5 Benefits to Separately Managed Account (SMA) 3rd Party Support
February 27, 2013
Among wealthier investors, separately managed accounts are an increasingly popular alternative to mutual funds as they offer more individual control, more nimble trade responses, and better overall performance. Offering separately managed accounts improves the ability of investment firms to compete with industry leaders in delivering the sort of performance that more affluent individual investors expect.
Because separately managed accounts are more agile than mutual funds, they require a commensurately greater level of involvement in managing the investment operations. This can pose certain challenges to separate account investment advisers; whose specialties favors a more client-focused approach, responding to the needs of existing clients and courting new accounts. As such, the logical course is to use that division of labor to their advantage, rather than attempting to fight against it; outsourcing investment operations offers numerous advantages to these investment managers.
1. Risk Management
After several well-publicized investment scandals, the phrases "MF Global," "Ponzi scheme," and "rogue traders" ring clearly in the minds of investors, who are keenly interested in reducing their risk of being victimized by rogue traders. Outsourcing investment operations of separately managed accounts means that two distinct entities oversee the disposition of their funds, making them serve as a set of checks and balances on one another. With independent investment companies, investment advisers can easily offer clients the transparency that they demand from their separately managed accounts. Investment data is stored digitally and shared with the investment manager securely online, making it easy to find and access reports and records for auditing, and letting clients see where their investment is allocated.
2. Regulatory Compliance
Since 2008, a bevy of new investment regulations have cropped up and the regulatory climate continues to evolve. Keeping up with these new regulations governing separately managed accounts and the implications they have for investment managers is a full-time occupation in itself, and instituting the procedural and technological upgrades necessary to comply with them is prohibitive for many investment advisers. By outsourcing some of the operations involved in the management of client investments to an independent contractor who keeps up to date on these regulatory changes, investment managers can continue to provide their clients with quality service for their separately managed accounts without incurring the substantial up-front costs involved in complying with shifting regulatory standards.
Digital records and automated reporting simplify investment management at every stage, but updating and maintaining the technology those services require is costly, in both resources and manpower. Ensuring the security of the accounting systems with regular updates and keeping automated reports going out to investors incurs significant costs in hardware, software, and IT support. By contracting with an independent provider, investment companies can avoid many of these costs while benefiting from these efficiency-enhancing services for their separately managed accounts.
4. System Integration
Efficiency and convenience are important to the end user as well, and outsourcing investment operations enables clients and account managers access to the independent provider's fully integrated suite of account, data, and various reporting tools, branded with the investment manager's details. These tools make accessing all of a customer's disparate data smooth and easy, and inspire client confidence.
For firms handling all aspects of clients' investment management internally, more accounts and more growth necessitates more employees, more technology, and more expense. What operational worked with only a few accounts quickly will become a bottleneck and cause many headaches including increased potential for making mistakes. By outsourcing investment operations, an investment manager can avoid these additional operational costs for separately managed accounts while focusing on delivering superior returns and bringing on new accounts.