Model Portfolio & SMA Strategists Showcase - Flipbook - Page 20
SMAs & MODEL PORTFOLIOS
TOOLS VERSUS MANAGERS: A
DISTINCTION WORTH TAKING
SERIOUSLY
The industry uses “overlay” to describe
two meaningfully different things, and
conflating them leads to real duediligence mistakes.
Overlay tools are software designed
to ensure tax and trading efficiency,
integrated with the managed-account
platform. The asset managers whose
models feed into the account retain
operational control over their own
sleeves. The overlay tool’s role is
limited to account-level allocation, cash
management, and reconciliation. This
is a lighter-touch approach. Managers
keep their intellectual property intact
and their trading autonomy largely
undisturbed, while the client still
benefits from some account-level
coordination.
Overlay managers, by contrast, deliver
a full discretionary advisory service.
Rather than just coordinating trades
that individual managers hand off,
an overlay manager can take on
execution authority across the entire
account, using a single overlay tool or
process to assume discretion for all a
client’s holdings. This produces more
complete tax optimization and portfolio
customization, but at a higher cost,
and with reduced day-to-day control
for the underlying asset managers,
some of whom are genuinely reluctant
to cede that control, wary of losing
intellectual property or influence over
how their own strategy gets expressed
inside a client’s account.
A concrete, named example of
overlay management at this scale
is Parametric Portfolio Associates,
which runs a business built specifically
Overlay Tool vs. Overlay Manager × Passive vs. Active
OVERLAY MANAGER
OVERLAY TOOL
PASSIVE OVERLAY
Managers retain sleeve
control; tool coordinates
account-level allocation and
reconciliation only
Full discretionary service;
overlay manager can take
execution authority across
the whole account
ACTIVE OVERLAY
Tool ensures tax/trading
efficiency while managers
keep operational control of
their own sleeves
Managers send model signals;
centralized overlay manager
executes at account level
with full discretion—best tax
optimization
20
WATCH OUT FOR
“We offer overlay”
means almost nothing
Nearly every platform will say yes to this
question. The real question is whether
that overlay is a tool coordinating
account-level allocation or a manager
taking on genuine discretionary authority
across the whole portfolio. Those are
different services at different price points
wearing the same label.
around this model. An advisor selects
several third-party asset managers for
different asset classes, each manager
feeds their model updates directly to
Parametric rather than trading a client
account themselves, and Parametric
aggregates all of it into a single
centralized account, coordinating
rebalancing, tax-lot management, and
risk control across every underlying
manager’s contribution at once. The
advisor retains the manager-selection
decision, and Parametric retains
execution and tax optimization.
This is worth understanding as a real,
decades-old commercial service rather
than a theoretical structure, precisely
because it illustrates how much
coordination genuinely is possible once
a client’s various strategies are routed
through a single overlay relationship
instead of each being traded
independently.
PASSIVE VERSUS ACTIVE
OVERLAY
A separate but related distinction
concerns how much discretion the
overlay actually holds. In a passive
overlay, the manager retains full
operational control over their sleeve,
and the overlay’s role is limited
to account-level allocation and
reconciliation, closer to the “overlay
tool” model above. In an active
overlay, the manager sends model-
