By Danielle Verbrigghe
Originally published in FundFire, a Financial Times service, on March 31, 2017
A turnkey advisory platform for independent advisors launched a new separately managed account (SMA) program which will feature a very short list of customizable strategies.
FTJ FundChoice, a $7.3 billion turnkey asset management platform (TAMP), has historically focused on mutual fund and exchange-traded-fund (ETF) strategists. But the firm has launched a new SMA program, to broaden out its offering, targeting independent advisors working with high-net-worth clients looking for more customization. The new platform uses a dual-contract setup, in which clients sign contracts with both the SMA managers and the firm, and all the managers will have full discretion.
With the SMA platform, FTJ is targeting advisors with high-net-worth clients who have portfolios that need customized management to handle specialized holdings or tax issues, Manguso says. “This particular SMA is really targeted for the advisor that has existing clients or runs into existing business that needs this customization,” Manguso says. “Right now there are not many SMAs that can do that.”
So far, only one SMA manager has made the cut. Meeder Investment Management will provide highly-customized portfolios at a minimum of $1 million.
But FTJ plans to add more to the menu, while keeping the list very limited, says Gary Manguso, v.p., product strategy, at FTJ FundChoice. The firm will only look to add SMAs that fulfill a specific need and provide something that can’t be delivered within the construct of the ETF and mutual fund strategist environment, Manguso says.
“We know it’s a crowded marketplace,” Manguso says. “We’re not building a platform where we’re going to be looking at a repetitive number of firms. It’s going to be very consistent and very targeted.”
The firm has partnered with Rocaton for help with due diligence in its search, but FTJ has final say over SMA manager selection.
The company is currently hunting to add municipal bond SMAs to the program, including a high-customizable municipal bond strategy, and a more packaged municipal bond ladder SMA. Some managers are already under consideration, and the firm may end up selecting one manager for both types of municipal bonds strategies it looks to add.
Further down the line, Meeder may look to add a socially responsible investing (SRI)-focused SMA to its list. That search is still early-stages, but Manguso says the firm will likely be looking for something highly-customizable.
The firm isn’t looking to add vanilla, style-box-specific SMAs in categories like large-cap growth, Manguso says. “Nobody needs a new one of those,” Manguso says.
“It’s all about the customization,” Manguso says. “High-net-worth investors in general are usually looking for a more customized experience. They have tax issues they’re interested in solving. That’s going to be a focus.”
The bull market in equities has created a challenging environment for advisors working with high-net-worth clients to manage for taxes, and many clients are now sitting on unrealized gains or losses, says Angelo Manzo, portfolio manager at Meeder.
“The portfolios of these clients now are driven by these individual holdings and for us its working with the advisors to help transition that portfolio and help manage the overall tax ramifications and the overall risk in the portfolio,” Manzo says. “We tell advisors we may not be able to control the market, or the regulations coming out of Washington, but we do have some control over the overall tax on the portfolio.”
Indeed, customization is a key factor that draws advisors to use SMAs over other types of vehicles. A FundFire survey of financial advisors in 2016 found that 86% of SMA users pointed to a manager’s ability to customize as at least a slightly influential factor in manager selection. For some advisors, it was a top factor. Thirty-five percent cited customization as extremely or very influential to SMA manager selection.
Tax management has also been a selling-point for many SMA managers. In SMAs clients own the underlying securities, and are thus able to do more precise tax loss harvesting than with mutual funds or ETFs, where clients can only harvest losses as the vehicle level.
Demand for customization is one of the factors that have helped dual-contract SMA programs achieve steady in recent years. Dual-contract arrangements can provide maximum flexibility for managers to customize their strategies for wealthy clients.
In recent years, dual-contract programs have been an area of consistent growth for the SMA industry. Dual-contract program assets grew 13.9% in 2016 to reach $423 billion in assets under management, according to a report from Cerulli Associates.