At least in theory, Wall Street brokers try to create solutions that make investing easier for ordinary people. In practice, though, what starts out as a seemingly good idea for beginning investors turns out to be an expensive lesson in why you're better off taking control of your own money.
A short history of big brokers
For decades, brokerage firms have made money at investors' expense. Before the revolution that discount brokerage pioneer Charles Schwab
Now, it's easy to buy and sell stocks cheaply. The proliferation of discount brokers has made negligible stock commissions commonplace. At several brokers -- including not only popular discount brokers Schwab, Fidelity, Vanguard, and TD AMERITRADE
So how are higher-cost brokers trying to protect their profits? One recent innovation called the unified management account aims to bring unique coordination of various types of investments under a single umbrella, making them easier to manage and even bringing some additional benefits that typical brokerage accounts don't offer.
The one-stop shop
Oddly enough, UMAs were developed in part to solve a problem that Wall Street itself had created. As competition from discount brokers made it difficult for full-service brokers to charge big commissions, they instead moved more to a compensation model based on assets under management. Just as a mutual fund charges an annual expense ratio based on a certain percentage of the value of your fund investment, so too did full-service brokers tack on a percentage-based fee for managing your assets. But the resulting scattering of different types of accounts made it hard to keep track of everything.
UMAs seek to change that by bringing mutual funds, ETFs, and individual stocks and bonds under one roof. Most of the programs include separately managed accounts, with money managers choosing individual securities for client accounts. Designed for investors with substantial assets of $500,000 or more, the programs have brought in tens of billions of dollars at Morgan Stanley's
In fact, the system works so well that off-Wall Street financial managers have gotten in on the action. Well-regarded manager TIAA-CREF as well as discount broker E*TRADE Financial
Is it worth it?
The stakes are high for the brokerage companies that offer UMAs. E*TRADE, for instance, charges an advisory fee ranging from 1.25% for assets of $1 million or less to 0.95% for accounts with more than $5 million under management. And that charge is on top of any fees charged by investments that the UMA manager chooses, such as the expenses of ETFs and mutual funds.
In exchange, investors are supposed to get more than just convenience. By keeping track of all the different components of your overall portfolio, your manager should be able to do some innovative things, such as managing your investments to take advantage of tax opportunities where having less integrated holdings would make it impossible. In practice, though, it's unclear to what extent an UMA translates into real tax savings.
What you're paying for
The ultimate question remains whether the fees you pay to participate in an UMA program lead to improved performance that translates into higher returns. As the newest phase in the evolution from actively managed mutual funds to "wrap accounts," UMAs face the same uphill battle versus passive index funds: They have to dig themselves out of their fee-created return hole before the first penny can go into investors' pockets. Convenience is worth something, but until these programs prove themselves, you should wait and see before committing your money.
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Fool contributor Dan Caplinger likes to keep money in his own pocket. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of JPMorgan Chase, Bank of America, and Interactive Brokers, and has also opened a short position on Bank of America in a separate account. Motley Fool newsletter services have recommended buying shares of Charles Schwab and Interactive Brokers. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy won't shortchange you.