FWR talks to a firm working with wealth advisors, offering a platform for structures such as Unified Managed Accounts that it says can help ease the frictions of breakaways and advisors moving jobs.

There has been a steady trend of wealth managers defecting from wirehouses, banks and other firms to strike out on their own. Meanwhile, sector M&A activity shows that some advisors want to join hands with partner firms and win economies of scale. Making all these transactions fit snugly is certanly not a walk in the park. 

One way to reduce the pain of change, cut costs and enable managers to give clients a good experience is through Unified Managed Accounts (UMAs), Barrett Ayers, president of Adhesion Wealth, a Charlotte, North Carolina-based firm, told this news service. Adhesion, founded in 1999, is a wholly-owned subsidiary of Vestmark with more than $13 billion in assets under administration and $5 billion in UMA assets under management. 

The firm targets independent investment advisors across a spectrum of sizes. The average account size on Adhesion’s platform is around $250,000 and the average family/household size is just around $1 million. The business may not be at the higher end of the wealth spectrum compared with some of the organizations Family Wealth Report talks to, but the arguments about its model are likely to have broad relevance.

Ayers reckons that ferment in the industry, driven by rising client demands, new technology and regulation, puts his firm in a promising space.

“We see the trend [of breakaways] continuing and even accelerating into 2021,” Ayers said. 

“We think there’s a bubble forming in the wealth management space and it makes it ripe for disruption. On one hand, you have advisors who were promised a way to completely revolutionize their practices by licensing a bunch of technology. And while there is some good business-building and growth tech out there, there’s also a lot of time and energy that can be wasted on what I call ‘administrative software’ – those applications that don’t contribute to the advisor’s true value proposition,” Ayers continued. “Some advisors are distracted not growing their business or deepening client relationships. At the same time, the market is expanding quickly – 300 new RIAs file registrations each month and that will only accelerate given the exceptionally low barriers to entry. And finally, you’ve got fee compression.”

Big changes lie ahead, he said.   

“The story is dire for advisors who don’t take care of business and focus on their practice. Advisors are busy with non-core activity, additional competition gunning for your clients who don’t have the administrative burden you might and can operate efficiently in a low-fee environment. It’s a market that is particularly susceptible for disruption for those who are not careful. That could come in the form of heavy-handed government regulation or a large Silicon Valley tech company completely reinventing the rules of the game,” he said. 

UMAs
In such an environment, it makes sense for advisors who are moving around in the sector to assure clients that they won’t be hit by unnecessary frictions. 

“The last thing an advisor wants to tell a client when they’re leaving their wirehouse is that he has to sell out of their accounts and buy new holdings when they get to their RIA [when that advisor breaks away]. Obviously selling out positions create a taxable event,” Ayers continued. Advisors who want to join an independent firm and “tuck in” clients can find this easier to do, he said.  

Unified managed accounts are managed investment accounts that have developed from separate accounts. Where a separate account holds the securities associated with a single investment manager or style managed for a client, a UMA typically holds a number of separate accounts, as well as other investment products such as mutual funds and exchange traded funds.

For some time, the industry has wrestled with how to customize offerings for clients without junking efficiency. Parts of the value chain need to be “industrialized” while giving customers their own specific experience at the front end. Ayers draws on the world of modern entertainment tech to illustrate the point. “Sometimes we liken our business to Netflix: We sell movies. We use a cool web-based interface for consumers to watch them (as opposed to Blockbuster or movie theatres,” he said. 

“So advisors like the idea of managed accounts available and accessible through a ubiquitous platform like Adhesion, but then supercharging them by using the UMA structure which allows for things like customization, tax management, investor convenience, portfolio drift correction, cash management, lower-cost, and SMA access for smaller accounts,” he continued. 

UMAs can also be more efficient for areas such as tax-management, he said. In older Separately Managed Account programs (such as single or dual contract ones, the advisor must open individual accounts for each SMA. That means that inside such an account, Manager A can sell IBM and manager B can buy the same security but in a different account. This is a “wash sale”, but this will not be known if the two managers aren’t talking. By contrast, when manager A and Manager B are put into the same account (UMA) and hire an “overlay manger” to oversee both managers, wash sales can be stopped, stripping out a lot of unnecessary cost, taxes and commissions.

“And given our bird’s eye view as an overlay manager, we have found that the overlapping position condition is highly prevalent - on average, Adhesion accounts have 17 of these types of common, overlapping positions where a holding is held across multiple managers and thus the likelihood to generate an unfavourable transaction is heightened dramatically,” Ayers said.