casemark/managing-separately-managed-accounts

Managing Separately Managed Accounts

Structures SMA operations including client customization, investment policy compliance overlay, trade execution, and GIPS-compliant performance composites.

When To Use

• Onboarding a new SMA client and translating their IPS into portfolio rules and restriction schedules
• Implementing or updating model portfolios across multiple SMA sleeves with client-specific overlays
• Running pre-trade and post-trade compliance checks against client guidelines, regulatory limits, and ESG/values-based restrictions
• Building, maintaining, or auditing GIPS-compliant performance composites
• Preparing periodic SMA management reports for clients, consultants, or internal oversight committees
• Rebalancing accounts after cash flows, corporate actions, or model changes while respecting tax-lot and wash-sale constraints

Inputs To Gather

• Investment Policy Statement (IPS): Return objectives, risk tolerance, time horizon, liquidity needs, and any unique circumstances
• Restriction schedule: Prohibited securities, sector caps, ESG screens, concentrated-stock constraints, and any legacy/low-basis holdings to preserve
• Model portfolio(s): Target weights by security or asset class, acceptable drift bands, and rebalancing triggers
• Account details: Custodian, tax status (taxable / tax-deferred / tax-exempt), cost-basis method (specific-lot, FIFO, HIFO), and cash reserve requirement
• Fee schedule: Management fee rate, billing frequency (advance/arrears), fee-calculation methodology (average daily balance, quarter-end market value)
• Composite assignment criteria: Strategy name, inception date, minimum account size, inclusion/exclusion rules, benchmark index [VERIFY against current GIPS standards edition]
• Regulatory context: [VERIFY] Applicable regulations — SEC/state RIA rules, ERISA if retirement assets, UPIA if trust assets

Workflow

1. Account Setup & IPS Translation

   • Map IPS objectives to a model portfolio sleeve or custom blend
   • Encode restriction schedule into the compliance overlay system (prohibited tickers, sector/industry caps, issuer concentration limits, ESG exclusion lists)
   • Set cash reserve target and rebalancing trigger thresholds (percent drift, calendar, or cash-flow driven)
   • Confirm custodian connectivity, trading permissions, and settlement instructions

2. Portfolio Construction & Trade Generation

   • Run model-vs-holding comparison to generate target trades
   • Apply compliance overlay pre-trade: check restriction schedule, diversification limits, and wash-sale look-back window [VERIFY wash-sale rule applicability for tax status]
   • Incorporate tax-aware logic: harvest losses where threshold is met, avoid short-term gains, respect holding-period preferences
   • Generate trade blotter with per-account allocation, noting any accounts where full model replication is infeasible (small size, restrictions, or pending cash flows)

3. Execution & Allocation

   • Execute block/batch trades where permissible; allocate fills pro-rata or by pre-defined rotation method
   • Document allocation methodology to satisfy SEC fair-allocation requirements [VERIFY broker-dealer vs. RIA allocation rules]
   • Reconcile executed trades against target; flag and resolve breaks same-day

4. Compliance Overlay — Ongoing Monitoring

   • Run post-trade compliance check confirming no guideline breaches
   • Monitor accounts daily or per policy cycle for drift beyond tolerance bands, corporate-action-induced breaches, and restriction-list updates
   • When a breach is detected: classify as active (trade-caused) or passive (market-movement); document cure timeline per IPS and regulatory requirements
   • Maintain compliance exception log with breach date, cause, resolution, and responsible party

5. Performance Measurement & Composite Maintenance

   • Calculate time-weighted returns (TWR) using daily valuation or Modified Dietz for sub-periods [VERIFY GIPS calculation methodology requirements for current edition]
   • Assign accounts to composites based on documented inclusion criteria; new accounts included after first full measurement period
   • Remove terminated accounts effective the last full measurement period prior to termination
   • Reconcile composite returns to underlying account returns; investigate dispersion outliers
   • Maintain composite history, asset totals, number of accounts, dispersion measure, and benchmark comparison

6. Client Reporting & Review

   • Produce periodic management report: holdings, transactions, performance vs. benchmark, attribution summary, compliance confirmation
   • Highlight any restriction-driven tracking difference versus model
   • Include fee calculation detail: gross-of-fee and net-of-fee returns, fee amount debited
   • Flag upcoming action items: rebalancing due, IPS review anniversary, tax-loss harvesting opportunities, or composite reassignment triggers

Output

A structured SMA management report or operational document containing:

• Account summary: Current market value, asset allocation, cash position, and unrealized gain/loss
• Performance table: Period returns (QTD, YTD, ITD) gross and net of fees vs. benchmark; annualized returns for periods > 1 year
• Compliance status: Pass/fail confirmation against restriction schedule; any open exceptions with cure status
• Transaction log: Trades executed in the period with rationale (rebalance, cash flow, tax harvest, model change)
• Composite snapshot (if applicable): Composite return, dispersion, number of accounts, total composite assets, benchmark return
• Action items: Pending rebalances, IPS review dates, restriction schedule updates, and any items requiring client or committee decision

Quality Checks

• Confirm restriction schedule is current — cross-reference against the most recent IPS amendment and any interim client instructions
• Verify trade allocation methodology is consistently applied and documented for fair-allocation compliance
• Reconcile composite account count and asset totals to underlying records; resolve discrepancies before publishing
• Validate that gross-of-fee and net-of-fee return calculations use the correct fee rate and billing method
• Ensure wash-sale and tax-lot tracking aligns with the account's cost-basis election at the custodian
• Check that all [VERIFY] items have been resolved for the applicable jurisdiction, tax status, and GIPS edition before finalizing
• Review for stale data: pricing, corporate actions, and restriction lists should reflect T or T-1 at most