Smartleaf

Smartleaf provides an advanced overlay portfolio management solution that enables wealth managers to efficiently implement any investment decision across all client accounts within one business day.   By automating tax, risk and constraint sensitive rebalancing, Smartleaf helps wealth management firms – banks, registered investment advisors and broker/dealers:

• Create a true Unified Managed Account (UMA) that can combine equities, mutual funds, ETF’s, ADR’s and individual fixed income instruments in a single account, taking advantage of any combination of proprietary and third-party research
• Streamline wealth management processes and increase portfolio manager productivity
• Provide clients with higher levels of customization and tax management
• Increase consistency and compliance
• Offer clients an open-architecture solution that adds third-party manager research in a manner that complements existing proprietary research

Our goal is to help wealth managers efficiently implement their best thinking.  We’ve done our job if every portfolio is managed as if the portfolio manager had unlimited time every day to devote to analysis and rebalancing.

Overlay is an approach to portfolio management where every account replicates – with adjustments for tax, expenses and customization criteria – a blend of one or more model (idealized) portfolios provided by investment analysts.   Operationally, overlay separates research (market beating ideas expressed in the form of model portfolios) and customization (tax management, social criteria constraints, etc).

OPM lets you take advantage of the best investment research available while making it easy to customize your clients’ portfolios for individual tax management, risk management and specific investment selections.    The overlay approach automates customization and tax management, making it possible for you to simultaneously increase customization and consistency.

In traditional Separately Managed Account programs (SMAs), discretion is shared among multiple money managers, each of whom acts a sub-advisor.  With traditional SMA, the client’s assets go outside the firm; with models-based overlay, assets remain in-house and ideas (in the form of models) come in.  With overlay, there are no sub-advisors; only one person manages an account–the “overlay manager.”

The original purpose of a UMA was to provide better coordination and consolidated reporting of traditional separately managed accounts (SMAs).  In a traditional SMA, discretion of a client’s portfolio is distributed to different money managers, each of whom acts as a fiduciary and subadvisor, responsible for trading a sub-account.   In the beginning, clients received multiple statements (one for each sub-account) and there was little coordination (e.g. wash sale avoidance) among the different managers.  These first UMAs added an extra layer of coordination and communication on top of the traditional SMA structure with a goal of lessening these problems.

The Smartleaf UMA delivers the end goal of holistic management of an account containing multiple investment vehicles (e.g. mutual funds, equities, ETFs), but accomplishes this goal differently.  The Smartleaf solution removes the need for shared discretion (advisor and subadvisor) and replaces subaccounts with one true unified managed account.  The Smartleaf UMA is operationally simpler, less expensive, more flexible and supports dramatically higher levels of customization and tax management.

There are two basic approaches to implementing overlay:  sub-account vs. holistic.

• With sub-account overlay, each client account is divided into sub-accounts.  Each sub-account is typically assigned one model, and each sub-account is rebalanced and traded separately.
• With holistic overlay, there are no sub-accounts.  Instead of multiple sub-accounts each tracking one model, the unified account follows a single blend of multiple models.

Sub-account overlay grew out of, and is very similar to, traditional SMA.   For this reason, it retains most of the limitations of traditional SMA:  you need to create and reconcile sub-accounts, you need a separate workflow to open, close and transfer assets in and out of the sub-accounts, and you need a separate process to try to coordinate among the sub-accounts.

Smartleaf employs the holistic approach, which greatly simplifies implementation and operations.  More importantly, by enabling risk trade-offs across the entire portfolio, it supports a higher level of tax and customization and lower levels of drift and dispersion.

Yes, although caution is in order.  With overlay (subaccount or holistic), sleeve-level reporting represents the combined contributions of the model vendor and the overlay manager, who work for different firms.

Yes, and in a manner that adds no operational complexity.   With overlay, becoming open architecture simply means incorporating models from third parties, and Smartleaf handles all the operational details (contracting, data upload, billing and invoicing).  Third-party models can be combined easily with proprietary models.  You can offer your clients portfolios that mix any combination of equities, mutual funds, ETFs, ADRs, fixed income and other assets.  Smartleaf’s overlay management system lets you customize and tax manage the account regardless of the source of the models.

Yes, Smartleaf can add alpha (market beating ideas) by enabling you to more easily:

• Implement your alpha-generating ideas, including tactical asset allocation, model selection or stock selection
• Become open architecture (if you’re not already) and/or make your existing open architecture program more flexible and less costly
• Add “tax alpha” by providing more consistent tax management

100% of Smartleaf’s implementations have been successful.  This is due to the simple and non-invasive architecture of Smartleaf integrations.

• Integration is limited to:
  • A daily upload from your system of record
  • An export from Smartleaf of a trade file to your trade management system
• There is no reconciliation process
• Smartleaf is offered as a hosted service with a full disaster-recovery capability; no new software resides on your premises except for a file export and a file import
• None of your other systems depend on the Smartleaf system

The basic idea is that for each portfolio:

• You create/select a “target.”  The “target” is simply the hypothetical portfolio you would buy for a client if they started with cash and no restrictions.  Typically, there are a half-dozen or dozen different targets per firm (or per portfolio manager), one for each risk type (e.g. aggressive growth, conservative, etc).
• You specify any customization criteria you want to apply.  This includes “never buys,” “never sells,” tax & expense management preferences, minimum trade size, etc.

Every day, Smartleaf compares the portfolio to its target and, consistent with the customization parameters you’ve set for that portfolio, suggests trades that will keep the portfolio close to its target.

No.  Customization typically comes from the customization parameters, not the target.   Portfolios with different risk profiles will typically have different targets.  While portfolios with similar risk profiles will usually share a target, portfolios that share a common target will typically differ from each other.

No.  Smartleaf is tax and expense sensitive and automatically avoids churn.  Smartleaf is a system for generating actionable, customized trades, which includes eliminating “noise” or churn trades.

Smartleaf enables you to give every one of your portfolios your best thinking.  We also free you up for research, prospecting or spending more time servicing your clients.

Your clients will benefit from:

• Greater access to your best research (alpha)
• Greater fidelity to your recommended risk level
• Access to “best of breed” third-party research that complements your proprietary strategies (open architecture)
• More year-round tax management
• More face time

Your firm benefits from:

• More effectively delivering its best thinking to its clients
• Lower costs
• Greater consistency
• Enhanced compliance

With Smartleaf, firms like yours have:

• Raised fees
• Lowered costs
• Increased margins
• Grown without adding personnel
• Increased market share
• Increased control and consistency
• Increased customization