BID and tailoring of MAs with scale and efficiency
There are many reasons for an increased interest and take up in managed accounts - but perhaps one of the most compelling is, when properly constructed, they provide efficiency and segregation of the investment process and the personal advice provided to clients. Whether it is through an internal investment committee, research houses, asset consultants or even through outsourced investment management, it allows advisers more time for relationships and strategy, whilst clients are getting access to specialist investment management expertise.
Despite this, there is still a perception in some quarters that managed accounts are too 'cookie cutter' in approach, and don't adequately meet the specific investment needs of clients or market conditions.
This perceived lack of personalisation has seen some advisers shy away from SMAs, as they feel they cannot adequately tailor a managed accounts to their clients individual needs.
But with the right fintech innovation, this issue can be addressed. There are solutions that provide portfolio construction tools for advisers that allow for the efficient use of models, while also allow for the tailoring of client specific needs and ethical considerations, as well as providing tools for the tailored implementation and execution alpha.
There are three main areas of tailoring: upfront on portfolio construction, tailoring within the rebalance process and finally in the execution of the portfolio changes.
For portfolio construction, with the right managed account technology, the advisers and portfolio managers can engage in tailoring by:
- setting minimum Parcel Size to minimise erosion of performance for small trades and brokerage and reduce the "noise for accountants"
- setting default securities for the sum of these smaller parcels to be traded into thus keeping the clients fully invested
- applying the 45 or 365 day rule for parcel sale override
- blending models / securities and models - and finding the blend that's right for clients
- setting securities to not buy or holdings not to sell for ethical, directorships or tax reasons
- setting security and asset class tolerances for materiality alerts ie: to rebalance only when this tolerance is met
For portfolio implementation the above tailoring makes it possible to bulk rebalance knowing that each client's preferences are already in place.
Another area of tailoring occurs at the time of investing the client portfolios, and some managed account providers also allow for best interest basis of not rebalancing the clients. This is not the case with SMAs but more likely to occur with MDAs. The form in takes depends on the circumstances, but, for instance, it could be a case of additional funds about to be deposited by the client and the adviser choosing to wait a day before investing the funds.
Some technology providers can also give advisers the additional flexibility to adjust what is implemented, based upon current market conditions or to meet the specific investment needs of their clients, as required under the Best Interests Duty.
In these cases the technology allows advisers to edit proposed rebalance trades (at dollar amounts, units or percentage of portfolio), remove or trade only specific asset classes, or trade only specific models. This results in dynamic portfolio asset allocation calculations and the resultant portfolio being available for the adviser to view, prior to committing the trades to the market
The final step is in the execution alpha. This is achieved by intra day trade execution, use of limit orders and technology that allows the client level netting of assets when held by multiple models to be bought and sold, minimising capital gains tax and transaction costs .
Tailoring with scale is an area however, where not all technology is the same, and definitely the case where not all technology is equal. Many of the opportunities to tailor portfolios in portfolio construction, rebalancing and execution, are not default options with every technology solution. It is important for advisers to seek out the best technology to ensure they best meet their client's individual needs whilst also getting the efficiency benefits.