Model Portfolio & SMA Strategists Showcase - Flipbook - Page 24
SMAs & MODEL PORTFOLIOS
limit, and how much room remains
against it? A high-conviction, lowturnover book of 30 to 40 names has
a real ceiling on how much money
it can absorb before continued
inflows themselves become a
performance headwind, a very different
consideration than an index-replicating
model, which can generally scale
without affecting execution. The
Appendix A questionnaire includes
this factor as a standing line item for
exactly this reason.
PARENT: WHO ACTUALLY OWNS
THIS FIRM
The parent question asks what sits
above the investment team: ownership
structure, business model, and
whatever incentives that structure
creates, intentionally or not.
Three distinct ownership models show
up regularly among SMA and model
providers, and each carries its own
version of this question. An employeeowned, independent boutique tends
to align incentives well, since the
people managing money also own the
firm, but raises legitimate succession
questions as founders age toward
retirement. What happens to equity
ownership and firm leadership when
the founding generation exits matters
as much as what happens to portfolio
management.
A bank- or trust-company-affiliated
manager offers institutional stability
and, often, superior fixed-income
trading access through the parent’s
balance sheet and custodial
relationships. But it’s worth asking
directly whether the manager is
incentivized or required to steer
clients toward proprietary products
or in-house custody as a condition
of access. And a manager owned
by or affiliated with its own research
or data firm can offer genuinely
differentiated proprietary insight, but
concentrates business risk in a single
family or ownership group across both
the research arm and the moneymanagement arm.
That’s a different kind of concentration
than the key-person risk discussed
above, though the two often travel
together at smaller firms.
None of these three structures is
superior to the others as a category.
Each raises a specific, answerable
question that belongs in the duediligence file. For an employee-owned
boutique, what does succession
actually look like? For a bank-affiliated
manager, what’s the proprietaryproduct incentive structure? For a
research-affiliated manager, what’s
the ownership concentration across
the parent and the advisory arm? A
provider that answers these specifically
has done the work. One that answers
only with “our clients come first” hasn’t.
There’s a fourth version of this question
worth checking specifically before
assuming the answer: Who actually
built the model? Some of the largest
institutional model-portfolio operations
don’t just run strategies under their
own name. They build and manage
white-labeled models on behalf of
other, better-known brands, which then
market those models as their own.
An advisor evaluating “[Recognizable
Brand]’s model portfolio” may, without
realizing it, actually be doing due
diligence on a completely different firm
that built and continues to manage the
strategy behind the scenes. This isn’t a
red flag by itself.
The firms that specialize in this whitelabel model-building business are
often highly experienced institutional
managers precisely because building
models at scale for other brands is
their core competency. But it means
the People, Process, and Fees legs
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of due diligence need to be applied
to whoever’s actually doing the
investment work, not just whoever’s
logo is on the fact sheet. A simple,
direct question resolves this every
time: who designed this model, and
who is actually responsible for its
ongoing management and rebalancing
decisions?
FEES: THE LEG THAT’S EASIEST
TO CHECK AND MOST OFTEN
SKIPPED
Total cost isn’t just the advertised
model or SMA fee. It’s that fee, plus
the expense ratios of any underlying
proprietary funds, plus whatever
platform fee a TAMP layers on top
(p. 14), plus, for a UMA, whatever
overlay management is charging for
account-level coordination. Advisors
who compare “model fee versus model
fee” without stacking the full cost
structure are routinely surprised by
what a client actually pays once every
layer is accounted for. The practice
checklist near the end of this guide
(p. 45) includes a worksheet for exactly
this stacking exercise.
The discipline to actually run it,
for every structure under serious
consideration, belongs here in the
due-diligence process, not as an
afterthought during client onboarding.
GIPS® COMPLIANCE: USEFUL,
BUT NARROWER THAN IT SOUNDS
Many providers advertise GIPS (Global
Investment Performance Standards)
compliance as a credibility marker, and
it’s a reasonable one. GIPS compliance
means a firm’s performance reporting
follows a standardized, independently
verifiable methodology rather than
cherry-picked or survivorship-biased
figures. But GIPS compliance is a
statement about how performance
is calculated and presented, not a
statement about whether the strategy
is good. A GIPS-compliant strategy
