Model Portfolio & SMA Strategists Showcase - Flipbook - Page 28
SMAs & MODEL PORTFOLIOS
in this guide (p. 34), active tax-loss
harvesting applied to the fixed-income
side of a client’s portfolio rather than
treating munis as a buy-and-hold-only
allocation.
Due diligence for a fixed-income
SMA manager should ask a related
but distinct set of questions from
the equity due-diligence framework
covered earlier (p. 22). What is the
manager’s institutional trading access
and execution quality in a market that
trades over-the-counter rather than on
an exchange? This affects the actual
prices a client’s bonds get bought
and sold at far more than it does for
equities. What is the credit research
process, and does the firm rely on
rating agencies alone or maintain
independent credit analysis?
And how does the manager handle a
client’s existing bond portfolio during
onboarding, given that municipal
bonds are considerably less liquid
than equities and a poorly managed
transition can be costly? None of
this changes the core due-diligence
framework. It’s the same people/
process/parent/fees discipline, applied
to a market with different mechanics.
RISK-ON/RISK-OFF OVERLAYS
AND HYBRID APPROACHES
Some tactical strategies operate
through explicit overlay triggers layered
on top of an otherwise standard
allocation, reducing equity exposure
when downside momentum indicators
fire, and increasing it when upside
momentum suggests a recovering
market. These triggers are sometimes
proprietary to a single RIA or TAMP
rather than the underlying asset
manager, meaning the same base
model can behave differently depending
on which platform is running the overlay
logic on top of it. This is worth surfacing
explicitly during due diligence.
Two advisors using the “same”
model from the same provider, but
through different TAMPs with different
tactical overlays, may be delivering
meaningfully different actual client
experiences.
OPTIONS-INCOME OVERLAYS
A separate strategy category, growing
in relevance as advisors serve more
income-focused and retiring clients, is
equity strategies that layer an options
overlay, most commonly covered calls,
on top of a stock portfolio specifically
to generate current income, at the cost
of capping some upside participation.
The mechanics are straightforward. A
manager holds a portfolio of dividendpaying or otherwise income-oriented
equities and systematically sells call
options against some or all of the
position, collecting option premium as
additional income on top of dividends.
The trade-off is equally straightforward.
If the underlying stock rallies past the
option’s strike price, the manager’s
upside is capped at that level, since the
option buyer can call the shares away.
This is a deliberate, disclosed trade-off
rather than a hidden cost, but it means
an options-income strategy needs to
be evaluated against an income-andstability objective, not a pure totalreturn objective, or its comparative
performance will look mediocre for
reasons that have nothing to do with
manager skill.
This category has been growing in
visibility recently as the same optionsincome logic that built dividend-value
SMA strategies over decades gets
packaged into ETF wrappers as well,
meaning advisors increasingly have a
choice between an SMA version (with
individual security ownership and the
tax-management benefits that come
with it) and an ETF version (with lower
minimums and less customization) of
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essentially the same strategy concept
from the same manager. That choice
runs through the same SMA-versusfund ownership framework laid out
earlier (p. 7).
A related but distinct category worth a
brief mention is volatility risk premium
strategies, which sell options (puts,
calls, or both) as a stand-alone source
of return rather than as an overlay on
an existing equity position. Where an
options-income overlay is an equity
strategy with an income enhancement,
a volatility risk premium strategy is built
around option-selling as the primary
return driver, systematically collecting
premium for taking on defined,
managed risk.
Some large SMA providers run this
as its own dedicated asset class
alongside their equity and fixed-income
offerings, and it’s worth advisors
knowing the category exists and
roughly how it differs from optionsincome overlays, even without going
deep on the mechanics here.
ESG AND VALUES-BASED
OVERLAYS
A separate customization axis, distinct
from tax management but frequently
paired with it in practice, deserves its
own mention rather than the passing
reference it’s gotten so far in this guide:
ESG and values-based overlays,
available on many SMA and directindexed platforms alongside the taxmanagement overlay discussed later in
this guide (p. 31). Several major SMA
providers explicitly market tax overlay
and ESG overlay as a paired offering,
reflecting how often the two get
requested together by the same client.
The mechanics mirror the exclusionbased customization already
discussed. A client can screen out
specific sectors, companies, or
business practices, or tilt a portfolio
