Active vs. Passive
| Approaches to overlay portfolio management can be described as either active or passive. In the passive overlay management business model, the individual separate account managers retain discretion or trading control over their relative portion of each client’s portfolio (called “sleeves”). In an active overlay management business model like Placemark’s, a single discretionary overlay manager is responsible for implementing model updates in the client’s accounts. In the active overlay process, investment managers become non-discretionary sub-advisors, sending model portfolios to the overlay manager who is then responsible for customizing the way those model portfolio trades are made in each affected client’s accounts. In this model, the overlay manager assumes many of the responsibilities previously performed by the separate account managers, including supervising client accounts, implementing client restrictions, executing trades, etc. |
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We believe that active overlay management has many advantages over the passive model.
| Active | Passive |
|---|---|
| The sponsor, advisor, and client interface with Placemark, which is able to implement all client account changes quickly and efficiently. | The sponsor, advisor, and client must interface with multiple discretionary managers to implement client account changes. |
| Work with Placemark provides a single operational interface that facilitates more efficient operational, due diligence, and compliance oversight and risk management. | A single custodial account will have multiple discretionary managers, requiring multiple controls, and introducing operating risks to the sponsor. |
| Using Placemark’s home-office workstation, the sponsor is able to efficiently initiate operational requests, significantly reducing cost and staffing compared with traditional SMA programs. | Sponsors must interact with managers as with traditional SMA programs and may even see increased operational cost and complexity compared with those programs. |
| Placemark is able to implement a wide array of client customization features across all of the sleeves in a client’s account, and even across several different accounts held by the same individual or family. | The multiple discretionary managers have no ability to coordinate their trading decisions to implement an integrated strategy for dealing with client tax, risk, or other customization needs. |
A passive overlay management process does not deliver the operational efficiency for which UMAs have been designed. An advisor and/or sponsor home office must interact with and coordinate the activities of each manager to effect changes in the client’s portfolio.
Imagine the complex set of interactions required across multiple firms in order to process contributions and withdrawals, perform tax-loss harvesting, implement changes in restrictions, and rebalance across sleeves. This process can be cumbersome when one is dealing with only two or three separate account managers, but the process becomes exponentially more difficult with each additional separate account manager in the UMA. Even if the interactions are facilitated using technology tools, the process is inefficient.
In Placemark’s active overlay model, the home office and individual advisors need only interact with Placemark to implement such services. Clients have a single discretionary manager supervising and implementing trades in their accounts, reducing paperwork and streamlining all operational processes. The active overlay management process is capable of creating far greater operational efficiency for all industry participants, including sponsors, advisors, clients, and investment managers.
By using a single discretionary manager, the overlay manager is able to make decisions at the client level and deliver customized services, going beyond the simple restrictions processing and wash sale prevention he could provide using passive overlay.