What is the difference between a Separately Managed Account (SMA) and a Unified Managed Account (UMA)?
A Separately Managed Account is an account that is managed by a third-party asset manager, adhering to a specific investment strategy to which a client decides to allocate funds. Generally, the SMA strategy invests in individual stocks or bonds, or potentially a blend of the two, and may target an asset class or style. It should be noted that this third-party manager does not manage the client’s entire portfolio.
A Unified Managed Account can comprise many different SMAs as “sleeves” (termed a sub-account UMA), or all the different funds and strategies can be blended together and treated as one composite (holistic UMA). The holistic UMA allows for easier attribution analysis and enables one’s primary investment advisor to manage the whole account, by adjusting allocations to the different third-party strategies contained within. The adoption of a uniform UMA framework by advisors and firms has enhanced scalability and efficiency.
While technology has facilitated the use of SMAs and UMAs, the recent surge in popularity can be explained in three ways: Accessibility, Transparency, and Customization.
Accessibility
The pivotal moment for SMA / UMA utilization occurred in late 2019, when the major brokerage companies did away with commission fees on trades. Free from the fear that their return might be diminished by transaction fees, investors with smaller asset levels can now evaluate if the SMA / UMA wrapper is attractive for them. Additionally, the introduction of fractional shares and their continued adoption by a growing number of brokerage firms cleared the way for account minimums to reduce. Together, fractional shares and the elimination of commissions on trades have empowered the average investor to invest like large institutions, without needing the colossal amount of capital that those institutions boast.
Transparency
SMA / UMA accounts create greater transparency because the investor can see at any moment what is in their accounts, and when the transactions were executed on individual securities. Moreover, these accounts can afford investors greater peace of mind through enhanced due diligence. Beyond the oversight offered by the third-party asset manager, the client’s advisor, and their own oversight, platforms can conduct due diligence on their clients’ SMA / UMA accounts, such as what the Orion Portfolio Solutions’ due diligence team offers for its Global Strategies.
Customization
The ability to own individual securities unlocks greater levels of tax efficiency for clients. The cost basis, i.e. the original value for tax purposes, is unique to the investor. That is something neither mutual funds nor ETFs can claim. Additionally, SMAs / UMAs can offer personalized investing strategies via ESG screens. Asset Managers can create custom screens, both positive (enhance or include exposure to certain asset classes or investing ethos) or negative (exclude certain asset classes or industries - i.e., “sin” companies). Moreover, if a client doesn’t like a specific company in their portfolio, it can easily be removed. While there might not be clear evidence of alpha generated by investing based on a client’s individual beliefs, it also isn’t costing them anything, and it creates a heightened level of personalization and satisfaction for the end-client when their portfolio reflects who they are.
Orion Portfolio Solutions offers a handful of different SMA options on the platform by managers such as Lazard, Franklin Templeton, Appleton Partners, and we are constantly evaluating the existing universe to add more solutions. Moreover, we have made great strides to build out the SMA capabilities we offer as we can also conduct customized ESG screens and exclude individual securities. This has been a great boon for our direct indexing team, which is also constantly creating new strategies that can fit in the SMA wrapper.
Orion Portfolio Solutions builds, delivers, and manages UMA portfolios with a unique diversification process that seeks to align investment decisions with client objectives, across various market scenarios.
You can also find and implement quality investment options with a curated list of third-party strategists, each of which is vetted and monitored through a dedicated due diligence process. Learn more about how Orion Portfolio Solutions vets, maintains, and oversees a curated suite of strategist options by downloading our brochure here!
2530-OPS-10/02/2020