Capital MarketsCash InvestmentsCompliance

Pain You Can Manage and Pain You Can’t: Separately Managed Accounts

By December 8, 2021No Comments

SMAs mean accepting KYC and legal dept. pain, but clear communication can save plenty of heartache with managers.
Members joined forces for a panel discussion on the pain points associated with setting up, maintaining and reporting for separately managed accounts (SMAs) at a recent meeting of NeuGroup for Cash Investment. Not surprisingly, the most painful parts are the know-your-customer (KYC) obligations and the legal agreement tug-of-war needed for account setup.

  • The encouraging, somewhat unexpected takeaway: Effective communication and a strong relationship with your asset manager go a long way toward easing the pain of misalignment with the manager.
  • Clear definitions of terms, well-understood parameters and monitoring of execution and performance, along with regular and open communication with asset managers, are critical elements of the SMA relationship.

Prioritize clarity and dialogue. All members stressed that SMA guidelines shouldn’t be subject to interpretation and warned peers against learning the hard way that managers may have different definitions or understandings than what treasury expects.

  • Avoiding misinterpretations of instructions requires precise language describing types of securities, duration, credit ratings and, for some corporates, ESG ratings.
  • One member said different managers have different styles and recommended using more than one manager in a space to better understand differences and recognize what works best for your organization.
  • Regular, open communication is essential and valuable. One member said the biggest benefit they get from SMAs flows from the relationships with portfolio managers and the intelligence those managers provide.

Lay the groundwork. Don’t get stuck being the net in the frequent ping pong matches between the legal departments of your company and the asset manager. Sometimes it’s a disagreement on boilerplate language that may be resolved by the lawyers communicating directly. Scheduling a conference call is your best and fastest option for legal resolutions.

  • Communicate needs and expectations with both your asset manager and custodial team from the start, beginning with accounting and reporting requirements. Agree to cadence and deadlines for data so month- and quarter-end reporting will be received quickly and without a lot of back-and-forth with managers and custodians.
  • One panelist in the midst of an SMA RFP is using a scorecard to evaluate the operational efficiencies of different managers. For his company, there must be clean connectivity with the trustee, Clearwater, and key treasury technology systems to avoid headaches down the line.
  • Buyer beware: members noted that using different systems for valuations requires reconciliations. One member flagged that it’s often an issue on structured products: “Our SMA managers use Bloomberg, we use Clearwater.” Numbers don’t always match, and minor discrepancies are found that need follow-up.

Time-consuming KYC and legal agreements. Unfortunately, to realize the benefits of separately managed accounts, you must buckle up for the frustrating tasks associated with KYC requirements. Keep in mind that you are tending to two relationships: the asset manager and custodial team; each one has nuances and different areas may mean different requirements.

  • It is pretty rewarding to check off items on your to-do list. However, even when you think you’ve completed everything, banks usually come back and need more. Their requirements change over time.
    • You may have filled out something a year ago, but additional requirements may come into play, or changes have occurred with authorized signers or those allowed to direct or redeem funds. Once you get an SMA in place, assume that it requires constant maintenance.
  • In a perfect world, account opening times with custodians range from 10 days to 15 days before connections, accounting, privilege and cash and trading authorities may be applied. One panelist said, there is a lot more paperwork today than 10 years ago.

Is there an ideal time to shop for SMA managers? Not necessarily, but just make sure they aren’t distracted by M&A, one member said. Looking at the track record of the investing team and leadership helps. And remember that sometimes the large size of a given firm doesn’t get you the attention you want.

  • One member said that with SMAs, you are ultimately betting on people and whether they will they be incentivized to work their best for you. There has been a huge compression across the board, which is a benefit for the buy side: 2021 is better than 2011.
Justin Jones

Author Justin Jones

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