"Without change there is no innovation, creativity, or incentive for improvement. Those who initiate change will have a better opportunity to manage the change that is inevitable."
— William Pollard, Physicist
The rate of change and innovation in the wealth management industry has been tremendous over the past few years. Technology-heavy, online registered investment advisors (RIA's), also referred to as robo-advisors have been attracting assets at an ever faster rate, causing concern among traditional advisory firms.
As in any battle, there are multiple options for attack and defense.
To defend against robo-advisors, many traditional advisory firms are expanding their low-end offerings, partnering with robo-platform providers like Jemstep, Upside (recently purchased by Envestnet) or Betterment Institutional (a division of robo-advisor Betterment).
In his book Art of War, Chinese General Sun Tzu noted:
So in war, the way is to avoid what is strong and to strike at what is weak.
Most robo-advisors build their models using baskets of low-cost ETF's or mutual funds. A few, like Wealthfront, offer equities as well.
But none of them can handle more complex products like unified managed accounts (UMA's). This is currently a weak point that brick and mortar advisory firms can exploit, if they move quickly.
A client-directed unified managed account (UMA) program is an idea that might be attractive to self-directed, higher-net worth clients that tend towards wanting more control over their investments. This goes against the standard UMA methodology where the firm maintains discretion, which allows them to rebalance accounts without having to obtain client approvals. A client-directed UMA would be non-discretionary. (See RIAs Take Advantage of Discretion to Launch UMAs and Improve Efficiency)
Stifel Financial plans to launch such a non-discretionary UMA program later this year, according to an article in FundFire. It will be available to their 2,000+ advisors as well as the 700+ advisors coming on board as part of their recent acquisition of Stern Agee.
According the article:
The new UMA, for which Stifel started production pilot testing this month, offers more flexibility for customization compared with another, older UMA program already offered by the firm. In the new program, advisors can provide assistance on determining asset allocation and investment selection, but clients retain discretion, regulatory filings show. Stifel's home office provides overlay management and trading.
Non-discretionary UMA's have been around for a while, but their market share is dwarfed by the discretionary side. According to global analytics firm Cerulli Associates, discretionary managed account programs grew 50% faster than non-discretionary programs last year.
Historically, Stifel has not been as successful at attracting assets as other sponsors even as assets in UMA programs have increased more than six-fold over the last five years as reported by the Money Management Institute. Launching this new wealth management program could help bolster Stifel's managed account business and help offset the potential loss of younger or more technology-savvy clients to online advisors.
There are most likely many reason why Stifel's UMA programs have not been as successful as they could have been. As a consultant, I have worked with many UMA technology providers and TAMPs and helped them roll out new programs and optimize existing ones. The biggest culprits when programs do not take off are usually lack of internal marketing and advisor training.
As I was once told by Len Reinhart, who is recognized as one of the founders of the separately managed account industry, "UMA's are sold, not bought." What he meant was that clients are never going to walk into an advisor's office and ask to buy a UMA. Advisors can only sell UMA's but in order to do so, they must understand the product, how it works, and for which clients it would be the best fit.
Otherwise, all of the time spent implementing the platform and rolling out the fancy new technology will be wasted and the program will whither and possibly die. Certainly, not the best use of any company's scarce resources.
I have worked with clients in this situation and helped them to re-launch their UMA programs in partnership with their technology vendor or TAMP. But it is best to avoid reaching this low point in the first place!
The emergence of robo-advisor firms offering low cost advice directly to clients may prompt more brokerages to launch their own client-discretionary advisory programs that straddle the line between low-cost self-directed accounts and full service advisory offerings, says William Trout, a senior analyst with Celent's wealth management practice.
UMA programs typically have much higher minimums due to operational costs and charges from the underlying SMA managers. Stifel has managed to keep their costs down without sacrificing scalability to be able to offer their non-discretionary UMA program to clients with just a $50,000 minimum. This puts them in line with the biggest digital wealth management firm, Vanguard Personal Advisor Services, which recently lowered their minimum to $50,000.
Stifel plans to start client fees at 2.5% for accounts with less than $150,000. In light of the fee-compression from robo-advisors whose average costs are less than 0.5%, Stifel's fees may discourage Millennials and other younger prospects who do not have a lot to invest yet. (See Why Demographic Differences Define How Advisors Should Talk to Clients)
Such a high fee may not even be competitive against other UMA programs. New research from Cerulli found that average UMA fees across the industry have dropped 20 basis points since 2008.
Considering that Stifel manages around $21 billion in discretionary advisory program assets in their current UMA program, which it calls 'Unison', they should be looking for ways to expand market share. Especially because discretionary programs are more scalable since the company can centrally manage asset allocation, investment selection and rebalancing accounts, without checking with clients first. (See Current Trends in UMH Programs & Technology)
I'm not sure if client-directed UMA's are the wave of the future. But I do expect robo-advisor platforms to start supporting UMA's sometime soon. There is just too much competition in the digital space. The second-tier players like Betterment, Wealthfront and Personal Capital (who used to be first tier until Vanguard got in the market) will need to be the ones to initiate change in hopes of being better able to manage it.