David Gordon is SVP of direct indexing at Vestmark, a technology and services company dedicated to helping wealth managers deliver personalized, multi-asset investment solutions to retail investors.
Russ Alan Prince: How does Vestmark’s technology and services support advisors in creating portfolio solutions for clients?
David Gordon: Since our inception more than 20 years ago, Vestmark’s mission has been to enable access to sophisticated investment solutions, making it simpler for wealth managers to offer clients personalized and tax-managed portfolio solutions. A recent study done by Forrester found that one wealth management enterprise’s advisors using Vestmark’s technology saved up to 25% of their time managing and trading accounts. Home office overlay teams using Vestmark to manage UMA programs saved up to 33% of their time.
We support a range of investment products and solutions from direct indexing—index-based separately managed account strategies—to actively managed SMAs, mutual funds, ETFs, individual equity, and fixed-income securities and options, all of which can be held and traded on our platform.
Vestmark recently launched a series of index-based SMAs that provide exposure to ESG, dividend growers, and other sectors based on indices developed by S&P Dow Jones Indices, available through the Vestmark Manager Marketplace. This is just the latest in our personalization initiatives. In 2023, we’re launching investment services that leverage the key strengths of our technology.
Prince: What is the difference between an SMA and a UMA, especially as this relates to the portfolio solutions advisors can create for clients?
Gordon: The SMA—separately managed account—offers investors specific investment strategies and allows for personalization and individualized tax management that can’t be accomplished in pooled vehicles such as mutual funds or ETFs. With SMAs, investors own individual securities, which allows advisors to drive greater tax efficiencies and tailor portfolios. SMAs come in many forms. They can be actively managed strategies, passive or index-based strategies—referred to as direct indexing—or can be managed portfolios of ETFs and/or other securities.
The UMA—unified managed account—brings these SMAs together into a single diversified, multi-asset portfolio, sometimes alongside other securities such as ETFs or mutual funds, depending on the client’s account size. With a UMA, an advisor gains visibility and the ability to manage across all of the asset classes and investment vehicles. This provides advantages in managing after-tax performance, as well as implementing an array of other types of portfolio customizations such as social screens, position restrictions, isolating legacy positions, and automating cash management. Managing all of this manually would be incredibly unwieldy, so having the right technology is key.
Many firms offer UMAs but with serious limitations. For example, in a blending technique, the advisor blends various models from different managers but loses the ability to track individual manager performance. It becomes impossible to uncover which models contributed to a client’s overall risk/return and to track how each manager is performing to assess that strategy.
Another tricky situation arises when firms employ tagging models, which solves challenges with distinguishing positions but creates the issue of cash management. Tagged models have account-level cash positions but can’t separate how much cash belongs to each manager within the UMA, making it difficult to accommodate multiple discretionary parties in a single account. Enabling multiple discretionary parties in a single account is important so that the program can accommodate manager-traded strategies and offer a wide array of fixed-income, muni, small-cap, options, or alternative strategies, for example, in styles where managers insist upon maintaining trading discretion.
Both issues can be alleviated with true sleeve-level sub-accounting. Vestmark does this and supports multiple discretionary parties in a single account meaning each sleeve of a UMA can be under separate discretion. With these capabilities, an advisor, home office, or third-party manager can manage and trade various portions of the client’s allocation.
Back to the SMA versus UMA question. One way to contemplate the difference is like a musical score. If one member of an orchestra plays his instrument, the audience certainly won’t experience the harmonious sound of the entire orchestra. Only when all the musicians play together does the crowd experience an incredible performance. With portfolio management, only when all the trades and tax decisions of an account’s strategies are synchronized does the advisor gain a full understanding of a client’s portfolio.
Prince: How does Vestmark view the evolution of the portfolio of the future, and how does your firm see your tech and services supporting advisors’ delivery of planning and investment advice to clients?
Gordon: While the financial advice industry continues to become more sophisticated, individual investors' financial lives can still be further improved. Household Managed Accounts will enable advisors to affect asset allocation across an entire household as well as optimize the asset location between taxable and non-taxable accounts. For example, take municipal bonds which are not subject to federal income tax. These generally shouldn’t be in a client’s IRA or 401K but instead could be held in taxable accounts, while assets generating taxable interest income may be better located in tax-deferred retirement accounts.
Advisors who can locate a client's various investments where they can generate the most favorable after-tax returns, while simultaneously managing risk exposure of the entire household, will be engaging in effective householding. And, good householding isn't possible without first employing unified managed accounts.
At Vestmark, we are working towards enabling the advisor to see non-discretionary held-away accounts as part of the client’s overall household portfolio allocation. With a more complete picture of a client’s portfolio, advisors can keep all accounts in line with overall allocation targets, household goals, and risk parameters. We see this as the “Holy Grail” of investment management.
Russ Alan Prince is the executive director of Private Wealth magazine and chief content officer for High-Net-Worth Genius. He consults with family offices, the wealthy, fast-tracking entrepreneurs and select professionals.