UMAs vs. SMAs: Pros and Cons of Personalized Investing

Amid compressing fees and mushrooming fund options, asset managers are clashing for market share in a new arena: personalization. Thanks to recent technological leaps, Dimensional Fund Advisors hopes to prevail with a newly accessible investment vehicle.

The Big Picture in Practice podcast asked two Dimensional experts about the move to unified managed accounts with their UMA and lower-minimum separately managed accounts platform. We welcomed Katie Hendrix, asset allocation research director and vice president, and Bryce Skaff, co-head of the Global Client Group.

Here are a few takeaways from the conversation.

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Unified managed accounts eliminate the need to manage different types of investments in different accounts, instead combining them into one account managed by an investment professional. Financial advisors can look across a portfolio of stocks, bonds, and mutual funds, for example, to make informed rebalancing and risk management recommendations.

Bryce compares unified managed accounts to a well-tossed salad.

“I'm a lover of Greek salads,” he explains. “The other option is to portion out a side of cucumbers, a side of tomatoes, a side of onions, olives, and spices. Greek salads put it all together in an efficient way for me to eat my vegetables.”

In the same way, he says, UMAs allow investors to consume what they want in a very efficient fashion. Investors can find a custom mix that bakes in their preferences.

Unified managed accounts can hold different types of investment vehicles in the same account, including:

• Separately managed accounts.
• Mutual funds.
• Exchange-traded funds.
• Stocks.
• Bonds.
• Options.
• Commodities.
• Private market investments.
• Real estate.

Separately managed accounts are similar to UMAs in that they offer an integrated portfolio view for tax management and portfolio rebalancing. SMAs allow investors to directly own equities or bonds, instead of a share of a pooled fund, but often don't include different types of investments with different goals like UMAs do. 

Investors might need multiple SMAs to target different investment objectives, while a UMA can hold investment vehicles with varying objectives in one account.

Katie thinks of UMAs as a “natural evolution” of Dimensional’s long-time focus on tax management. The firm has 20 years of expertise in running tax-managed accounts, refining its approach to trade-offs between asset allocation, premiums, costs, and tax-aware portfolio launches.

“More and more, advisors are going from investment advisors to full wealth management providers,” Bryce says. “Taxes are an incredibly important part of that for taxable investors.”

The UMA structure supports client choices around preferences like:

• ESG interests. Investors can choose to exclude sectors that go against their environmental or social values.
• Employee stock options. If they have amassed stock options through incentives, employees could exclude additional stock to avoid overconcentration.
• Tax preferences. Advisors can choose their approach from a spectrum of options, based on an investor’s tax sensitivity.
• Legacy positions. Advisors can help clients move portfolio assets to Dimensional while being aware of their tax and investment goals.

Dimensional clients sometimes request direct indexing, a subset of separate accounts. The approach aims to replicate index performance with as little tracking error as possible.

Katie and Bryce say that direct indexing can lead to tax inefficiencies and hidden costs.

For example, if the Russell US Indexes remove securities from its list, which it reconstitutes each June, direct-indexed SMAs have to sell off those securities in one day. Recent Dimensional research found that index additions tend to rise in price ahead of when an index fund would want to buy, and deletions fall in price before an index fund would want to sell, while both show reversals after index reconstitution.

“We’ve never thought that’s a great way to approach someone’s investment solution,” Bryce says. “Not being so handcuffed to the index itself affords us an opportunity to design and implement a portfolio with an elevated experience.”

Through the Dimensional portal, advisors can configure investment specifications for a client account. Dimensional evaluates accounts daily for meaningful opportunities to manage cash, rebalance, and improve tax efficiency.

Internal systems consume that information and link it to the tax lots in the accounts to generate trades—“over 10,000 trades on average a day,” Katie says. Then Dimensional delivers reporting on the overall portfolio to clients. They can continue to improve the system based on user feedback.

With its revamped technology, Dimensional could scale its strategy to accounts with a lower minimum. In the past, UMAs were only available to high-net-worth investors with minimum accounts of $20 million or more. Dimensional’s current SMAs and the new UMA are open to investors with minimum account sizes of $500,000.

“By having our own technology, we can be more nimble and operationally efficient as we deliver tax management across all those levels,” Katie says. 

The new UMA platform aims to add value over index-based approaches with the right amount of personalization. But challenges crop up when adjustments move a portfolio too far away from its original objective. Too many individual tweaks could threaten to undermine intentional allocations for risk premia and diversification.

That means firms need guardrails to guide investors into the right portfolios for their goals.

“The level of personalization built into our system doesn’t mean we have a solution for every person all the time,” says Bryce. “We have a way that we think works to approach markets.”