The Future of Advice Delivery: What Will Solutions Look Like?

This is a summary of a session from the FRA’s 11th Annual Managed Account and UMA Summit that was held in September 2013 in NYC.

Moderator: Walter Hartford, VP, Business Development, F-Squared Investments


Unified Managed Accounts (UMA’s) are not a silver bullet

What the managed accounts industry needs is new investment options, not new account types, Shkuda contented.  UMA’s are not a silver bullet that can solve all of a client’s investment needs.  What’s inside an account is more important than the account structure, she claimed.

Shkuda proposed that UMA growth has been flat for the past few years because the strategies being offered aren’t providing solutions for what clients perceive to be their needs.  Managed account providers must improve on their track record of innovation in order to increase market share, she suggested.

The following three rules were offered by Shkuda for the industry to be more innovative:

1) What has worked in the past, won’t work in the future – mainly due to increasing levels of competition
2) Firms must continually re-invent themselves – especially larger sponsors and wirehouses who are often afraid of cannibalizing their existing business
3) Think outside the box

A 2% inflation rate is a bigger risk to baby boomers’ retirement than another financial markets meltdown.

The #1 fear of most retirees is running out of money, Jones observed.  Conventional wisdom says that they should be worried about a repeat of the 2008 crisis and adjust their investments accordingly.  This is the strategy followed by most advisory firms whose compliance departments will raise a red flag if the portfolio for a 65-year old client cracks a 50% equity allocation, he noted.Riverfront Price Matters

We have built up compliance processes and client profiles that are out of date, Jones proposed.  These profiles insist that as you age, you must increase the percentage holdings of bonds. But what if bonds are suddenly the biggest source of risk in a client’s portfolio?  Then we’re all heading like lemmings over the cliff, he warned.

Starting in a fair value market, the recovery time after 2008-like event is around 12 months 45% of the time and around 24 months 65% of the time.  98% of the time, investors have made back all of their money back in under five years, he said.

This means that for a baby boomer that will be retired for 30-40 years, an event that only lasts 18-24 months is not their biggest risk, Jones emphasized.  Even if the inflation rate were to remain the same as the past five years, around 2.3%, after 10 years an investor’s standard of living will be cut by 20%, after 20 years by 1/3 after 30 years by half.  Slow, steady erosion from inflation is biggest risk to baby boomers’ retirement, not drawdowns, he said.

Of course, these recovery time frames are only valid if advisors keep their clients fully invested in the market.  If they try and time the market or cede to clients’ demands to sell at the bottom to avoid further losses, then they will miss most of the upside, which usually occurs early in the bull market cycle.

Helping Advisors Coordinate Account and Income Management

LifeYield UMHLifeYield appeals to advisors that want to help clients maximize their holdings, Sharry proposed.  Once investors turn 50, they often consolidate their assets in order to reduce paperwork and streamline their investment management.  A tax optimization overlay service, such as LifeYield, can help advisors to help investors do this, he said.

Sharry went over some questions that investors should be asking their advisors such as, what is the best way to organize investments that have been gathered over many years?  When is the optimal time to take Social Security?  After retirement, what is the best sequence for Roth conversions?  What is the tax optimal way to make withdrawals from their principal?  Investors are less interested in increasing their income as they are in increasing their cushion to avoid running out of money in retirement.

LifeYield defines Unified Managed Households (UMH) as Coordinated Account and Income Management.  Sharry believes that the biggest hurdle today for most firms is their inability to change their business model.

What does it mean to increase risk in order to meet client goals?

Risk should be defined as probability of achieving goals in terms of client desired outcomes, Jones explained.  The industry currently defines risk as volatility and as the standard deviation of annual returns, however, most clients think risk is when they see a monthly statement with a negative performance number on it!  Volatility can be completely avoided by putting clients into 100% cash, which will fail to meet their lifetime goals, yet by the industry’s current paradigm of risk, this would be considered a 0% risk portfolio, he stated.

One way to reduce risk and volatility in client portfolios is by reducing the amount of unnecessary taxes that are paid, Sharry said.  This is also referred to as ‘tax alpha’.  LifeYield’s tax overlay service can make recommendations on asset location and the timing of withdrawals, which they claim can generate tax alpha of between 100-180 bps annually.

What should we use in place of bonds in client portfolios?Uncle-Sam-bonds

Jones believes that the bond market is over-valued, which makes bonds a risky investment.  He suggested that bond portfolios follow a sort of ‘hypocratic oath’ to avoid doing harm to clients.  Riverfront has reduced the maturity of their bond holdings to no longer that 3 years, with very short maturity credit structures, he reported.  They have invested in high yield bonds because the recent issuance bonanza has allowed these companies to build up a lot of cash on their balance sheets.

Another option is to replace bonds with other asset classes that can generate cash flow, Jones proposed.  Real estate is a good example, but it should be through directs investments made available to retail investors, rather than through REITs or ETFs, he warned.  This is because exchange-traded investments, such as REITs and ETFs are marked to market, which increases both their volatility and the ease with which clients can sell during short-term downturns.  However, direct real estate investments, such as timber and farmland, are marked to model, which results in more staying power for retail clients, he said.

What are some current trends that you are seeing out in the market?

In his travels, Sharry is seeing different vendors working together to improve integration from end to end in the wealth management process.  LifeYield is currently working on integration projects with eMoneyAdvisor, MoneyGuidePro, Orion Advisor Services, and Envestnet, to name a few.  The goal is to create a seamless experience across CRM, Financial Planning, Execution, and Reporting, he said.

On the profiling side, it is critical to avoid different definitions of client risk across different solutions, Shkuda added.

Finally, Jones re-emphasized that the industry must redefine risk as not meeting the client’s liability objectives and avoid focusing on short-term volatility.  There should be a concerted effort to define new asset classes and fixed income portfolio constructions that help meet the income needs of clients while avoiding excess volatility, he said.

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The Wealth Tech Today blog is published by Craig Iskowitz, founder and CEO of Ezra Group, a boutique consulting firm that caters to banks, broker-dealers, RIA’s, asset managers and the leading vendors in the surrounding #fintech space. He can be reached at