of June and are projected to reach $47 billion by the end of the year, according to the Money Management Institute, a Washington-based trade association for the managed-accounts industry. UMA assets grew by 63% between 2005 and 2006, and will grow by 52% this year if the $47 billion projection is met.

UMAs are the fastest-growing segment of the $789 billion separately managed accounts industry, said Jean Sullivan, principal of Dover Financial Research in Westwood, Mass., which researches the industry for the MMI.

Spectrem surveyed the members of 507 affluent households in June and July, and found that the type of financial institution they would feel most comfortable going to for UMAs would be full-service brokerage houses, followed by investment advisers, investment managers, mutual fund companies and banks. Respondents said they were least confident in insurance companies as a source for UMAs.

About 36% of respondents said that they were comfortable opening a UMA with a financial adviser, compared with 43% for a full-service broker, the survey found.

The most popular reason given for not being interested in UMAs, which were de-fined as “professionally managed accounts,” was because these people used a self-directed approach to their investments, Spectrem found.

UMAs are coming to dominate assets at the investment companies that make them available, said Randy Bullard, executive vice president of Placemark Investments Inc., which is based in Addison, Texas, and Wellesley, Mass.

Placemark, which manages about $7.8 billion in UMAs, is one of the largest providers for sponsors, including Smith Barney, a division of New York-based Citigroup Inc.; RBC Dain Rauscher Corp. of Minneapolis; and Philadelphia-based Janney Montgomery Scott LLC. It also provides UMAs directly to advisers through San Francisco-based Schwab Institutional and Jersey City, N.J.-based TD Ameritrade Institutional.

In addition to the benefit of allowing multiple investment products, UMAs allow for asset allocation, the processing of cash flows, tax planning and customization, Mr. Bullard said.

UMAs typically have a $200,000 minimum, though some allow investments as low as $50,000 if the money is limited to mutual fund and ETF investments, he said.

In addition to being a better investment for clients than just separate accounts or mutual fund wraps, UMAs are operationally efficient for the adviser, Mr. Bullard said.

For a client, the important aspect of a UMA is that there is one statement, said Harris Nydick, a financial adviser with Totowa, N.J.-based CFS Investment Advisory Services LLC, which manages about $550 million.

CFS rolls separately managed accounts into a single account with one statement because the firm doesn’t like the UMA platform choices that it has seen.

Some UMA platforms are too expensive, and others don’t offer the greatest investments. “Sometimes the best fixed-income providers don’t have the best equity options,” Mr. Nydick said.

It would be convenient if there were a single custodian harboring the process, because there would be less room for technical glitches, he said. However, as long as there is a way to look at the account overall from a tax perspective, and for asset allocation and diversification, that is what is important, Mr. Nydick said.

A client should have at least $1 million to start a UMA, because each of the investments within the account must be substantial in size to get good pricing, he said.

“Our philosophy is that we cannot control what will happen in the market, but we can control what it will cost,” Mr. Nydick added.