10.06.2022 11 new Morning Note posts under Morning Note (10) and CAPIS Insights (1)


"CASE STUDY Part 4: Outsourced Trading for Wrap and Separately Managed Accounts (SMA)"

posted by CAPIS on 03/30/2022 at 9:07 am


03/30/2022 at 9:07 am

This article was written by Martin Coughlan, CFA, CAIA. Martin has spent over twenty years working at asset management firms globally. 


Outsourced Trading for Wrap and Separately Managed Accounts (SMA)

In Part 3 of our series, we discussed some of the common concerns investment managers have in terms of outsourced trading and how those concerns can be allayed. In this final part of our series, we will look at one specific challenge that managers face when considering outsourced trading – how outsourced trading can be effectively implemented for Wrap and SMAs.


An overview of Wrap and SMAs

Wrap and SMA accounts continue to be a very important offering in the marketplace with combined Q3 AUM in the United States of approximately $10 plus trillion from the Money Management Institute.Martin Coughlan, Acclinate

Both vehicles facilitate individuals that require a more customized approach and those that wish to solely own securities rather than units of a mutual fund or other fund vehicle. They can also be used to allow more effective tax management for High-Net-Worth investors.

While the terms are often used interchangeably, there is a difference. With a Wrap account, a financial advisor may serve as the account’s investment manager, selecting individual securities or mutual funds. With an SMA, a financial advisor will use a separate money manager to manage the assets. In this paper we will focus on the latter and use the term SMA. However, regardless of whether assets are managed in either format, it is well known that the administration around trading is problematic for most firms.

It is also an area of regulatory focus and where investment managers that offer SMAs need to ensure that their practices act in the best interests of their client as well as having disclosures that provide the necessary transparency to investors.


Trading of SMAs

When managing SMAs many investment managers trade away or step out allowing them to execute a trade through a broker or dealer other than through the program sponsor. However, most mangers still employ rotation among the SMA sponsor programs they are part of and their institutional separately managed accounts.

In practice, executing brokers, in most cases, cannot aggregate institutional orders with trade away orders while including a markup/down on the wrap allocations and a commission on the institutional accounts. It is either charge a commission on the institutional allocation and step out the trade away with no compensation or settle all allocations at a net price.


Outsourced trading of SMAs

For firms considering a move to outsourced trading, there are challenges to consider when they manage both accounts for institutional investors as well as in SMA format as aggregation, allocation and settlement becomes more difficult when considering outsourcing trading.

However, while not widely used at this time, there are tools available that can help investment managers mitigate these aggregation, allocation, and settlement problems.

Investment managers can meet their best execution responsibilities, trade all orders (institutional and SMA) within a single block while simplifying their operations. By trading in this way, it should allow managers to reduce market impact and limit return dispersion among accounts managed in the same investment strategy across different sponsor platforms.

As part of this process, there is a need for investment managers to outsource this operational component. This should fit with the stated objective of many managers to outsource non-core functions.

As the outsourced trading market continues to develop, we expect that additional tools will become more widely used to allow for the effective outsourcing of SMA accounts while reducing the administration burden with the settlement, clearing, and disclosure processes.



Over the course of our 4-part series, we have looked to analyze the development of outsourced trading in recent years and how investment managers can benefit from considering a move to an outsourced model. We expect the growth in the industry to accelerate in the coming years with investment managers being able to customize the outsourced model that fits with their business.


© 2022 Acclinate LLC. Paper commissioned by CAPIS

Acclinate’s founder is Martin Coughlan, CFA, CAIA. He spent over twenty years working at asset management firms globally. He has experience across the investment, distribution and operations functions. As a member of executive committees at three different asset managers, he is very much attuned to the challenges and opportunities that the buy-side faces. He has been involved in a number of outsourced trading implementations at investment firms that previously employed legacy trading desks.

DISCLAIMERThis article is for informational purposes only and intended solely for use by institutional investors. Use of this information by persons other than the intended recipients is prohibited.  Nothing in this article should be construed as an offer or solicitation for the purchase or sale of any financial instrument. All market prices, data or other information are not warranted as to completeness or accuracy and are subject to change without notice. This article was commissioned by Capital Institutional Services, Inc. (CAPIS) and at the time of publication its author was an independent contractor of CAPIS.  Notwithstanding the forgoing, the comments or statements herein do not necessarily reflect the views or opinions of CAPIS. 




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