GIPS & UMAs ... perfect together?

We have had a few clients raise questions of late regarding how UMAs fit within GIPS® (Global Investment Performance Standards). The two major questions: (1) Are these accounts to be included in composites? (2) Are they included in firm assets?

"UMA" stands for Unified Managed Account, and can be viewed as an extension, if you will, of a wrap fee account, in that it’s a separately managed account (as opposed to a pooled account or mutual fund), where the investor is typically participating in a sponsored program that’s offered by broker/dealers and other financial institutions. They typically allow the client access to multiple managers who are providing management of various investment strategies.

UMAs differ from wrap fee accounts in that the managers usually provide the sponsor with their model, and it’s up to the sponsor to execute the trades associated with the model. And unlike wrap fee programs, the investor isn’t a client of the manager; rather, they’re a client of the sponsor and don’t have a direct relationship with the manager.

When these types of accounts (that is, where a manager provided their model to a third party to execute for their clients) first surfaced, the answers to how GIPS fit in were pretty clear: they didn’t! That is, if a manager merely provides their model to another manager or a sponsor who is then responsible for executing it, the manager has no way of knowing (a) whether it was, (b) whether it was done properly, or (c) when it was done. The manager receives a fee (which is often tied to the amount of assets) for their model, but they have no direct oversight for the assets. Therefore, the accounts aren’t to be included in composites and the assets aren’t part of the firm’s asset’s under management: these are “advisory assets,” and are therefore excluded from the firm assets.

Of late we’ve seen a graying of the lines occur, where it appears that some programs place the managers into a role where they “may have discretion” over the assets. They again pass their model onto the sponsor, but it’s understood that the sponsor will execute it in a timely manner. In these cases, the UMAs are looking a lot like wrap fee relationships, and one could argue that the accounts are to be in composites and the assets are part of the firm’s AUM.

These programs afford us an opportunity to step back and perhaps simply consider when an account would or would not be required to be in a composite, and whether or not the assets are firm assets. Here are some tests which might help:

1. Has the client signed an agreement with the manager directly, whereby the manager assumes (full or partial) discretion over the client’s assets, or is the manager formally defined as a “sub-advisor” to the sponsor?
2. Is the sponsor obligated to carry out the manager’s model directions, including trading and rebalancing?

I originally thought there would be more issues, but believe these two should suffice. If you can answer “yes” to both, then you’d be obligated to include the account in a composite (unless they fail to meet the firm’s discretionary policy, of course) and the assets in the firm’s AUM. Granted, I think it would be difficult to see a situation where you’d answer “yes” to the first and “no” to the second, but that’s not really an issue. The manager must have confidence that their trades are being executed and that they have clear responsibility for the assets.

Can discretion be shared? Yes, it can, without obviating the manager’s responsibilities under GIPS.

Recall that in the world of wrap fee, the compliant firm can view the sponsor as the “client,” and the same would hold here, too. This simply means that the additional workload of shadowing client account assets may not be necessary. If the manager relies on returns and other data (e.g., market values) that come from the sponsor, they must have confidence that they meet the GIPS requirements; otherwise, they will have to maintain the necessary records themselves.

Since I’m unaware of anything being written on this topic before, what I present here is simply my interpretation of the standards and how they would apply to UMA accounts. By all means I welcome your thoughts on this topic. Perhaps this will result in a dialogue, which I would welcome.

If your UMA relationships fail these tests, can you refer to these relationships in your marketing? Yes, you can! Just don't include the accounts in composites and the assets in your AUM. You can include a separate asset number  (e.g., "assets under advisement") and include a narrative that describes the extent of this business, in order to showcase how your models are used by others.

Some GIPS compliant managers want to include these accounts, because it increases  their assets under management while others would prefer not to, because it means more work. It really shouldn't be a matter of choice; there should be clear tests that would determine the appropriate treatment of UMAs. And of course, a manager may have some UMA relationships which would be included and others which wouldn't. The manager should document these relationships so that the rationale behind their decisions is clear.