Personalization can significantly increase client satisfaction and advisor success in today's wealth management ecosystem. Financial advisors can foster deeper relationships and higher retention rates by tailoring investment strategies to match each client's unique financial goals and tax situations. This is not news.
However, thanks in large part to the evolution of major investment vehicles and revolutionary technological advances, advisors can—and should—provide this type of service at scale. Clients deserve customized investment strategies that best support their goals—and advisors should seek access to the tools that enable them to do so.
Even with these major improvements in scalable solutions, most investors are not using tax optimization. Perhaps because of their reluctance to provide expertise in an area as complex as tax, advisors often overlook this tremendous opportunity to improve the client experience. While advisors often suggest tax loss harvesting, much more can be done.
Tax optimization
The next frontier for tax optimization goes beyond tax loss harvesting and applies new technologies to better understand the entire client family. We have seen promising opportunities present themselves in our suite of solutions.
However, many wealth management professionals ignore these opportunities to optimize after-tax returns, missing out on what we believe is an essential element of effective investment management. This may be due to their fear of giving advice in an area that is seen as outside their expertise, but more work needs to be done.
The industry needs to further improve and evolve its supporting infrastructure to enable this type of customization and reporting. Furthermore, to date, there is no industry standard definition of after-tax returns. We need to do more to develop reporting modules that are widely accepted and understandable.
I fully expect that as this technology becomes more available and in greater demand, regulators will need to step in to ensure that these approaches serve the best interests of customers.
SMA and UMA
The use of separately managed accounts has grown significantly, further driving personalization. According to Cerulli AssociatesSMA platform assets grew 28.7% year over year to approach $2.4 trillion. Cerulli expects these programs to reach $3.6 trillion by 2027.
However, unified managed account platforms—another key niche for SMA distribution—have also experienced strong growth. Cerulli's data shows that SMA strategy assets within UMA platforms grew 32.6% year-over-year to reach $890 billion. These tools can provide additional control to advisors while providing clients with a more personalized and diversified investment vehicle.
Advisers on a rapid growth trajectory should also consider a unified tax-managed managed account framework, which can make tax and portfolio management more efficient and can lead to better client outcomes .
While equity SMAs are typically distributed as models, fixed income allocations are typically traded by managers. We believe that UMA technology is the key to incorporating multi-discretionary capabilities that enable the combination of a wider spectrum of strategies in a single account.
These are just two of the important steps we've seen financial advisors at RIAs and broker/dealers take when they have access to advisory solutions that put them in the driver's seat. As we continue to see advances in technology and the application of AI, personalization is likely to advance further.
The technology will enable additional customization at scale, and firms will need a partner that can provide customizable solutions to a mass number of customers. Advisors need their firms to invest today in tomorrow's technology.
Rob Battista is Senior Vice President and Head of Advisory Solutions at Vestmark.