The latest sensation in managed accounts offers streamlined service.

Just when advisors and their clients thought they had the hang of separately managed accounts, two big players in the business, Smith Barney and Lincoln Financial Advisors, gave them another acronym to throw into the alphabet soup: IIS (Integrated Investment Services) and LS (LincSolutions) platforms.

Boston-based Cerulli Associates officially dubs them Unified Managed Accounts, and the executive director of the Money Management Institute, Christopher L. Davis, calls them "the Holy Grail." One could say UMAs are a 30-year overnight sensation, since they represent the accumulation of about three decades of development and oversight by the industry. But little has been reported until recently about the firms that have integrated the technology-hence the recent flurry of news about unified managed accounts.

So what, exactly, is a unified managed account? According to Jack Rabun, a senior analyst with Cerulli Associates, "We are calling it a 'product-neutral managed account platform.' The technology [platform] is able to streamline the delivery of such products as mutual funds, ETFs, separate accounts and individual securities by blending or integrating these products in one managed account environment."

What this means is that advisors at those firms currently utilizing the UMA technology (and those independent RIAs and planners utilizing third-party providers or turnkey asset management programs) can offer their clients multiple, fee-based investment solutions in a seamless manner, thus having more time to develop and service relationships.

Some of the major advantages of UMA technology are allocation of assets across a range of financial solutions, portfolio rebalancing, tax management, consolidated performance reports and billing statements. Providing all this in a single account, says Cerulli's Rabun, is a main benefit of UMAs. The simplicity of the system creates efficiency for the advisor, improving client service, the building of better portfolios and, ultimately, attracting and retaining a solid client base. "Some platforms are proprietary, while others are utilizing third-party providers," he adds.

ABCs Of The Programs

Who has the more robust system is debatable, of course, depending upon which firm you speak to and what the advisor's needs are. According to Gary Dorfman, senior vice president and national director of investments and financial planning services for Lincoln Financial Advisors, in Fort Wayne, Ind., "It's still a little early to evaluate and compare, but adding value and improving operating efficiency for our planners is one of LFA/Sagemark's primary objectives."

Dorfman, a 17-year Wall Street veteran previously with Sanford Bernstein, was also responsible for building Robertson Stephens' Private Client Group. Now his expertise, which centers on creating high-level wealth management platforms and marketing organizations, is helping advance Lincoln's technological capabilities, thereby creating a value-added avenue for their more than 2,000 planners to pursue on behalf of their clients.

"We have three components to our wealth management platform: Account aggregation, enhanced planning tools and the managed account component," Dorfman says about LincSolutions, the UMA platform launched in May. "The account aggregation includes consolidated reporting, one report on virtually all of client assets (both at Lincoln and those held away), and the benefit of 'click and drag' functionality, which in the past for advisors was a time consuming process to manually create spread sheets. We've created the ability to activate both internal products and services as well as link to approximately 130 outside financial institutions." He adds that the technology positions their planners as primary points of contact for clients.

The Enhanced Planning Tool component offers portfolio diagnostics to analyze the client's current portfolio, Dorfman says, as well as efficient frontier analytics for the risk/reward work and "stress testing"-for the likelihood of meeting clients' objectives for spending and preserving their purchasing power-by using the Monte Carlo engine. It also features a generic investment plan that illustrates the optimal portfolio strategy compared with the client's current asset structure, specifically tailored to their goals.

"The third component, or implementation phase," says Dorfman, "is the actual managed account [UMA] platform, which includes individual securities, ETFs, separate account managers, mutual fund wrap and MDA-type accounts, and we're forecasting that in 2004 we'll be able to include some alternative investments. We are also able to improve pricing, which flows through to our planners."

LincSolutions began as a concept with third-party managed account provider London Pacific Advisors (LPA), now a part of SunGard, one of the world's largest technology concerns servicing the financial services industry. Financeware, New Frontier Analytics and StatementOne were a few of the experts Lincoln called in during the initial stages to help design and execute the components of the platform.

"The fact that SunGard can work with large, complex requirements is fairly unique to us," says Jack Waymire, president of SunGard Advisor Technologies in Sacramento, Calif. "We have 450 products organized into 120 business units. We have been buying service providers over the past 20 years, so we have the best technology in the country to link to the Lincoln platform. That way, Lincoln is not limited to technology created internally. I believe it creates an even more powerful solution for Lincoln's advisors."

Meanwhile, Citigroup affiliate Smith Barney has been working on its own brand of UMA platform for about a year, after numerous starts and stops with various configurations over a period of about ten years. Launched on August 4, the Integrated Investment Services (IIS) platform is the culmination of the expertise of the Smith Barney Consulting Group based in Wilmington, Del. IIS combines in a single account their approximately 190 mutual funds (TRAK), separate accounts for affiliated and non-affiliated programs (Fiduciary Services) and ETFs.

Says Tim Williams, director of product management for the Consulting Group, "We have over 400 investment choices that an FC [financial consultant] can use to create a portfolio for the client. It's the first time that it's all being incorporated in one proposal. The FC can use this information to create whichever proposal they believe is prudent for the client, within boundaries, because we will provide suitability boundaries."

Williams says this gives IIS an advantage over other platforms. "Unlike some competitors out there that are focusing on 'pick a pie' solutions, we started with the basic building blocks and are building 'customized pies' for the clients," "We're saying to our advisors that every international manager-whether it is a mutual fund or a separate account, or even an ETF-we've done research on it and it is at your disposal. And we've done that on a platform where we will continually monitor the portfolio for the client and for the FC. We'll give the FC a ton of tools to monitor it and rebalance it as we go forward. So, it is not just the front-end sales-we've re-engineered the process from front end to back end."

Alternative solutions, such as hedge funds, private equity and others that their advisors currently are scrambling for, may be coming, says Williams. "We do not have them on this system yet. The main reason is the private equity-hedge fund phenomenon is combined with a lot of complications-the back office, the operations, the daily reporting numbers. But we believe 80% of a good product is better than 0% of a perfect product. We spent untold dollars and a lot of effort to re-engineer the platform. Phase two has already started, and we're looking at additional investment choices for suitability."

Williams gives credit for the development of IIS to the financial service professionals who worked with Smith Barney. "This platform was built by FCs," he says. "And while I think we're pretty smart here in New York, we're never as smart as the FC in the field. This was accomplished with a team of about 65 FCs, sales assistants, branch managers, and tech analysts. These folks kept us on target."

But what of the majority of independent advisors who do not work with Lincoln, or are not with a major wirehouse like Smith Barney? What are their options for offering a UMA solution to their clients?

The Best Kept Secret

With all of the publicity and hoopla surrounding the latest developments at Lincoln and Smith Barney, some of the trade media have overlooked a major player in this niche: AdvisorPort Inc., now a division of PFPC and called PFPC Managed Account Services, by all accounts was the first entrant into the true UMA market. Its open architecture will allow access by virtually any firm. It is often referred to as a turnkey asset management program, or TAMP, a term that CEO Gregory Horn says does not accurately describe the firm.

"We have been in the UMA market for about three years now," says Horn. "When AdvisorPort was formed in 1999, we envisioned an open platform that would allow for the housing of any fee-based product that a fee-based advisor would use. We envisioned this platform would span the gamut of our products and include multi-strategy accounts with embedded hedge funds."

According to Horn AdvisorPort was ahead of the curve, and in 1999 they already had a management team with experience in fund-of-fund vehicles and hedge funds. "We knew how to deal with them in portfolios in terms of how to generate the performance, how to merge the performance with traditional managed accounts, and how to deal in terms of IPS inclusion. It evolved rapidly, and we launched in April 2000 on the Web. We didn't use the acronym UMA, but we clearly understood it."

A true pioneer in the field, Horn's experience spans an enviable family office practice, and the eventual formation of Persimmon Capital Management, which he still oversees. His average account size is around $10 million. "Persimmon was the blueprint that became AdvisorPort," says Horn. "We aren't just ops people, or technologists, or spin-offs from a TAMP. We are a combination of practitioners, scale operations people and money management experience." Horn says that because he and his team have been in the trenches, they know first-hand what the advisor/consultant (and client) needs and now have "many successful independents" using the platform.

Horn uses the term "middleware" to explain what he says sets the company apart from the crowd: "Most of our competitors have built their platform as a user interface or Web site linked directly to a portfolio accounting engine. We've built out an entire robust middleware layer of data warehouse, data hub, billing engine, reporting engine and data verification tools [which allows management by exception instead of management by review]. That entire middleware is what sets us apart in the industry. As our portfolio accounting engine, tax lot accounting and performance measurement, we use CheckFree APL for large scale processing-it's a great engine. For more flexibility we extract data out of APL and put it in the middle layer, and that's where we transform the data and standardize the data to do whatever we need to with it."

He goes on to explain, "The misnomer, though, in UMA is that everything has to be in one account, and that's impossible because we have clients with multiple registrations, and IRA, trusts, joint assets, irrevocable trusts and so on. If the advisor needs to have a comprehensive asset allocation across multiple pockets, or registrations, you can't do that in one single account. But you can do it with the proper infrastructure in that you can take multiple accounts and roll them into a view that allows an advisor to look across an entire reporting group."

The PFPC Managed Account Services platform is open on the front and back end, and is linked with 11 custodian platforms. "The technology finally allows us to do this efficiently," says Horn.

Advisor Reaction

PFPC's users are gaining access now as a result of their signing on with independent broker dealers. "The RIA response rate is somewhat slower because the technology trust factor is critical. Many advisors are used to 'touching' the data and having their own systems in the back office," says Horn.

Lincoln's Dorfman agrees, and has a realistic outlook. "Adoption is usually challenging in the beginning-individuals are hesitant to embrace change, but as they take the time to become more familiar with the technology they will understand the value it offers. There is a learning curve, and we are going through the educational process now with our planners. The activity is high, new plans being developed, many utilizing the platform, and high numbers of people are logging on to the account aggregation services."

Now that the UMA race is on, how long will it take for other broker-dealers and third-party providers to follow suit and either build or buy platforms to serve the masses? More importantly, how will advisors respond to them?

According to Scott MacKillop, a separate accounts expert and the president and co-founder of Evergreen, Colo.-based Trivium Consulting, most financial services firms will be offering UMA-type capabilities. But he believes that advisors will take their time warming up to them.

"Today, for example, SMAs are everywhere," says MacKillop, "but only about 15% to 20% of advisors use them. Similarly, multiple-style portfolios are widely available but they are not used by most advisors, and I expect to see the same pattern with UMAs."

Rich Behr, an independent advisor with Investment Management Consultants Ltd. in Denver, says, "Approximately 75% of our client base is utilizing SMAs in the traditional form. We are in the process of evaluating the full impact, regarding cost savings and efficiencies, of moving to a UMA platform. We feel they are a natural evolution of the SMA industry, and that the improvement in technology and ease of use will make these vehicles more attractive for the industry as a whole."

MacKillop says that it takes longer for advisors to adjust their business models than it takes for new technologies to be developed, in large part because the industry has not done a thorough enough job of educating them about these new offerings. Third-party providers tend to devote more time to educating advisors about their product solutions, and for independent advisors the training information is critical.

Says Alan Sislen, a managed accounts pioneer, president of Managed Account Perspectives LLC and former chief of Merrill Lynch's Investment Consulting Group, "For many of the independent advisors, they are dependent on what their vendors offer. I believe the market is moving in this direction [UMAs], and the primary vendors to the independents will provide a solution. This may also be one of those situations where the smaller, more nimble firms will have an edge if they make the decision to offer UMAs."

The independents will have plenty of options. In addition to AdvisorPort, the other usual suspects like Lockwood, Placemark, EnvestnetPMC, FundQuest and Brinker will not be far behind. "There are some other companies that don't appear as frequently on the radar screen that have outstanding technology development capabilities," says MacKillop. "Firms like Net Asset Management and Oberon Financial Technologies may actually come up with great solutions in a shorter time frame because of their focus on, and expertise in, technology development."

LPL already has a program, Strategic Asset Manager (SAM), which allows advisors to combine mutual funds, individual securities, ETFs and other classes. But according to the Cerulli report, their program (as well as others) would fit into a more broad-based definition of UMA category. The distinction is that the firms that currently are making progress with UMA technology are including separate accounts as a main component.

Independent broker-dealers like American Express "are able to shift final decision-making about end-consumer pricing to the advisor," states the Cerulli report. "[They] deliver the asset management and platform fees to the independent advisor and allow the advisor to apply their advice fee component on top of these expenses to arrive at the total end-client cost."

The independent broker-dealer of American Express Financial Advisors' not-yet-launched Premier program combines single-style separate accounts, multiple style accounts, mutual funds, ETFs, hedge funds-of-funds, single securities and cash management products.

Some advisors may not realize the critical need for the technology in their practice, says Horn. "The RIA firm may think, well I only have two people handing this end of the business. However, if they can free up those individuals, the advisor can better refocus their energy on building their practice, and they will see that top line revenue will grow much faster with this technology. Advisors want to get out of the back-office business. The new model is to outsource all of the data manipulation-spend more time on servicing clients."

MacKillop says that clients will likely become confused if advisors make the mistake of trying to explain the UMA concept in all its glory, or to describe the differences between separate accounts and UMAs. "A glazed look would set in almost instantaneously," he says. "The wise advisor will steer clear of the jargon and the technical mumbo-jumbo, and should resist the temptation to pull back the curtain and show the client how the wizard does his magic."

He says that many advisors get very excited about new technologies that help serve clients better, but advisors should spare them the details. "Doctors learned this years ago. They do not describe to the patient the details of how they are going to perform surgery, or the tools they are going to use. They just tell the patient that they will make the pain stop. We in the financial services industry should follow the same approach."

Alan Sislen agrees, "The client doesn't care how the information was integrated, or how the performance measurement calculation is done. They want to have less paperwork, more understandable reporting and, overall, a simple, straightforward relationship with their advisor."

Cerulli's Rabun agrees that most clients are not interested in the inner workings of the system or memorizing more acronyms. They want the basics: preservation of wealth and growth of assets in a relatively safe environment, controlled by an individual with ethics and a solid value proposition.

Says SunGard's Waymire, "One of the definitions of a trusted advisor is that they are knowledgeable and have the tools-and can access them 24/7-to develop sophisticated solutions and deliver them to a client with confidence."

Smith Barney's Williams agrees, and adds, "It's not just what you're allowed to do with the investments, but how you do it from front end to back end. We engineered to make this the platform for the next century that truly serves the client."