Selecting professional investment managers according to client needs frees advisors to focus on areas to which they can add the most value to clients.zhuweiyi49/iStockPhoto / Getty Images
Investors are increasingly looking beyond investment performance and seeking advice tailored to their goals, values and life circumstances. For advisors, that means delivering more comprehensive support across a broader range of client needs.
The good news is advisors don’t need to shoulder every part of the client relationship alone. By leveraging separately managed accounts (SMAs) and unified managed accounts (UMAs), they can delegate security selection while still managing the overall asset mix and portfolio management.
Selecting professional investment managers according to client needs frees advisors to focus on areas where they can add the most value to clients, such as holistic wealth planning, tax efficiency, and advice tailored to a client’s long-term goals.
What are SMAs and UMAs?
An SMA is a professionally managed investment account in which the client owns individual securities directly. Each SMA is managed by a third-party investment manager hired by the advisor for their specific expertise, such as Canadian equities or global growth equities. The manager operates within a clearly defined mandate and makes buy-and-sell decisions based on their investment processes.
In comparison, a UMA consolidates multiple SMA strategies into a single account. Rather than opening separate accounts for each asset class or mandate, clients can access a multi-manager portfolio under one umbrella. That simplifies reporting, centralizes portfolio rebalancing decisions, and improves co-ordination across investment strategies.
Managed accounts offer more transparency than mutual funds and exchange-traded funds (ETFs). Clients can see exactly what they own, providing a tangible asset to rely on in volatile markets. That transparency also enables advisors to monitor manager activity, identify style drift and make timely adjustments. In mutual funds and ETFs, clients hold units in a pooled vehicle, which provides no visibility into real-time holdings or direct ownership of the underlying assets.
Because clients own the securities in SMAs and UMAs, capital gains and losses are realized for each security rather than being shared across a pool, as is the case with mutual funds and ETFs. Advisors can monitor realized and unrealized gains, conduct tax-loss harvesting more effectively, and align asset allocation with different account types for greater tax efficiency.
Clients can also exclude specific companies or sectors based on personal preferences or ethical considerations, allowing for a tailored investment approach that aligns with their values.
One of the most significant benefits of managed accounts is that they enable advisors to step away from the time-consuming task of selecting individual securities across multiple asset classes and countries.
Investing has become highly commoditized. The proliferation of analytical tools and model portfolios has levelled the playing field, leaving little room for individual advisors to add value through security selection. What differentiates an advisor is no longer investment selection, but the ability to provide personalized advice that helps clients navigate life’s challenges and achieve their long-term financial goals.
Selecting the right manager
Manager selection is a critical part of implementing managed accounts for clients. While third-party providers offer a short list of approved managers screened for track record, the quality of the management team and pricing, advisors should conduct their own due diligence by focusing on these key factors:
- People: Stability in leadership and key personnel is essential. Advisors should confirm that the individuals responsible for historical performance are still managing the portfolio.
- Process: A clear and repeatable investment process must be in place. Advisors should understand how securities are selected, how risk is managed and how decisions are made.
- Performance: While strong historical returns are important, advisors should avoid chasing “star managers.” Consistent second-quartile performers tend to provide more stable results over time.
- Mandate discipline: Managers must adhere to their stated investment style, such as value or growth. Style drift undermines diversification, making portfolio construction less reliable.
- Portfolio fit: Advisors should assess correlations between managers and avoid combining highly correlated strategies in a client’s portfolio to maximize the benefits of diversification.
Advisors should engage directly with managers by visiting their offices, understanding their investment processes, and reviewing their investment decisions regularly to ensure accountability and proper stewardship.
Adopting a new approach is never easy, especially for advisors who have spent years building their practice around security selection. For those looking to move away from investment management, a practical first step is to implement managed accounts in areas that demand more time and specialization, such as global equities.
Using SMAs and UMAs to construct portfolios tailored to client needs will enable advisors to deliver the value-added services clients expect.
Susan O’Brien is a senior wealth advisor with the Susan O’Brien Wealth Advisory Group at Richardson Wealth Ltd. in Calgary.