I recently had dinner with an executive at a major wealth management firm who oversees trillions in advisory assets. We grew up in the business together and he knows I work with firms who are building a unified managed household (UMH) approach. He asked me: “What’s in the way of our industry building comprehensive advice platforms?”
My answer? “You and everyone else knows the future of advice is multi-account/household-level management.” He nodded in agreement. “But most have their hands firmly gripping the rearview mirror and are still primarily focused on developing single account solutions.”
I continued: “You offer an array of models, SMAs, UMAs and direct indexing products, right? He kept nodding. And you’re building a copycat tax-transition service that is currently so popular? And that is taking too much time and costing too much money? And you know these are single account solutions?
He stopped nodding and sheepishly said, “It’s the best we can do for now, right?”
“Actually no,” I said, “that’s not right. Most firms are focused on single account solutions, but the leaders are building multi-account solutions today.”
UMH Is A Major Priority
A recent Cerulli study indicates more than half of the marketplace (53%) is working on building UMH capabilities, with 37% making it a “significant priority,” up from 22% in 2022. Clearly the trend is toward fulfilling clients’ desire to have their assets managed in a comprehensive way.
There are many factors driving this:
• More people are turning 65 this year than at any point in history.
• Everyone hates paying taxes. And those in or near retirement know that every dollar that goes to pay taxes is a wasted dollar.
• Advisors and clients know taxes have the biggest impact on efficiently growing and distributing client assets.
The greatest benefit of creating a UMH approach is tax minimization. And if you’re serious about generating tax alpha and truly improving financial outcomes for clients and advisors, the results can only be maximized as a multi-account exercise.
Vanguard, EY, Morningstar and Envestnet have all done studies and determined taxes have the biggest impact on what investors make and keep. And asset location has the biggest impact of all, which is fundamentally a multi-account exercise.
And with compounding that means your clients will have more money in retirement if you coordinate all of the following on all of the taxable and tax qualified accounts in a household portfolio: asset location, tax loss harvesting, transitions, rebalancing and income generation.
Tax Management Is A LOT More Than Tax Loss Harvesting
For those with their hands on the rearview mirror, tax management is just tax loss harvesting. I unpack this in a recent FA Mag article on industry trends.
And let’s not forget risk. Since all clients have their various accounts and holdings spread all over the place, the asset allocation and risk must also be coordinated, which is impossible with everything so spread out.
For the client to reap the tax alpha rewards they are due, they must consolidate assets in one place and manage the risk and tax across their accounts in a coordinated way.
As we know, adjustments to the household asset allocation bring with it “taxable events.” A requirement of household-level management is that risk and tax are coordinated together to maintain the risk target and pay as little in tax as possible.
Who Wins With This Multi-Account, Unified Household Solution?
Everyone. Clients can improve outcomes by 33% according to the EY study. When the financial benefit can be quantified in dollars and cents, advisors can demonstrate their value and address concerns about their fees. Firms that incorporate this into their platforms, attract and retain net new assets. And come April, less AUM leaves to pay taxes. After all, lowering outflows to pay taxes benefits advisors and firms through increased assets under management (AUM) and revenue.
And, because the tax alpha benefit can be quantified in dollars and basis points, a compelling case can be made why the investor should consolidate all their assets with the advisor providing the service.
As you are reading on a regular basis in the industry media, organic growth and net new assets are the metrics all firms are chasing and should.
So, if you want to generate more money for your clients and grow your AUM, you must manage client portfolios in a coordinated, tax-smart, and risk-smart way.
That’s tax alpha and that’s comprehensive advice.
Why Don’t We Just Do That?
It’s complicated. Very complicated.
Systems across the industry were built for single-account solutions. Retooling is out of the question. That’s why there are APIs that can provide tax efficiency guidance customized to each firm’s—and client’s—preferences.
In addition to using APIs to manage multiple accounts in a comprehensive way, there is an emerging approach that is a multi-account tax overlay model. It will revolutionize the business in my opinion. Both the API approach and the overlay model can deal with the legacy systems as they are and can produce multi-account guidance to advisors and their firms.
The competition is underway for wealth and asset management firms to develop comprehensive platforms. Buckle up. It’s coming. And for those who take the lead, it will spell a win for consumers, advisors and firms.
Jack Sharry is the EVP and chief growth officer of LifeYield and host of the WealthTech on Deck podcast. He is on the board of Next Chapter, a leadership community dedicated to improving retirement outcomes.