Urgent Need for Infrastructure Standardization for Unified Managed Accounts

UMA assets under management have grown to $127 billion, and investor managers and sponsor firms are projecting an increase to $355 billion in the next five years, according to a new report by Dover Financial Research.

 By Melanie Rodier, Sept. 5 2008, 1530 hrs

Rapid growth in unified managed accounts (UMAs) will be undermined unless the industry soon addresses the need for greater standardization and automation, according to a new report issued by Dover Financial Research.

UMA assets under management have grown to $127 billion, and investor managers and sponsor firms are projecting an increase to $355 billion in the next five years, Dover Financial said.

In recent years, model portfolios have evolved, the study found. Today, an overlay portfolio manager now often takes over trading and administration, while the investment manager has responsibility for constructing the portfolio.

Investment managers and sponsors expect 30-50% of separately managed assets (SMAs) " now at $519 billion " to convert to UMA model portfolio programs within five years.

"The industry should seize the opportunity to embrace standards, rather than create more inconsistency. As proven in other sectors, such as the mutual fund industry, standardization provides the foundation for product innovation and flexibility," Sullivan added.

Model portfolios were initially designed to make it easier for industry participants to customize and balance portfolios and facilitate communications between sponsors and investment managers.

But because exchanging information between investment managers and overlay portfolio managers is new, the industry is experiencing inconsistencies regarding the actual data elements and the use of different communication methods, the report said.

The study also found that manual processes associated with back-end communications are becoming more difficult and more costly to maintain and result in a greater likelihood of errors.

Further, investment managers want more sales-tracking information than they are currently receiving, but only a few sponsor firms with model portfolio programs share sales patterns with them; and without sales information, it's not possible for them to prepare accurate invoices, the study found.

"It is vital to identify the issues and obstacles that can impede growth of UMAs and avoid operational issues that have already put significant pressure on the separately managed account market," said Ann Bergin, managing director and general manager of wealth management services at DTCC , which underwrote the report.