Earlier this year, we began offering Parametric’s Tax-Managed Custom Core Separately Managed Accounts (SMAs) to our wealth management clients. (Prior to this point, Litman Gregory had not offered SMAs to clients.)
In June, we published an article detailing our research team’s due diligence on these tax overlay strategies. We are now sharing our experience from an operations perspective through a conversation with Litman Gregory’s director of operations, Tisha Ehrenberger.
The biggest challenge, says Ehrenberger, was the initial educational hurdle. In addition to our research team’s due diligence on the investment offerings, our operations and compliance teams had to conduct their own due diligence into how each SMA was structured and how to best integrate the new service offering.
Ehrenberger’s no. 1 suggestion for any peer advisory firm is to begin your educational ramp-up through your custodian. Our relationship manager not only gave Ehrenberger an overview of the SMA space, she was able to immediately help us understand what our current custodial agreements included and what new agreements Litman Gregory would need to put into place before we could offer SMAs to clients. She also sent through useful reference links for their advisor website and set up an introductory Operations meeting with an SMA specialist. The SMA specialist provided additional detail and pointed her to SMA-specific account applications/agreements (which had new options and terms for the firm to consider). The Parametric Sales and Operations teams were also a great resource. They walked Ehrenberger through contract options and their standard service model, including Parametric account set-ups, maintenance, investment minimums, reporting/billing options, and timing.
All of Ehrenberger’s research, coupled with our analyst team’s work, ultimately fed into an interim “key facts” document prepared for our Litman Gregory investment advisors. This provided each advisor enough of an understanding of the offering to be able to talk to clients about it, and importantly, gauge the level of interest in the SMA products (which we later used to inform and establish our fee agreements with Schwab and Parametric).
When asked what the trickiest part of the process was, Ehrenberger says as with most operational tasks, the devil is always in the details. For example, we learned early that these SMAs would introduce a substantial number of equity positions to our platform as well as detailed trade activity, specific-tax-lot accounting, and corporate actions so it was important to systematically understand up front what modifications (and training) would be necessary to handle accounting, reporting, trading, and importantly, compliance and legal. Our team assessed each area and came up with a plan to manage the changes we needed to make.
We involved our chief compliance officer in the due diligence process from the outset, and that was crucial in getting the SMA program up and running in an orderly fashion, says Ehrenberger. The bulk of the changes to our service offering involved compliance at some level; for example, adding and updating agreements (money manager, custodial, client, and firm) as we defined our new services and terms, how we were going to charge on it, whether the changes would require a new IPS authorization (they didn’t, thankfully), etc.
Rather than roll out the new SMA offerings to our entire client pool at once, we rolled out the program on a pilot basis, using an existing client who had been waiting a long time for this offering and with whom we had a solid relationship. Ehrenberger highly recommends this approach to other firms, as it allowed us to gain a good understanding of how the process worked A to Z so we could ensure the experience was a positive one before rolling it out to more clients or even prospects. The positive results of the pilot program put Ehrenberger at ease, and it also provided a working example to test out her new procedures before training the rest of the operations and client services teams.
Fast forward nine months and we’ve now successfully shepherded 13 clients into the Parametric SMA offerings. Of course, this doesn’t mean we aren’t still fine-tuning our methods. As with our research process, we believe there are always reasons to monitor an operational workflow. Documentation requires constant updating and reviewing, and there’s also the important step of translating procedures across the company so everyone’s on the same page.
As a parting word of advice, Ehrenberger says to always remember to give yourself plenty of runway to launch an SMA offering if it’s new to you or your firm. We set ourselves a goal but didn’t know how long it was going to take to work through. Thankfully, we communicated each step of our discovery process back to the broader project team, so our management, investment advisors, and research analysts were all apprised of the project progress and eventual rollout.
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