America's Best Direct Indexing Buyers Guide 2024 - 17

2024 DIRECT INDEXING BUYERS GUIDE
limitations of SMAs, which were often
managed separately from the rest of a
client's portfolio, such as mutual funds,
ETFs, or in-house equity portfolios.
This separation made it challenging to
manage the portfolio as a whole.
A UMA is a single account that
includes any combination of
SMAs, mutual funds, and ETFs,
with consolidated holdings and
performance reporting. There are two
primary ways to implement a UMA.
Sub-Account
(Sleeve-Based) UMAs
Sleeve-based UMAs are an extension
of SMAs, where additional sleeves
are added to hold mutual funds or
proprietary equity holdings. When
SMAs were first introduced, the subaccounting
system for SMAs was
often separate from the system used
for mutual funds or in-house equities.
To create a UMA, it was necessary to
consolidate these systems.
Blended-Model (Holistic) UMAs
While sleeve-based UMAs are more
efficient than traditional SMAs, they
are still costly and cumbersome.
The issue lies with the sub-accounts
themselves. Maintaining systems that
track sub-accounts is expensive, and
dividing an account into sub-accounts
makes it harder to manage the portfolio
holistically.
Key portfolio characteristics, such
as risk, are properties of the entire
portfolio, not individual securities.
Managing risk, particularly with
customization and tax optimization,
requires a comprehensive approach-
one that doesn't rely on sub-accounts.
Blended-model UMAs, like modelbased
SMAs, start with third-party
specialists providing portfolio models.
However, they eliminate the need for
sub-accounts, blending the various
models into a single composite model.
The client's account is then managed
holistically according to this composite
model.
If an SMA is implemented using
blended models, it automatically
becomes a UMA. There's no need
for additional steps to include mutual
funds or proprietary models, and no
extra sleeves are required. Mutual
funds, ETFs and proprietary models are
simply added to the composite model
in the desired portfolio proportions.
There are three common concepts
related to sleeves that often get
confused:
* Sleeve-Level Accounting (also known
as " sub-accounting " or " partitioning " )
is the process of dividing a single
account into virtual sub-accounts
(sleeves) by tagging each tax lot to a
particular sub-account.
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* Sleeve-Level Rebalancing refers to
rebalancing each sleeve separately
from the others. More broadly, it
describes any rebalancing method
where the existence of sleeves
influences the process.
* Sleeve-Level Reporting involves
reporting the returns of each sleeve/
sub-account independently.
These three sleeve-related concepts
are often conflated because they
typically occur together. Sleevelevel
rebalancing and sleeve-level
reporting inherently require sleeve-level
accounting.
However, the reverse is not always
true-it's possible to have sleeve-level
accounting and reporting without
sleeve-level rebalancing. In such cases,
all the sleeves are merged daily, the
account is rebalanced holistically, and
then it's divided back into sleeves.
Sleeve-Level Accounting allows
portfolio management to be divided
among multiple sub-advisors, with
each sub-advisor managing their own
segment of the portfolio. This can be
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America's Best Direct Indexing Buyers Guide 2024

Table of Contents for the Digital Edition of America's Best Direct Indexing Buyers Guide 2024
