Model Portfolio & SMA Strategists Showcase - Flipbook - Page 19
SMAs & MODEL PORTFOLIOS
numbers, which a later chapter will
argue deserve real skepticism (p. 29),
a few practical questions determine
whether a marketplace model is a
good fit. How often does it rebalance,
and how is that communicated? Some
models rebalance on a fixed calendar.
Others rebalance opportunistically
based on the manager’s tactical views.
The latter requires more attentive
implementation.
What’s the actual proprietaryfund concentration? A model built
predominantly from a single provider’s
own funds isn’t inherently worse than
one with more open architecture, but it
does concentrate manager risk in a way
worth understanding and disclosing.
Does it offer tax-loss harvesting
or replacement-fund guidance, or
is it strictly buy-and-hold? Many
marketplace models are designed for
buy-and-hold investors and provide no
active guidance between rebalancing
dates. That’s fine for a passive core
holding and a real gap for anything
meant to serve a tax-sensitive client.
Can it be modified? As noted earlier
(p. 10), custom model assets have
grown faster than off-the-shelf assets
recently, precisely because advisors
increasingly want a starting point
they can adjust rather than a finished
product they have to accept wholesale.
Model marketplaces solve a real
problem. They collapse what used to
be weeks of manager research into
an afternoon of screening. They don’t
solve the ongoing implementation
discipline that determines whether a
client’s account actually tracks what
they think it’s tracking. That discipline
either happens inside the advisor’s
own practice or it needs to be explicitly
delegated to a TAMP capable of
automating it, which is exactly the
segue into overlay management,
covered next.
Overlay Management
M
odel-only delivery has an
implementation gap: the
risk that a published signal
never actually reaches the account.
Overlay management is the industry’s
answer to closing it. This chapter
covers what an overlay actually does,
the meaningful difference between an
overlay tool and an overlay manager,
and where the real value (and real cost)
sits in that distinction.
WHAT “OVERLAY” MEANS IN
PRACTICE
An overlay is the layer of software
or discretionary management that
sits between a model’s published
allocation and a client’s actual account,
translating strategic decisions into taxefficient, coordinated execution. Rather
than trading each sleeve or model
in isolation, an overlay looks at the
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whole account, sometimes the whole
household, and makes execution
decisions that account for tax lots,
wash-sale rules, cash needs, and
multiple overlapping strategies at once.
This is the mechanism that makes
UMAs actually work as consolidated
accounts rather than just consolidated
statements. Without an overlay, a UMA
holding three sleeves is really just three
separately managed pools of money
that happen to share a custodial
wrapper. With an overlay, those three
sleeves can be rebalanced together,
harvest losses against each other, and
avoid redundant trades that would
otherwise trigger unnecessary tax
events.
