By Patrick Keel
Read Time: 5 minutes
Separately Managed Accounts (SMAs) are portfolios of individual securities managed on your behalf by a professional asset management firm. These firms are usually third party providers and don’t control the entirety of a client’s portfolio, but rather a certain segment or asset class. SMAs differ from mutual funds in that each portfolio is unique to a single account, meaning if you set up a separate account with Money Manager XYZ, then Manager XYZ has the discretion to make decisions for this account that may be different from decisions made for other accounts. While these financial tools allow advisors a unique and efficient way to gain access to asset classes where specialized managers excel, they can be extremely difficult to include, manage, and trade around.
Fortunately, TradeWarrior has created a trading tool as part of their suite of services which gives users an innovative way to both include the SMA as part of a household, and rebalance/trade around the asset where advisors don’t typically have direct management authority.
By nature, SMAs are typically reserved for high net worth individuals (qualified investors) because initial investment minimums into these vehicles can be high. They are typically implemented to give these clients access to highly skilled managers that specialize in the security selection within particular asset classes. Advisors utilize these investments and third party providers because they may not have the time or resources to do the research necessary to potentially gain above average returns over the long term for their clients. Unfortunately, once an advisor decides to use SMAs for certain asset classes, they don’t have immediate control over the individual investments and, therefore, do not have a say in the trading and rebalancing of these vehicles. Because the advisors relinquish control of asset selection and because these types of investments usually contain a large amount of individual securities, the advisor does not necessarily need to or want to see each and every asset; their biggest concern is having the appropriate exposure within the segment or class so their clients are properly invested.
When investing in SMAs and including them in a client’s portfolio, an advisor is more concerned about the overall market value of these bundle of securities and not necessarily seeing each asset when making trading and rebalancing decisions. This is where TradeWarrior has achieved a true value component to their portfolio management software.
In order to allow the advisor to see what he or she wants to see, and not what they don’t, TradeWarrior has devised a tool that will actually compress all of the individual securities’ value and show the end user what they care about most; the market value of the SMA and not what it contains. By compressing the SMA account to a single line item, TradeWarrior eliminates the potential of seeing hundreds of securities the advisor does not need to see when making trading and rebalancing decisions for a client’s portfolio. With a single line market value, the advisor can now quickly see if a client is over or underweight in that particular segment or asset class and know if action needs to be taken to add or reduce exposure.
Another advantageous feature of the SMA tool created by TradeWarrior is the ability to use multiple segments or asset classes within a single separately managed account. While many SMA’s only cover one segment or market asset class, other more advanced managers utilize multiple segments or classes within a single managed account. An example of this would be a manager that uses Domestic Small Cap, Mid Cap, and Large Cap in a single managed account portfolio. Typically, this would be very difficult to break down into three separate components because most other trading tools would only stop at compressing the market value of the SMA. TradeWarrior goes a step further and actually allows the end user to designate, by percentage, how much of the compressed value can go into each segment or class.
The great advantage here is not only the flexibility to add multiple classes, but to also be able to adjust percentages on the fly as managers are making their investment selections. For example, if a manager decides to move assets from 33% to 50% Domestic Large Cap, all the advisor needs to do in make these adjustments in TradeWarrior, and they can continue allocating market value to the appropriate segment without a massive amount of manual manipulation.
The ability to both utilize and trade around separately managed accounts is crucial when managing large client portfolios. TradeWarrior believes their SMA tools accomplishes what advisors want and need; an easy way to quickly see exposure to SMA segments and classes and make appropriate trading and rebalancing decisions in real-time with little to no manual intervention.