Bull markets, bear markets, a new interest rate regime, up and down inflation, significant growth in household net worth, and wholesale retirement law changes. Today’s financial advisor has faced many challenges in just a few years. What’s more, the ongoing gentrification of the profession means a new generation of wealth managers is entering the space, bringing fresh skills and ideas to what is already a dynamic industry. There’s little time left for hands-on investment management, though that’s the service still most associated with financial planning. 

Outsourcing asset management activities allows clients to gain exposure to nuanced strategies that can be better personalized for their situation. Specifically, SMAs are now used to house defined-outcome vehicles, such as Structured Notes. Through this innovative approach, an experienced asset manager handles the challenges of single-product note purchases and life-cycle management. Through professional management with specific investment objectives, such as yield enhancement, risk-managed growth, and targeted return, the administrative burden is lifted from the advisor. We are excited about this at Halo, and it’s something advisors teaming with us have been curious about as the Structured Note market has matured. 

There are six primary benefits to outsourcing Structured Note investment management through SMAs:

1. Expert Customization

Over the coming weeks, you will hear more about the aspects of these strategies and how they can fit a range of investor types. Perhaps the greatest benefit of using SMAs for Structured Note exposure is access to personalized support from Halo and the expert money management capabilities of independent investment firms. 

Assistance through both channels bolsters an advisory practice’s customization and flexibility. Among the many upsides of including SMAs in client portfolios is the ease of executing and managing a tailored investment plan to help meet the needs and risk/return objectives of individual clients. Whether they are looking to secure a high income stream, limit downside exposure, or put in place an equity repair strategy, today’s wealth manager has access to a new generation of portfolio structures that were once reserved for the ultra-wealthy.

2. Increased Efficiency

Most advisors already outsource parts of their operations. Turnkey asset management programs (TAMPs) are more popular than ever, back-end processes are sometimes handled by a third party, and other operational tasks can free up precious hours. 

According to “The Wealth Advisor” 2022 Survey, 30% of the typical workweek remains devoted to investment management — that is the same percentage as direct client activity. Now, we do not assert that all asset management should be outsourced, but certainly, advancements in technology over recent years can be harnessed by today’s advisors so they can potentially have more face time with existing and prospective clients. 

You might find that the SMA’s expertise in asset allocation, security selection, and risk management makes for a winning trade-off so that more hours are put toward nurturing client relationships, other financial planning areas, and business development.

3. Expertise and Diversification (at a reasonable cost)

SMAs and model portfolios, like so many areas of investments and trading, have become streamlined without losing their benefits. Along with spreading out risk among asset classes and asset vehicles, clients gain access to more diversified portfolios. 

There is a behavioral advantage that comes with expert outside management as well: Since models and SMAs are not tradable securities, there are no ticker symbols, and nervous clients may feel less inclined to commit bad behaviors when volatility hits — call it a behavioral diversification benefit. 

Many advisors are surprised to learn that some SMAs can even be cheaper for clients than actively managed mutual funds due to the trading frequency and type of assets included in the SMA. While it’s not always the case, the net costs may not differ all that much from other investment types.

4. Scalability and Growth

Outsourcing eventually becomes the go-to strategy for advisors looking to grow their business. We came across a revealing survey conducted back during the throes of the pandemic.

Among 500 advisors polled, 92% of those who outsourced activities during March and April 2020 (the height of market volatility) reported that doing so improved their advisory practice. Moreover, 70% of wealth managers were able to devote more time to client engagement rather than investment management. Underscoring the growth potential of outsourcing, nine out of 10 advisors reportedly gained new business during that tumultuous period.

5. Executing Fiduciary Duties

Advisors can enhance their risk management capabilities by leveraging SMAs and professional portfolio managers, so more informed decisions are made based on both market conditions and individual client goals. A Structured Note model portfolio, for instance, may have a strategy to generate a certain level of income yield per year. The outside manager may be better equipped to hit that target given their focus and skill set. 

You, as the advisor, don’t have to stress about handling coupon payments, outcome periods, notes being called, and the like. The SMA will not let cash sit on the sidelines, either. The strategy promised to clients can help enhance client confidence. Investment strategies, portfolio operations, and note lifecycle tasks are all completed with professionalism by the SMA manager. Lastly on this topic, credit diversification is also handled through an SMA, offering yet another layer of assistance compared to taking the DIY approach.

6. Transparency, Control, and Compliance

As more advisors allocate to Structured Notes, there are sometimes challenges regarding showing clients what they own and outlining various market scenarios and how they might impact the client’s financial well-being. SMAs offer transparency in the reporting of holdings along with detailed performance reporting metrics. This standardized approach fosters a clearer understanding of portfolio holdings and measuring sticks for how secure a client’s investment plan is. More transparency means more trust in the advisor, further improving confidence among retail clients. 

From the compliance angle, uncertainty about what lawmakers might bring about next is a common source of advisor anxiety. Outsourcing investment management to SMAs can help wealth managers navigate the complex regulatory landscape more effectively. 

Why Outsource with SMAs for Structured Notes?

An April 2023 survey conducted by “The Wealth Advisor” found that 43% of financial advisors used a model portfolio, SMA, or TAMP as a strategy to recover from market losses in 2022. With so many professionals having sought to repair portfolios efficiently, the advisor-respondents were less concerned with the brand-name managing assets and more closely attuned to costs, scale, better client outcomes, and the ease of understanding and explaining strategies to clients. Outsourcing via a Structured Note SMA through one of three risk-focused strategies offers the opportunity to differentiate your value-prop while saving you time in the process.

The Bottom Line

The financial advisory landscape has absolutely grown in recent years, and while the pie has gotten bigger, competition is fierce and complexity only seems to grow. The benefits of outsourcing grow with each passing year. Technology and efficiency today make costs more than manageable, and expert niche managers can simply perform activities better than an advisor who is often spread too thin with not enough client one-on-one time. SMAs — for parts of the investment management process — empower advisors to provide exceptional value to their clients and grow their business.