One of the criticisms of separately managed accounts (SMAs) has been that their management is not truly separate—that is, that they aren't sufficiently customized to meet individual client needs.

Even with the technology available in recent years, the common knock on SMAs has been that they have never been quite able to live up to their promise of offering clients true flexibility.

These critics have maintained that SMAs have not enabled individual tax harvesting, trading efficiencies or true customization based on client needs and risk tolerances. Separate is, they have said, as separate does. This same criticism was first leveled at SMAs when they were introduced in the 1980s, and it continued into the 1990s, when detractors complained that claims of separate management of accounts holding only $100,000 were exaggerated and that true separateness could not be delivered for accounts of less than a few hundred thousand dollars.

Inferiority Complex

Then, as SMA software technology grew over time, more people embraced this investment vehicle. Still, SMAs were considered quite inferior to manual management.

Even though SMA technology has continued to evolve, criticism has persisted. Many of these perceived deficiencies were to be resolved by the advent of unified managed accounts (UMAs).

UMAs

The typical SMA is a single-strategy account, whereas a UMA may contain multiple strategies. The UMA is an evolution of the SMA; it is a single-registration account that includes multiple vehicles such as SMAs, ETFs and mutual funds.

Now, with the advances in managed account technology that have occurred over the past year, clients may benefit more from SMAs and/or UMAs, for the new technology makes both products far more flexible. The newfound flexibility allows advisors to offer the managed account vehicle that is more appropriate, depending on the client's needs.

The investment strategy is determined in the consultation stage with the client. Advisors are now able to fulfill requirements set down in these consultations not only with far more flexibility, but with greater transparency as well; advisors are able to review all trades with clients if they so desire.

Rules-based tax filtering—the process by which advisors and their clients establish trading rules and account conditions—is set up when an account is opened. These rules, set by clients, are the defining parameters of what an account can own, how it can trade and what the expected outcomes of any trade may be.

As they build their clients' asset allocations, advisors have the capability to apply the client's holistic allocation rules to the SMA or the UMA-meaning those regarding a client's entire financial picture or portfolio, not just a segment of it.

For the UMA, clients are able to apply various portfolio preferences to the account and subaccounts, and have them apply across each sleeve within the UMA. A sleeve is a portion of a UMA that is allocated to a specific vehicle (such as an SMA, ETF or mutual fund), or specific investment style (such as large cap, small cap or international).

Because of new software that refines rules-based trading, the process of customizing tax filters according to specific client criteria is no longer a tedious manual undertaking.

A Single Wish

Best of all, the new technology allows advisors and their clients to determine account parameters only once. Then, all subsequent trading activity in the SMA or UMA will be subjected to these criteria.

This is particularly beneficial for UMAs, although such account-level features are also available in SMAs. This technology allows managers to check for clients' individual wash-sale-rule criteria in SMAs and for the same at the sleeve level in UMAs.
For example, a client account can trade on percentage gains or losses, within a set time period relative to the account's market value, the dollar based on the value of a trade or the dollar value of a position.

Clients may set a dollar threshold for realized gains or losses and may designate the number of days a position may be frozen from trading, allowing it to move from short- to long-term gains for tax purposes.

Such tax controls are set at the account level and automatically followed at the subaccount level. This way, the advisor can easily change a client's tax filters as needed, and the changes are reflected at the sub-account level.

Swapping Lots

In UMAs, the new technology enables tax-lot swapping between sleeves. The technology hunts in all sleeves and then finds the most advantageous tax lot to sell. If the manager of a sleeve is selling shares for tax-harvesting purposes, automated tax-efficient trading finds the most advantageous lot and moves that lot to the sleeve that is selling the security.