What it means
Traditionally, an investor who wanted several strategies would open separate accounts for each one. This created a pile of statements, made it hard to see the whole picture, and made it difficult to coordinate tax and risk across all of them.
In a UMA, each strategy is a "sleeve" within the same account. One strategy might be a large-company share portfolio, another a bond portfolio run by a different manager, and a third a low-cost ETF.
A central overlay manager looks at the whole account to rebalance, which means bringing holdings back to the target mix, and to harvest tax losses. Tax-loss harvesting means selling investments at a loss to reduce the tax on gains elsewhere.
The investor typically pays a single fee based on the account's value, which may be a combination of the underlying managers' fees and a platform charge. Minimum investments are often higher than for a standard managed account, because of the extra work involved.
The main advantages are consolidated reporting, easier rebalancing and better tax management. The disadvantages are cost, the complexity of the structure and the fact that you depend on the overlay manager to coordinate things properly.
UMAs are mostly sold through financial advisers and wealth managers in the United States. They are most useful for clients with substantial assets and a taxable account, where tax coordination can add real value.
In practice
Real-world examples.
Example
An adviser sets up a UMA for a client with $2,000,000. The account holds a large-company strategy, a municipal bond strategy and a global ETF sleeve. At year end, the client receives a single report showing performance for each sleeve and for the whole. The adviser uses it to discuss whether any sleeve should be replaced.
Example
A client sells a block of shares in one sleeve at a loss of $15,000. The overlay manager uses this loss to offset a gain realised in another sleeve. The coordination reduces the client's tax bill for the year. Without a UMA, the two accounts would have been traded without any reference to each other.
Example
A wealthy business owner wants exposure to three specialist managers but dislikes receiving four statements. The adviser proposes a UMA that wraps the managers together. The owner accepts a slightly higher platform fee in exchange for easier oversight. She also likes that her accountant can work from one set of tax documents.
Formula
Calculation
Blended fee % = total annual fees in dollars / total account value x 100
A client has a $1,000,000 UMA with three sleeves. A large-company share sleeve of $400,000 is charged 0.40%. A bond sleeve of $300,000 is charged 0.30%. An ETF sleeve of $300,000 is charged 0.15%.
Share sleeve fee = 400,000 x 0.0040 = $1,600.
Bond sleeve fee = 300,000 x 0.0030 = $900.
ETF sleeve fee = 300,000 x 0.0015 = $450.
Total fees = 1,600 + 900 + 450 = $2,950.
Blended fee = 2,950 / 1,000,000 x 100 = 0.295%. If the adviser adds a separate 0.80% advisory fee, the total cost is 0.295% + 0.80% = 1.095%, or $10,950 a year.Case study
Seen in the real world.
Oakmont Wealth is a fictional adviser, and this is an illustrative scenario. It had a client, Lena, with $1,500,000 spread across four separate managed accounts, each with different rebalancing dates and no coordination on taxes.
Oakmont moved the money into a single UMA with the same four strategies as sleeves. In the first year, the overlay manager realised $20,000 of losses in two sleeves to offset $20,000 of gains in the others, which avoided tax on those gains. At an assumed tax rate of 20%, this was worth about $4,000.
Lena's cost rose by 0.05% of the account, or $750, for the overlay service. The net benefit was $3,250 in the first year, plus much simpler reporting. The illustrative case shows the value of coordination, though results depend on markets and tax rules. Oakmont reviews the arrangement each year to confirm that the savings still exceed the extra cost.
Watch out
Common mistakes.
- Assuming a UMA is always cheaper. Combining managers and an overlay service can add costs.
- Ignoring the minimum investment. Many UMAs require large starting balances.
- Expecting tax savings every year. Tax-loss harvesting depends on market movements and on tax law.
Questions
People also ask.
What is the difference between a UMA and a mutual fund?
A mutual fund pools many investors' money in one portfolio, whereas a UMA is one investor's own account holding several strategies.
How is a UMA different from a separately managed account?
A separately managed account generally holds a single strategy, while a UMA brings several strategies together in one account.
Who runs a UMA?
An overlay manager coordinates the sleeves, while the individual strategies may be run by different managers.
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