Kurt Salmon’s Wealth Management practice will publish a series of insights that discuss UMH and its implications for your firm. We hope to engage participants from all constituencies of managed accounts and the broader investment industry to extend our ideas and continue the conversation. A summary of our upcoming UMH series follows and provides an introduction to this important discussion.

The Crisis Impact on Wealth Management

In mid-2009, we reported that the impact of the financial crisis on the Wealth Management market was relatively consistent with the rest of the financial services industry. Similar to the asset managers servicing this sector, the distribution side also suffered greatly as AUM shrunk to its lowest level in decades.

In 2008, High and Ultra High Net-worth (HNW) clients saw their assets drop to $33 trillion from $40 trillion in 2007. By close of 2008, there were approximately two million fewer investors in the HNW category, a stunning drop of 25 percent.

This decline in assets, coupled with troubled financial institutions, profoundly impacted clients as well as the Wealth Management industry, most notably, Financial Advisors serving the HNW client base. The U.S. market traditionally dominated by top wire-houses and major insurance firms such as Merrill Lynch, Citi Smith Barney, Morgan Stanley, AIG and Prudential underwent a complete transformation, as some of those firms were no longer able to operate standing alone.

The Hedge Fund Industry lost significant credibility as a result of its inability to provide timely information and meet the demand for withdrawals. Advisors and their clients lost faith in their relationships with platform providers, products and the investment process. Between 2009 and 2011, approximately 25 percent of HNW clients either fired their traditional advisors or transferred their assets to new and presumably safer products.

In recent years, Financial Advisors (FA) have reexamined both their roles within the industry and relationships to their firms and clients. The financial crisis has imparted a new voice to proponents of independent advice and clients’ longing for a holistic approach to wealth management.

Post-Crisis Climate

Fast forwarding to 2012, the Dow Jones Industrial Average has made a full recovery and exceeded the 12,000 mark and the NASDAQ is in the 3000 territory. While the high unemployment rate continues to slow economic growth, investor confidence is rebuilding and Financial Advisors are finding their clients willing to invest with a more positive outlook toward the future.

Firms, specifically those who are servicing independent advisors, note that AUM is growing and returning to healthy levels. The Industry’s response to the crisis of focusing on initiatives that help restore trust between clients and advisor is showing favorable results. Even so, the work continues, with both groups seeking better solutions.

HNW clients will continue to look for:

  • Holistic asset allocation
  • Fundamental products
  • Research and due diligence on products and strategy
  • Communication and transparent reporting

Financial Advisors will expect and need:

  • Improved access to products
  • Business development expertise
  • Compliance and legal coverage
  • Streamlined operations
  • Integrated technology

Holistic, household asset allocation and management have become a natural response to the crisis and post-crisis environment. In the U.S. market, tax advantaged asset management coupled with this approach will gain greater prominence as clients seek to maintain tighter control over their financial wellbeing while dealing with the volatility of markets.

A New Approach

The Unified Managed Household (UMH) is a new product positioning that is receiving active response from the advisor community as well as the HNW client base. UMH is following a series of promising products: SMA, MFA, MSP, and UMA. The trend is greater coordination of asset management among products with increased emphasis on asset allocation on the Investor level beginning with reporting, progress in investment performance measurement, and is realized in UMH by informing trading decisions across products. As with all managed accounts, UMH depends upon a technology bed.

Given the positive response from the HNW market place, the discussions of future plans for including UMH strategy is universal among our client base of broker/dealers, money managers, investment banks, and technology providers. With rare exception, the discussion often lacks clarity and specificity relative to product scope, investment process, operations and technology—all requirements for a successful implementation.

UMH Insights Overview

The Business Environment

We begin by examining the business environment and look for trends and events that call for examining the issues the Wealth Management industry should consider including the impact of regulatory changes, regaining investor confidence, and redefinition of investor market segments, and advances in technology.

The Path to UMH

Next, we explore the influences within the Wealth Management industry that lead to UMH:

  • Market Drivers
  • Business Drivers
  • Technology Drivers

Benefits of UMH

How will introducing a UMH approach benefit the investment community? We view UMH from the perspective of:

  • Investors
  • Financial Advisors
  • Money Managers and Sponsors

UMH Dissected

We tackle issues specific to UMH, beginning with a definition which is important in establishing a baseline for our discussion. The growing success of the Unified Managed Account (UMA) is seen as a precursor of industry trends and serves as a technical underpinning of platforms to support UMH.

How UMH will be realized?

Our insights to the challenges and issues in introducing a UMH approach are based on years of experience in the Wealth Management industry working with broker/dealers, money managers, investment advisors, outsourcers and technology providers.

This “how to” perspective discusses:

  • Data requirements
  • Limitations of portfolio accounting platforms
  • What constitutes a “household”
  • Business processes affecting UMH
  • The changing roles of the Financial Advisor
  • Implications on cost and impact on platform choices and priorities

How Close to Reality is UMH?

Finally, we assess the maturity of technology in support of a UMH approach discussing the characteristics to be considered for a UMH platform.