Everywhere you turn, wealth management and wealthtech leaders are saying the next big advance is the unified managed household (UMH). Comprehensively managing a household portfolio in a risk-smart and tax-smart way can improve financial outcomes for investors and advisors by 33% or more, according to an EY study. 

Harry Bartle works closely with most of the largest wealth management firms in building UMH platforms to enable advisors to help clients make more and keep more, especially as they look to retire. Harry and I discuss what he and his clients have learned as they build advanced UMH platforms.

Jack: Why has it taken so long for UMH platforms to take hold?

Harry: For a UMH to create real benefits for advisors and clients, it needs to hook into every part of an advisor’s tool kit. It has to link to planning, data, risk, tax, portfolio management, rebalancing, decumulation, books and records, custodian connections … the list goes on. On top of that, a UMH platform needs to marry new technology and user interfaces with legacy systems designed for single accounts. Everyone struggles with how to coordinate and optimize all of it. And while the inner workings of a UMH platform are complex, the advisor/client experience must be simple.

Jack: It’s interesting to contrast this with what we’re seeing in retail investing with apps like Robinhood moving at a breakneck pace. It’s not an apples-to-apples comparison, but these apps weigh heavily on the minds of advisors trying to steer people toward better outcomes.

Harry: Right. You might look at retail investing tech and wonder, “Why is it taking so long for the incumbents in our industry to build their platforms?” A company like Robinhood does not have an obligation to play nice with legacy tech. The narrow scope of what they are building means fewer regulatory hurdles, too. And to be blunt, it is a lot easier to create a zero-friction, gamified trading app than it is to coordinate a complex ecosystem that cultivates lasting and quantifiable financial success.

Jack: So, on one hand, you have apps that want to make it easy and fun to make short-term trades. On the other, you have platforms that are trying to make it easy to do the next best thing to help in the long run. If you’re a firm trying to make a UMH platform, where do you start?

Harry: Firms enjoying the greatest success begin in one of two spots. The proposal system is the easiest, because it links with two key areas that improve outcomes—risk and tax. A UMH-enhanced proposal lets you quantify the benefits in dollars to show the real value of all the elements working together. It’s a natural way for advisors to explain how all the moving parts translate into better client outcomes. 

The other starting point is household-level rebalancing. It’s the core of the UMH, and the most complex. It’s also important to understand that rebalancing is the flip side of the coin of determining the optimal sequence of withdrawal for retirement income from multiple accounts.

Jack: What are some of the ways firms struggle to implement UMH technology?

Harry: If your tools are telling you things that don’t make sense, you aren’t going to use them. Some platform architects have tried what’s called a “rules-based approach” to UMH. In practice, a lot of advisors find it too rigid to be useful.

Jack: What do you mean?

Harry: A rules-based approach is done account-by-account. Like the name says, it follows rules, which are set regardless of the portfolio. As an example, a rules-based UMH might decree that fixed income only goes in the qualified account and equities only go in taxable accounts. To be honest, the suggestions don’t often make sense to the advisor and are hard to adopt. We see adoption in the 7% to 10% range with a rules-based approach.

Jack: But that isn’t the only way to implement UMH. I know other firms like Morgan Stanley are taking a more flexible and dynamic approach.

Harry: Yes. They look at each household’s tax rates, holdings, and all accounts, and make suggestions to dynamically coordinate holdings so they are custom to the client. The advisor’s software tells the advisor the optimal asset location consistent with risk and quantifies the financial benefit.

The client’s holdings are dynamically placed in the appropriate account to maximize after-tax returns and increase household portfolio value. According to Vanguard’s value of advisors research paper, constructing a portfolio using tax-smart asset location "can add up to 75 basis points of additional return in the first year, without increasing risk." 

For income planning, all the accounts and products need to be considered to create a risk-appropriate and tax-smart sequence of withdrawals. As with accumulation, minimizing taxes and quantifying the benefit is vital for withdrawals. When our enterprise clients get that, things take off.

Jack: Thanks, Harry, for the UMH lesson. This is a win-win-win and an exciting opportunity for investors, advisors and firms.

Jack Sharry is co-chair of MMI's Digital Advice Community, sits on the Next Chapter Advisory Council, is host of the WealthTech on Deck podcast, author of the book Authentic and Ethical Persuasion, and is the executive vice president of LifeYield.