Category Archives: Model Portfolios

Understanding the Impact of Two Different Approaches to UMA

Is your firm considering outsourcing your investment management process?  Confused about what a Unified Managed Account (UMA) is as well as the various approaches used to drive this account?  If so, this blog is a must-read. 

A UMA is a highly versatile account that can hold multiple asset managers across a variety of security types.  It allows for mass personalization without sacrificing scale all while delivering the solution at meaningfully lower all-in costs than other programs. And most exciting is that it is an advanced form of outsourcing, so the operational and management burden is all wrapped into an “overlay fee”.

 In order to make the account run, a quarterback generally sits atop the program to coordinate all the activity, referred to as an Overlay Portfolio Manager – who oversees activity ranging from manager trades, cross manager rebalancing, security swaps within the portfolio to avoid excessive trading, cross manager tax management, tax harvesting, client restrictions, client personalization, cash management as well as a host of other day to day administrative tasks.

Adhesion has been in the business of offering our UMA program with overlay portfolio management for 12 years and have helped build and administer thousands of UMA programs for our clients.  Our platform is an open architecture program – which means that advisors have the freedom to ether build their own multi-manager allocations or use one of our pre-built portfolios that have been constructed by a 3rd Party Outsourced CIO (OCIO) or Investment Strategist. 

When evaluating a UMA Platform like Adhesion, it is important to ask detailed questions about approach and methodology because it will impact your client’s experience.

But to understand approach, let’s first define how managers and products co-exist in a UMA, because that’s really where an Overlay Manager earns their money.  It’s also what makes things really complicated and even a bit controversial.  Every security model within a UMA is called a ‘sleeve’.  If you were to put an equity SMA and a single mutual fund together in an account, that would be two sleeves.  Or if you combined three SMAs, two ETF strategists and 1 mutual fund – that is 6 sleeves.  Where the debate begins is how to keep those ‘sleeves’ segmented or ‘Partioned’.  The two methods to partition a UMA and the impact of the approach is really important as it will affect your client’s performance, taxes, fees paid, risk policy adherence, overall account dispersion as well as the reputation of both your practice and the managers firm.

Partitioned Sleeve Based.  A partitioned Sleeve Based Platform tracks individual tax lots to the manager that purchased those positions within the UMA.  We call it Tax Lot Tagging, and the tax lot lives forever with the manager. Each tax lot inside of an account must be explicitly tagged and associated to a manager’s model.  This means that if IBM is held by two managers, the method to assign them is based on the actual trade that was generated by the respective manager.   It allows us to explicitly compute taxes, performance, fees and gain/loss against the manager in which it was earned.   It ensures that when we trade a specific tax lot for the manager, we communicate ‘versus purchase’ instructions to the custodian so their books stay in synch with ours.   It is by far the most complicated method of overlay management.

Blended Sleeve Based.  Sometimes called a poor-man’s sleeve-based system, a blended methodology allows a platform to form a sleeve based on today’s holdings.  There is no tax lot tagging or sleeve-based account and thus there’s no historical record of where the tax lot came from.  This means what a sleeve looks like today is different than what it looked like yesterday. 

After spending much time researching the impact of these two approaches, an industry veteran once summed up the difference this way :

“…think of one of those big popcorn canisters you get during the holidays with the three segments for different flavors.  The segments are basically partitioned sleeves.  You can easily see how much caramel corn is left and how much has been eaten relative to the cheese popcorn.  Now take that divider out, shake the can and try to give your friend half of each flavor.  Now that’s what it’s like to manage a portfolio without partitioned sleeve”. 

To help visualize this issue, we have provided a real life demonstration below that illustrates the impact as well as a questionnaire that can be used to do your own due diligence

Partitioned Sleeve vs Blended Sleeves in Action

Consider the following scenario – Manager A and Manager B are equally weighted at 50% in a client portfolio.  In the first month, Manager A initiates a new purchase of $50,000 into ABCD.  From there, ABCD proceeded to grow a bit in the second month, then significantly in the final month  Manager B, evidently noticing the skyrocketing results of ABCD, wishes to window-dress their portfolio going into quarter end and initiates a brand new $40,000 position in the last month of the quarter as well.

SCENARIO I – PARTITIONED SLEEVE APPROACH:

Position Value in ABCD
Target Manager Allocation Month 1 Month 2 Month 3
Manager A 50% +$50,000 $52,000 $60,000
Manager B 50%  $             –    $             –   +$40,000
Total Portfolio 100%   $50,000 $52,000  $100,000

Manager A.  Over the quarter generated a $10,000 gain on the initial $50,000 investment or a 20% return ($10,000/$50,000).     

Manager A

Return                                            + 20.00%

Beginning Market Value                 $50,000

Ending Market Value                      $60,000     (Gain of $10,000)

Manager B.  Over that same period, had $0 gains and 0% return.

Manager B

Return                                            N/A

Beginning Market Value                 $40,000

Ending Market Value                      $40,000     (No Gain)

SCENARIO II  – BLENDED SLEEVE APPROACH:

Manager A Because in the third month Manager B initiates a position in ABCD as well, only 50% of the account’s total position is attributed to Manager A due to the target manager allocation of 50%.  The holding as a whole was up 11.11%, ($10,000 / $90,000)  however because Manager A  only owns 50% of the position are now attributed 50% of the return, or 5.56%

Manager A

Return                                            + 5.56%

Beginning Market Value                 $50,000   

Ending Market Value                      $50,000   (50% of Total Position’s Ending Market Value –  No Gain)

Manager B, Over that same period, were attributed a gain of $10,000

Manager B

Return                                           + 5.56%

Beginning Market Value                 $40,000

Ending Market Value                      $50,000 (50% of Total Position’s Ending Market Value –  $10,000 Gain)

With Scenario II, what may be obvious to those in the money management business is that the manager who took advantage of window-dressing ended up in a better position than the manager who took a risk.  Some have asked does this anomaly encourage managers to window-dress to split profits (and fees) ?

To the layperson, this seems highly confusing and counterintuitive.  Manager A did a fantastic job, added value, yet in a blended environment appeared flat.  Similarly, Manager B just initiated a position yet immediately is credited with a $10,000 gain.  Most investors would errantly suggest you fire Manager A and put more money with Manager B.

The average multi-manager equity portfolio at Adhesion Wealth has 17 positions that overlap.  Portfolios that include asset classes that are overlapping in nature (All Cap, SMID, Global Equity) have a significantly higher incidence of overlap. Imagine the impact above multiplied by 17x across 500 clients. The impact to both a reputational – and perhaps more importantly – a fee perspective – can be dramatic. 

Is your platform taking necessary precautions to avoid improper weighting and fee attribution?

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Adhesion Wealth Advisor Solutions & Auour Investments: Evolution of Downside Protection Webcast

auour-investments-sqEach month, strategists on the Adhesion platform offer insights on market trends and their products. We invited Auour Investments, to kick-off the Adhesion Manager Webinar Series.

To check out the recording of the Auour presentation, click HERE.

Visit the Adhesion eXchange to view Auour marketing material, performance data and much more.

About the Webinar:

Is Downside Protection on your Mind?

Downturns happen and the most recent have been some of the worst. With the current bull market in its eighth year and geopolitical risks creeping up, it may be time to think about the various strategies used to protect against material losses. This webinar will discuss the evolution in protecting against market draw-downs and the recent advances made using Regime-Based Investing.

Investing to the Regime with Regime-Based Investing

Regime-Based Investing is a new investment approach that dynamically adjusts market exposures throughout a changing investment environment. By adapting to the changing investment landscape, investors are offered a new strategy to minimize market downturns without the need to sacrifice performance in rising markets.

About Auour:

Auour is an ETF-based strategist that has been an innovator in Regime-Based Investing with five strategies that span the risk spectrum.  Robert Kuftinec  and Joe Hosler are two of the three founders of the firm and with their third partner bring over 65 years of combined investment experience and managing over $8Bil in assets at various major investment firms.

The Auour investment strategies are dynamic/tactical investment portfolios for both equity and fixed income needs.  The funds use ETF’s, which are low cost and tax efficient compared to mutual funds.

  • Fully Participate when markets grow – Auour’s algorithms also look to increase the aggressiveness if the market is constructive, allowing for the opportunity to outperform. Auour will change the investments to those that are intrinsically under-valued compared to others striving for better-than-market returns.  There are times when certain asset classes should work better than others, Auour’s models look to find those.
  • What makes Auour different? – The approach to downside protection is very analytic as the algorithms rigorously measure market risk and market movements.  The proprietary algorithms measure enormous amount of data every day to predict the risk in the market in their attempt to move to cash before material downside hits the markets.
  • In short, the Auour portfolios aim to participate in rising markets while experiencing less of the downturns when the markets are soft and can be customized to each client’s particular risk tolerance.
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Around the RIA Web with Adhesion, June 2016

A few great reads from the month of June, highlighting some of the key conversations we’re having with advisors. Growth, technology, investment design, outsourcing, recruiting, compliance…all are key discussion points for RIA firms and we share the following for your own discussions:

Wealth Management writes that the SEC proposal on succession planning is officially out, requiring RIAs to explicitly adopt and implement business continuity and transition plans. For those who have yet to adopt formal policies, the cost of implementation may be substantial and accelerate the trend towards multi-advisor platforms.

The clear trend in ETFs is towards lower fees, but massive amounts of money still reside in higher-fee counterparts. As shown by ETF.com, the march will continue at its own pace with RIAs and ETF strategists the typical early adopters of lower-fee products.

EVERYONE is in the market to buy existing advisory firms. Michael Kitces shares some ideas on (too?) popular ways to find opportunities, as well some less-traveled paths and key considerations in an acquisition.

Common theme for successful outsourcing…find a strategic partner not just a product vendor. How two advisors leverage healthy relationships, via Financial Planning magazine.

The standard 60/40 portfolio has been a tough benchmark in recent years, but basic math says that will be a tough act to follow. Illustrations from EconomPic and Charles Sizemore reveal a need to blend in some alternatives going forward.

Happy clients generally means happy advisors. Julie Littlechild suggests some steps for a manageable 7 week bootcamp to deeper client engagement.

Servicing clients of all sizes is a constant battle between the hearts and minds of advisors. There is no doubt that the DOL rule will force firms to reconsider how and whether they service smaller accounts. Our clients have been on this issue long before the DOL ruling, prompting ETF Select to be included as a new investment option for Adhesion client firms.

Retail investors are often mocked as “dumb money”, but behavioral biases are just as likely to impact those human beings known as advisors. Abnormal Returns shares thoughts on how hindsight bias can creep into all of us, and how the habit of writing can be an outlet for clear planning. Michael Batnick does his part to write about hindsight bias as well, and how some market truths are merely traps.

Reverse churning is a serious issue, and Blaine Aikin thinks the new DOL fiduciary rule puts more bite into the ability for regulators to demand more documentation from firms transitioning IRAs.

As Ben Carlson shares, what a firm DOES NOT do can reveal just as much as what they do. This negative knowledge can act as a worthy qualitative filter in assessing investment managers. Pair that with this riff from Tom Brakke on man vs. machines and you’re ahead of most highly-paid investment committees.

In this world of more sophisticated number crunching, let’s not forget that market “risk” is not truly quantifiable. It is not those with the best formulas who deliver the best plans, but Phil Edwards of Mercer suggests an open and imaginative mind towards the uncertainty of the future.

Client acquisition is a real but hard-to-quantify cost for advisors. Michael Kitces had two comprehensive articles on low-cost and high-cost ways to grow one’s client base.

The active vs. passive debate is never-ending but thoughtful advisors can look with an objective lens at the merits of both sides. As Nir Kaissar shows, the S&P 500 as it currently stands is currently structured as a bet on high valuation-stocks.

There is constant competition for the attention of affluent investors. Are there aspects of your practice that are highly unique to your firm? Matt Oechsli shares 13 true differentiators for financial advisors.

No such thing as a perfect portfolio but a core/satellite approach can provide an ideal mix of cost, reward/risk, and client behavior. Deborah Fox shares some thoughts on logical blends.

Interesting insights from the Schwab Independent Advisor Outlook Study into the way different RIA firms see their business changing over the next few years.

Adhesion continues to work behind the scenes in helping advisors grow, with new options allowing the integration of Outsourced CIO implementation via Mercer and robo technology via Riskalyze. We welcome your feedback at solutions@adhesionwealth.com, and encourage you to subscribe on the upper right of this page to receive our regular blog updates.

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Around the RIA Web with Adhesion, May 2016

A few great reads from the month of May, highlighting some of the key conversations we’re having with advisors. Growth, technology, investment design, outsourcing, recruiting, compliance…all are key discussion points for RIA firms and we share the following for your own discussions:

How does an RIA differentiate in a world full of “advisors”. By casting a tighter net, NOT a wider one. A must read from Michael Kitces on connecting with one prospect vs. trying to appeal to all of them.

We all want to embrace technology in the name of “efficiency”. Smart adopters take the time to think through the larger opportunity of better allocation of resources, and the right path to getting there. HarvardBiz with a great article on the flexibility, new learning opportunities, and advancement prospects that are possible with the right human/tech combo.

Banking on expected returns carries its own risks, but the danger gets magnified when future liabilities force inappropriate investment choices. The Thought Factory eloquently explains this risk, and Ben Carlson further clarifies what can happen when aggressive assumptions take the place of hard choices.

Adding to the risks highlighted above, how can future return assumptions remain so high after an unprecedented period of fixed income returns? Wes Gray shows the historically high returns in the recent past, while Brian Portnoy highlights the risks of plugging into cheap fixed income ETFs after a multi-decade bull market.

Speaking of risk, what is it? Risk can explained in a number of ways, depending on which pundit or academic is speaking. David Merkel shares a few ideas about properly defining risk, relevant to most clients of advisors.

Josh Brown makes a compelling case for rejecting clients who want it their way. In other words, suggestions are not as valuable as advice, and neither party benefits from this type of “customized” solution. Might be a good way to get out in front of the too many clients problem.

Formal schooling is just the ante for a career in financial services. Real client-facing experience is a must in learning to deal with demanding and anxious customers on a frequent basis, as shared by Lawrence Hamtil.

Factor funds are all the rage but are not created equal. As shown by Jack Vogel, the number of holdings, weight of those holdings, and reconstitution of those holdings varies and can lead to dramatically different outcomes.

It’s always good to hear how industry peers think about running their business. A few observations in Financial Planning on enhancing the human aspects of fee-based, fiduciary advice.

Adhesion continues to work behind the scenes in helping advisors grow, with new options allowing the integration of Outsourced CIO implementation via Mercer and robo technology via Riskalyze. We welcome your feedback at solutions@adhesionwealth.com, and encourage you to subscribe on the upper right of this page to receive our regular blog updates.

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Around the RIA Web with Adhesion, April 2016

A few great reads from the month of April, highlighting some of the key conversations we’re having with advisors. Growth, technology, investment design, outsourcing, recruiting, compliance…all are key discussion points for RIA firms and we share the following for your own discussions:

Tim Harford on the compromise effect and the paradox of choice, relevant for how advisors choose investments and their clients choose an advisor.

Michael Kitces uses the context of diet and exercise to show how advisors can use small financial planning goals to help clients on a successful long-term journey. More excellence from Michael on the evolving skill set of the modern advisor.

Ben Carlson on building failure into your process, so important in developing robust investment plans. This pairs well with his post on the dual mandate of an investment advisor, that the best plan for a client is one that survives the real world.

Tom Brakke states well the obvious flaw in starting manager research with a performance screen, and Corey Hoffstein shares the additional problems with using 3 years as a lookback period. The team at GestaltU covers the perils of past performance quite well in this excerpt from its new book.

A great advisor views his/her role as one of deep relationships, personal advice, and ongoing coaching through the journey. Awesomeness from Josh Brown on The Job Security of a Great Advisor.

Our advisor clients tend to embrace the flexibility of an open-architecture platform, again demonstrated in our approach to “robo”.  Some providers have chosen a more bundled approach to advisor solutions, later requiring a messy divorce in trying to replace any specific component.

Are you marketing to a niche market, or truly serving one? Julie Littlechild neatly explains the difference.

When it comes to data, more is not always better. As Tadas Viskanta explains, comparing different eras is hard and in investing can be downright dangerous.

Josh Brown on how bad active management is being taking to task. Jake at EconomPic shows when good active management can be worth the cost. Patrick O’Shaughnessy rounds out this topic with a wonderful illustration of the difference between seeking alpha and seeking assets.

Speaking of expensive active management, ThinkAdvisor reports that the SEC is prepping a 2016 initiative on 12b-1 fees, a hidden cost of mutual funds that gets disclosed but rarely discussed.

One trend sure to continue with the new regulations is mergers and acquisitions of RIA firms. Investment News summarizes this trend, and shares good ideas on items to consider in any potential arrangements.

Speaking of new regulations, some solid advice from Russell Investments on creating, documenting, and reviewing best practices for healthy client relationships.

The consummate guide to the DOL ruling from Michael Kitces, incredibly thoughtful and no stone unturned.

JP Morgan puts out a wonderful Guide to the Markets every spring, with all kinds of fun and informative graphics.

Adhesion continues to work behind the scenes in helping advisors grow, with new options allowing the integration of Outsourced CIO implementation via Mercer and robo technology via Riskalyze. We welcome your feedback at solutions@adhesionwealth.com, and encourage you to subscribe on the upper right of this page to receive our regular blog updates.

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TD Ameritrade Institutional UMAX powered by Adhesion

On the heels of an announcement to help advisors strengthen their investment offering, Adhesion is very pleased to have partnered with TD Ameritrade Institutional for their Unified Managed Account Exchange (UMAX) offering to advisors. UMAX powered by Adhesion makes Adhesion’s industry-leading, personalized UMA platform easily accessible to all advisors working with TD Ameritrade Institutional. We invite you to read more details about the offering in this summary.

 

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Adhesion UMA platform adds Mercer Research

Reflecting its core beliefs, Adhesion has become known in the advisor space for its commitment to open-architecture solutions and responsiveness to RIA needs. True to that vision, a significant new piece has been added, enabling firms to leverage world-class research in an affordable way, with customized implementation just one step away inside of Adhesion’s Managed Account desktop.

This strategic relationship with Mercer Investments gives advisory firms a single, fully integrated solution for building, implementing, and monitoring client portfolios across major RIA custodians. We invite you to read the details about this exciting new way to leverage specialists in building out a scalable practice.

 

 

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Embracing Flexibility

Today’s Unified Managed Account (UMA) offers the masses an affordable mechanism for achieving portfolio diversification with management expertise – formerly achievable only with mutual funds – with the flexibility, control, and tax efficiency traditionally associated with SMAs.

CNBC has a new article on its site, and it does a good job highlighting key benefits of managed accounts. These are the same benefits sought by the advisors we speak with every day, including:

  1. Personalization
  2. Transparency
  3. Tax-efficiency

With today’s UMA, managed accounts are available to the masses, no longer simply an elite product for wealthy individuals and institutions. Leveraging Adhesion’s UMA platform, advisors deliver sophisticated investment services across all segments of the client base with the following benefits:

  1. Hefty account minimums are no longer an obstacle
  2. Expensive and tax-inefficient mutual funds are no longer the only vehicle for employing professional managers
  3. Low-cost, passive products are easily blended with active and/or tactical management in a single account
  4. Client-specific customizations or restrictions can now be efficiently accomodated

By partnering with Adhesion, RIA firms can not only shed back-office functions but actually win new business through differentiated investment delivery. We invite you to learn more about how the right UMA provider can help you grow a more sustainable practice.  To read the CNBC article in its entirety, click here.

 

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