Beyond the Style Box: SMAs and Model Portfolios

This is a summary of a panel discussion from the MMI 2013 Spring Convention held in NYC on April 22-24.

Moderator: Mark Thomas, SVP, Head of Managed Accounts, PIMCO


How have advisor solutions changed over the past few years?

There’s been an overall shift from advisors being individual product practitioners to the Rep as PM (RPM) model, Tipper stated.  This is primarily due to RPM being better at addressing client demands for more flexibility.  As a result of the Financial Crisis, clients now want absolute return on their portfolios, but advisors would serve them better if they focused on providing customized advice solutions and RPM facilitates this, he recommended.

According to Gaskin, advisors have been migrating away from comparing performance of their client’s accounts against a benchmark, to having more  solutions-based conversations.  To support this, he explained, J. P. Morgan manages money in three ways:

  1. Blended benchmark-based portfolios: where they are trying to achieve a similar return with less risk, or a greater return with equal risk;
  2. Risk-based portfolios: which match a given level of risk that the client is comfortable with;
  3. Outcome-based portfolios: which has been generating the most client interest recently, where they’re trying to solve for challenging problems such as finding income, which is difficult in the current low interest rate environment.

What are the structural implications of a flexible, multi-strategy portfolio?Blast out of the box

Before coming to J.P. Morgan, Gaskin ran large cap value assets for institutions for over 20 years, and he used to believe that there were structural advantages to both the open architecture and proprietary model.

Gaskin now prefers the bank’s proprietary model, where they only offer internal strategies, since it allows them to know the list of managers very well.  They diversify through manager selection and target adding 50-100 basis points in return through GTAA (Global Tactical Asset Allocation), he said.

What is the role that SEI plays with their clients?

SEI acts like a traditional sponsor and provides solutions for advisors, Bono explained.  They offer multi-manager, multi-asset class portfolios and also provide advice.  They give advisors have a choice as to how to deploy active strategies, he noted.

When UMAs started to evolve in the early 2000’s, Bono described, they not only provided the power to combine multiple vehicles, but also leveraged model delivery to offer lower minimums and squeeze investment manager fees.  SEI has spent millions to tie their UMA offerings into their custody platform and provide UMH features to pull in outside accounts.  Their system also offers asset location in order to maximize after-tax returns, he said.  (Related article: Unified Managed Households: The Holy Grail of Wealth Management?)

How have the opinions of advisors changed regarding investment vehicles?

According to Tipper, financial advisors are becoming more vehicle agnostic as their platforms are offering them more investment choices.  He is seeing convergence across vehicles now that SMAs can also include funds and ETFs that advisors are using to create non-style box solutions, he observed.  (Related article: Asset Allocation: Is Modern Portfolio Theory Dead?)

Advisors are at the point where they want to deliver actionable solutions, but SMAs are too restrictive, Bono argued.  The market has gravitated towards using multiple vehicles to provide exposure to less liquid asset classes.  It’s difficult to deliver emerging market debt or inflation-oriented strategies using only SMAs.  Instead, advisors have been utilizing ETFs and mutual funds where they make sense, he explained.

In the international space, there has been evidence of dispersion between mutual funds and SMAs, Tipper noted.  To avoid this, SEI has delivered foreign ordinaries through a separate account, which helps their strategies compete against 40 Act funds, he said.

Advisors using RPM have evolved from using mainly individual securities and have embraced multiple vehicles across more of their client portfolios, Bono asserted.  Advisors have been shifting assets into pooled investments since the crisis.  According to Cerrulli, in 2008, 75% of RPM holdings were individual equities or fixed income securities.  However, by 2012, this had fallen to just 50% with the rest going into funds and ETFs, Bono pointed out.

What tools do you provide to advisors for portfolio construction?

Gaskin believes that the keys to successful portfolio construction is simplicity, messaging and support.  For example, JP Morgan favors holding individual securities and avoiding derivatives.  They offer web casts as well as face-to-face meetings for advisors and they value the personal touch.  They also offer significant peripheral support, such as white papers and research to help advisors understand what the firm is thinking.  They don’t want to push information out to the field, but prefer a service strategy that facilitates advisors pulling information when they need it, he insisted.

How should managers communicate with you to get the best results?

SEI has robust systems to monitor their exposures to different managers, gives them a feel for the manager’s process and style, they have tools to monitor outcomes, which eliminates the need for constant communication.  managers should provide thought leadership, help SEI understand where you see markets going, asset allocation going, etc.  Traditional style box, most clients don’t hand over 100% of their assets.

Managers have to be able to differentiate themselves from the crowd, Bono declared.  Every investment manager’s pitch winds up sounding essentially the same. Whether you are a value manager, a momentum manager, a stability manager or something else, those are just behavioral sources of alpha that can be replicated fairly easily, Bono noted.  When meeting with a sponsor’s due diligence team, a manager needs to explain why they’re better than the rest of their peer group Managers must find ways to express themselves that highlight their unique skills, he said.  (Related article: How Can Managers Find the Keys into Sponsor Platforms?)

Tipper suggested that managers should change their mindset away from simply gaining more shelf space to finding where they can add value to each sponsor’s platform.  Bringing fresh ideas and getting their salesforce behind them will greatly improve their chances of increasing their distribution, he commented.

Will SMAs eventually disappear?

SMAs have changed to become more vehicle-agnostic, Thomas observed, although there will always be some demand for the traditional style box.

The days of having a single program as the way to access an SMA account is going away, Tipper announced.  He sees clients shunning siloed solutions and thinking more about how to partner with their advisors.  Standalone SMA platforms are a thing of the past, he ventured.

What products or services are you offering now that are popular with advisors?

After soliciting feedback from advisors, they said that paperwork is their biggest headache, Tipper mentioned.  So, Merrill decided to collapse multiple product silos and allow advisors to deliver any product from RPM, to SMA to UMA with multiple investment vehicles in a single advisory contract, he said.

PIMCO’s best selling product is a fund of funds, called the All Asset Fund, with over $34 billion in assets, Thomas pointed out.  The fund’s strategy is to “move quickly in and out of other PIMCO funds” and the fund is made up of over 30 underlying PIMCO funds, he stated.

Where do asset allocation fees fit in?

Gaskin believes that we have reached equilibrium on advisory fees, meaning that they won’t go down, but they also can’t go up much further, either.  To improve their margins, advisors should focus more attention on their most profitable clients and don’t be afraid to drop clients that are solely focused on fees.  Providing comprehensive solutions that meet multiple client needs and improve the connection to the advisor have the best chance of succeeding, he asserted.

Related WM Today Content
A Sneak Peak at Envestnet’s Upgraded iPad App
Why Haven’t Advisors Embraced Unified Managed Accounts?
Which Portfolio Rebalancing Software is Right for You?



The Wealth Tech Today blog is published by Craig Iskowitz, founder and CEO of Ezra Group, a boutique consulting firm that caters to banks, broker-dealers, RIA’s, asset managers and the leading vendors in the surrounding #fintech space. He can be reached at