Embrace Product Complexity and UMAs for Success

In the last three years, the wealth management industry has seen an explosion of new investment products.  According to a recent VIP Forum report, the number of asset management products has increased 92%, liability management products 53%, and non-financial products 60%.

Our exclusive interview with Robert Zangrillo, chairman and chief executive officer of NorthStar, explored the impact of this product explosion on wealth and asset managers. Robert is a 20-year veteran in the financial services and software industries where he founded companies such as NorthStar and InterWorld and served as a managing director of the Cisneros Family Office.

Q: Why are so many products being introduced?

A: Over the last 10 years wealth management firms have continued to introduce new products in order to better serve their clients.  I think that trend will likely continue for the foreseeable future.

For example, asset managers introduced the unified managed account (UMA), a professionally managed private investment vehicle, due to client demands.  Affluent baby boomers liked the fact they could invest in complex products such as separately managed accounts (SMAs), but SMAs were not meeting their needs.  Affluents wanted lower expenses, more stability (not be affected by mutual fund additions and liquidations), better tax treatments, as well as more diversification, personalization and coordination of their portfolios - features SMAs were not providing.  In response, asset managers created UMAs to offer a single portfolio with a single registration (one set of paperwork) that can encompass every investment class, keep tax liabilities at a minimum, and be systematically rebalanced to maintain the investor’s preferred asset allocation.

With the advent of UMAs, asset managers are able to spend less time selling UMAs and more time providing advice and consulting services.  As a result, asset managers are increasingly becoming wealth managers.  Meanwhile, existing wealth managers are being challenged to become product experts across all of the new product offerings so they can recommend the most appropriate products to their clients.

Q: What major trends are driving new product introduction?

A: I see three major trends driving new product introductions.

First, investors will continue their transition from “stock pickers” to “product pickers”. As individual investors more closely resemble institutional investors, the market will move from a transactional fee-based buying and selling of securities to an advisory fee-based management of product portfolio mix.

Second, asset allocation strategies have become more complex. Wealth management firms have transitioned from offering three major asset classes (fixed income, equities and alternatives) to at most nine (cash, fixed income, U.S. equities, U.S. equity hedge, global non-U.S. equities, non-U.S. equity hedge, absolute return hedge, private equity and real estate), with an even more complex choice of underlying strategies.

Third, the increased competition among wealth managers has turned the focus from an investment approach to a balance-sheet approach of serving clients.  As a result, we have seen more product complexity stemming from liability and insurance products as wealth management firms compete for investors’ entire net worth.

Q: Relative to other issues facing firms, is product complexity important?

A: Product complexity is arguably the most important issue that firms must address as it becomes the primary differentiator for wealth management firms when they compete for clients, assets under management (AUM), and advisors.  In addition, new product offerings provide a way for wealth management firms to defend fee-based programs as certain product types become commodities.

Going forward, as asset allocation strategies look more like institutional models for specific risk profiles, wealth management firms will need to focus on their ability to sell, manage and differentiate their services based on products, especially UMAs.

Q:  What roles do SMAs and now UMAs play with regard to increasing product complexity?

A:  SMAs and exchange traded funds (ETFs) were the first signs that product complexity would forever change the wealth management market.  As firms look to further optimize their product offering for the after-tax benefits of clients, UMA platforms will become a must have for client acquisition and retention.  Firms will begin to lead with the benefits of their UMA or open-architecture platforms, which will result in more comprehensive and customized asset allocation and product recommendations in client proposals.  Firms that are not able to differentiate these benefits in their client presentation will end up losing market share as increased competition will become even more empowered than before.

Q:  What is the impact of increasing product complexity like that found in alternative investments on different types of firms such as multi-family offices (MFOs), asset managers, and private banks?  In other words, what problems are created by increasing complexity and UMAs?

A: The competitive landscape of wealth management firms will be broken down by value proposition. As product complexity increases, asset management firms will look to sell their proprietary or overlay products in the context of the ever-increasing product complexity offered by wealth management firms. Shelf space will become harder and harder to obtain as MFOs, private banks and brokerage firms offer mass customization for their clients. MFOs will have a harder and harder time competing at a product level as the increased complexity of products will place greater demand on the advisory teams when they compete against the open architectures of banks and broker dealers.

Q:  What are the best practices for dealing with increasing product complexity from UMAs?

A: The best practice firms can adopt to deal with increasing product complexity is to deploy a firm-wide open-architecture product catalog across all product types. This will allow advisory teams a more effective way to sell, manage and report on products in the context of client portfolios. Wealth management firms will need to develop four core competencies in order to effectively grow AUM:

Q:  How can NorthStar help? 

A:  As competition increases in the wealth management market, firms can use NorthStar to move to an open architecture as well as support their UMA initiatives. The NorthStar Product Catalog Solution leverages the collective knowledge of leading brokerage firms, private banks, trust companies, asset managers and MFOs and thus allows firms to more effectively differentiate their value proposition as more beneficial than their competition.

The NorthStar Product Catalog Solution can also be leveraged in the deployment of the following solutions:

Q: Relative to other investments a firm could make, how important is the Product Catalog as an investment?  Will it help firms gain competitive advantage or save money?

A: Relative to other technology investments, the Product Catalog is a must have project for 2008 as it becomes a fundamental building block for firms’ wealth management or asset management desktops. Advisory teams need the tools necessary to more effectively acquire, plan, manage and report in an open-architecture world.  Firms that cannot differentiate themselves around product complexity will be commoditized and lose market share in the increasingly competitive wealth management market.