Selecting and servicing a mutual fund is relatively straightforward for the average financial advisor. But selecting and servicing a separately managed account comes with greater challenges. These challenges demand a higher caliber of communication, cooperation and understanding between advisors and money managers typically not required when handling mutual funds.
Let's take a look at some of the differences:
To select an appropriate mutual fund for a client, you examine its history, consider its style and assess the fund family of which it is a part. But selecting managers for separate accounts requires due diligence of a different nature. After completing the investment-policy statement for the client, the manager search begins. You carefully evaluate each manager's skills and style, and work with the managers to customize a fund (or account) to suit each client's individual investment needs according to the policy.
To assess the suitability of a manager, you examine his or her capabilities in stock selection, servicing, operational support, and the ease or difficulty with which information can be obtained. Occasionally, personalities might enter the picture. Will you be comfortable working with the manager on a regular basis? How are differences solved? Above all, you must be completely satisfied that the money manager has the potential to meet your client's goals, as well as your professional needs.
For their part, the manager should have a full understanding of the managed account program you are developing for your client, its intricacies, the tools to be used, other professionals who might be involved and how the program will support your client's overall investment plan, which might include other funds.
Both you and your manager must thoroughly understand your respective roles in the total portfolio approach. For example, a value manager should be able to fully articulate the role he or she will play in the client's overall portfolio in selecting stocks so there is no confusion about the investment style to which the manager adheres. Once that style is fully understood, the role it plays in the overall portfolio will be clearer, too. You may need to revisit this issue from time to time to ensure there is no "style drift" taking place to boost performance in the event the manager's style goes out of favor.
Style, of course, is not the only area in which managers differ from one another. Some have stronger capabilities than others in certain market sectors and are more proficient in stock selection in those fields than in others. You should make sure the client understand the specific attributes and strong points of each manager. Having this information helps you explain to clients why you chose a certain manager.
You've Picked The Manager: What's Next?
After selecting the appropriate managers, it would be beneficial to revisit the investment-policy statement to confirm that the investment parameters based on the client's goals and objectives have indeed been followed. Customizing separate accounts according to each client's individual needs presupposes that each client's investment results will be different to some degree, even if the same asset-allocation percentages are used. Although two clients may have the same parameters of 60% stocks and 40% bonds, for example, one client may require his 60% equity exposure to consist of 35% large cap and 25% equity mutual funds, but the other client may require his 60% equity stake to consist of 40% large cap and 20% small cap. Each has the same allocation, but with different style subsets. Therefore, homogenous conclusions cannot be made about separate accounts as they are with mutual funds.
You and your managers should communicate regularly with one another to ensure they are working most effectively for the client. But, by having a clear understanding of the style, strengths and weaknesses of the manager-and the processes being adopted-you might find it unnecessary to maintain constant contact with managers. You should avoid trying to micromanage the programs in your clients' portfolios. By carefully selecting the right managers for the right tasks, there should be no need to do so.