Transitioning from model portfolios to an SMA

Over the past few years, we have seen a material increase in the interest and take up of managed accounts, such as separately managed accounts (SMAs), by dealer groups and financial advisers.

There are a variety of ways in which financial advisers and dealer groups are implementing SMAs, whether by outsourcing their portfolio solution to a professional external SMA portfolio provider, or establishing their own SMAs under their own brand where they are the model manager.

There are a host of things financial advice firms need to consider when partnering with an external SMA model manager or operating the portfolio internally. Many practices I speak to have opted for what is known as a non-implemented approach, whereby they reference notional portfolios that may be developed by themselves or sourced from an external model portfolio provider, such as an investment consultant.

Under this structure, the financial adviser implements portfolio changes, such as switches and portfolio rebalancing, and issues a record of advice (ROA) to relevant clients.

The decision to go down the path of an SMA is often driven by the desire to make financial advice more efficient and scalable, and SMAs are an effective way of streamlining the portfolio implementation process across a client base and removing ROAs from the process.


Lukasz de Pourbaix
Chief Investment Officer
onsec Investment Solutions

Whether outsourcing to an external SMA provider or operating an SMA internally, there are some key elements that need to be considered when transitioning to an SMA structure from a notional model approach.

Under an SMA structure, the level of external oversight governing the portfolios is generally more comprehensive, compared to operating a ‘paper’ model portfolio. SMA portfolios are issued by a platform with oversight of the investments by a responsible entity (RE), which may be the platform provider, an externally appointed RE or, in the case of superannuation, a trustee.

To satisfy the RE or trustee, the model manager needs to demonstrate that they have the relevant policies, processes, resources, governance structures and operational framework to operate the SMA portfolio.

The process will vary from platform to platform, however, as part of the initial due diligence process, the model manager will typically be required to provide extensive documentation covering areas such as policies relating to conflicts of interest management, documentation of the investment process, investment team experience, investment committee charters, and an outline of the operational framework governing the SMA portfolios (this will cover things such as separation of performance reporting functions and model management, as well as portfolio trade implementation).

In addition to documentation, the platform may also conduct a face-to-face model manager review meeting, which is akin to a research process, and covers things such as team, investment philosophy and process, risk management, portfolio construction, and performance. There are also ongoing reporting requirements by the platforms which form part of their ongoing oversight process.

Having a documented investment process is critical to operating any portfolio, be it a model portfolio, an SMA or a managed fund. As outlined above, SMA model managers need to be able to clearly articulate their investment process on paper, as well as providing evidence of adhering to and executing the process as part of the platform due diligence process.

The investment philosophy is the core of any investment process, as it encapsulates the fundamental investment beliefs of the model manager, which ultimately drive the investment process, including asset allocation, investment selection and portfolio construction.

For example, a model manager may believe that a passive approach is optimal because they believe that markets are generally efficient or conversely, that they believe in active management because they believe markets or individual securities may be mispriced by the market at certain points in the cycle.

Irrespective of the approach, the investment philosophy needs to be clear and consistently applied at every stage through to portfolio implementation.

The investment philosophy should also feature in the investment committee charter, which is the document that outlines how the investment committee functions. The investment committee forms the core of the investment governance framework supporting an SMA portfolio program.

There is no one-size-fits-all approach to constructing an investment committee. In our experience, investment committees operate well when they are well chaired, run to a clear agenda, made up of experienced individuals with complementary skill sets, underpinned by a clear investment philosophy and process, and include members from outside the organisation.

Once again, having a clear philosophy and process is important as it provides focus to the investment committee and sets out a clear framework within which committee members can make their investment recommendations.

The ideal number of committee members will vary from organisation to organisation. Ultimately, it is about ensuring that the committee is effective in its decision-making and that each member is contributing. It is also good practice to review the composition of the investment committee on an ongoing basis to ensure it remains effective.

The decision whether to operate an SMA in-house or outsource the model management to an external provider will fundamentally be driven by what an advisory business’ value proposition is to their clients and what their core competencies are.

For financial planning practices conducting their own due diligence on an SMA model manager, the criteria outlined above will provide a solid guide. However, a good starting point is to determine whether there is an alignment in investment philosophy between the model manager and the financial advice practice, as the investment process and ultimate portfolio outcomes will be driven by the investment philosophy.

For advice groups looking to go down the path of managing their own SMA, conducting a gap analysis of your internal capabilities and resources is also a good starting point.

Lukasz de Pourbaix is the Chief Investment Officer at Lonsec Investment Solutions.

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