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Monday, January 25, 2010

SOUND INVESTING: Unified Managed Accounts for Mass Affluent Investors

Sound Investing with Jason Lampa, MBA

Over the past several decades, the account structure and asset management options available to investors has shifted from the most basic of accounts, a brokerage account, to the managed accounts of today. Historically, affluent clients have preferred fee-based advisory services that offer customized investment management solutions. But, the growing demands of this affluent investor group have evolved. The account progression is illustrated below.

Brokerage Accounts →Mutual Funds→ Separately Managed Accounts →Unified Managed Accounts

The account options can be generally defined as follows:

Brokerage Accounts- Offer investors the ability to purchase individual securities, but without the professional services of money managers. Brokerage accounts are available with low initial purchase requirements, have minimal asset allocation capacity and require minimal suitability information from the clients to establish.

Mutual Funds- Offer investors professionally managed portfolios, but with limited customization capacity on the individual fund strategies and overall portfolio design. Individual investors are typically charged higher account fees with this option.

Separate accounts, such as the SMA and UMA, offer the ability for an individual investor to gain access to institutional quality portfolio managers in addition to portfolio customization and active tax management.

Separately Managed Accounts- Investment managers are available. A higher minimum opening investment is required to establish these accounts.

Unified Managed Accounts- Offers customized asset allocation models for each individual investor and the ability to implement. Professional investment managers are readily accessible, diversification strategies can be implemented, offer a simple fee structure, require low initial investment requirements (as low as $25,000 per account) and are competitive in terms of annual growth results

Until today, investors seeking professional money managers were limited to Separately Managed Accounts (SMAs). Technology was the enabler of SMAs. SMAs, as favorable as they were initially, are not perfect products. Individual investors began to take note, realizing that their investment returns were negatively impacted by limited investment selections and high fees; hence the development of the UMA.

UMAs of today now offer the ability to capitalize on professional money manager skill sets with less hassle, more transparent fee structures and convenient account monitoring and access capabilities. An UMA offers the ability to accommodate institutional managers, ETFs, mutual funds and bonds within a single account, opened with one application, with one associated fee and available for review on a single account statement.

While these accounts were initially only available to the wealthiest clients due to technology restrictions, the account type is beginning to make sense for most affluent households. In an attempt to provide accessibility to investors, turnkey management providers (TAMPs) have been developed in parallel to UMAs, attempting to build a more cohesive managed account program. TAMPs are the outsourced solution that allows virtually any broker-dealer to compete within the UMA space.

UMAs best serve those investors seeking some degree of tax management which cannot be achieved using mutual funds alone, and who do not have the level of assets to achieve diversification using separately managed accounts.

The primary benefits to the client who chooses to place their assets within UMAs include:

•Customization capability of investments
•Open architecture
•Due diligence performed by a variety of investment managers
•Convenience of having a single account
•Ease of manager and asset class comparison
•Automatic investment rebalancing allowing for the avoidance of overweighting in asset classes
•Consolidated tax data, reporting and attribution

For more information, please visit Jason's TNNW Bio.

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