Reinventing The Portfolio Management Experience

Firms that want to attract and retain new investors must be able to deliver a modern, client-centric experience that strikes the right balance between personalized attention and smooth digital interaction. Tim Duffy, Solutions Manager at SS&C Advent, shares how firms can create this custom experience through direct investing and robust technology.

Tim Duffy, Solutions Manager at SS&C Advent

The pace of change continues to accelerate in the asset and wealth management sectors. Firms are under constant pressure not simply to adapt to change but to embrace and profit from it. Between the influx of data, rationalising fees, and easily accessible trading platforms, portfolio managers are rethinking their strategies and delivery mechanisms. Keeping up with changing industry trends means keeping up with technology.

Between the influx of data, rationalising fees, and easily accessible trading platforms, portfolio managers are rethinking their strategies and delivery mechanisms. Keeping up with changing industry trends means keeping up with technology.

THE WAY FORWARD: CUSTOMIZATION

Direct indexing is growing in popularity. The practice enables managers to customize an investor’s experience by directly holding securities with matching or similar characteristics to packaged and pooled products, such as mutual funds and ETFs. You could compare this strategy to customising a speculative home. You have the same floor plan but can choose designs to suit your preferences and lifestyle. This strategy provides managers with benefits and flexibility they wouldn’t have investing in a mutual fund while maintaining diversification and adhering to the investor’s risk tolerance, preferences, and return goals. The main benefits of direct indexing include tax loss harvesting, portfolio customization, and risk management.

Tax-loss harvesting offsets and manages capital gains from appreciated securities by thoughtfully realising holding losses. In addition, directly holding securities in a separately managed

Taccount can help combat unwanted capital gains distributions from mutual funds. Many studies suggest after-tax “alpha” of approximately 1 per cent for taxable accounts. Portfolio customization allows portfolio managers to create a more client-centric experience. They can customize portfolios to conform to client-specific values, often in the form of ESG requirements. Some securities and broad themes are excluded or included in a portfolio to align with underlying investor preferences. Additionally, investment firms have more control over portfolio risks. For example, if a client has significant outside holdings or company-issued stocks, direct indexing affords more flexibility and ease when managing those positions.

This passive strategy requires skilled portfolio managers who can build a fund that mirrors the underlying securities of the pooled product. The process of understanding which securities to replace while adhering to an investor’s risk tolerance and preferences can take an enormous amount of time and often sophisticated technology. Factor in the time it takes to place hundreds of orders and your strategy could already be outdated. Therefore, active managers are instead turning to direct investing strategies through personalized and diversified separately managed accounts (SMAs).

Delivering On The Promise Of Customization

Direct investing, or active SMA, strategies follow a similar structure to direct indexing. Managers can still implement tax-loss harvesting and extensive portfolio customization within their active strategies but “unbundle” their clients’ investments from pooled products. With easily accessible trading platforms, the rising generation of investors expects instant, on-demand access to information, including on their investment portfolios. Firms seeking to attract and retain new investors must deliver a modern, client-centric experience to balance personalized attention and smooth digital interaction.

The good news is the average investment firm can now partner with technology providers to deliver on the promise of portfolio customization at scale for their investors. This secular shift is highlighted in a 2021 Accenture survey of 250 asset management executives, in which 80 per cent of respondents said “customization for the masses” will be a definitive growth driver over the next five years.1

Traditionally, direct indexing and active SMA strategies were the domain of large institutional investors and high-net-worth clients due to the costs associated with managing these strategies, given the time and resources required to manage individual portfolios. However, developments in the marketplace, such as fractional share trading, decreasing or no-commission trades, and technology advancement, have expanded the opportunity to mass-affluent individual investors. By combining core investment competencies with strong technology platforms, investment firms can proactively provide bespoke portfolio management without increasing overhead expenses.

Technology To Support An Active Strategy

Firms looking for a technology provider should seek a strategic partnership to enable growth for their business in an increasingly dynamic and competitive marketplace. Firms should consider scalability and capability when looking for technology to support portfolio customization.

Scalability is a core requirement. Most existing technology platforms are built for firms either managing a small number of complex institutional portfolios or many wealth-focused model portfolios; the right platform will enable firms to effectively and efficiently manage both methods. As firms evaluate solutions, they should consider the current capabilities and the solution’s roadmap; future capabilities should align with a firm’s longterm goals. At a minimum, a direct investing solution should include the following capabilities: n Tax loss harvesting n Order generation flexibility n Wash sale restrictions n Security equivalents and substitutions n Efficient drift monitoring n Multiple custodial and broker block orders n Integrations to downstream systems like accounting, analytics, and client reporting

Choosing the right technology to support direct investing and future investment approaches will allow firms to differentiate themselves in a crowded marketplace. Firms embracing this evolution of customization will have an advantage and be well-positioned for the future.

SS&C ADVENT: TRUSTED TRAILBLAZERS IN INVESTMENT TECHNOLOGY

SS&C Advent was one of the original trailblazers in investment technology three decades ago and has stayed at the forefront of innovation ever since, with a singular focus on serving the wealth, asset, and alternative management sectors. Firms worldwide are leveraging our robust technology and services to optimise performance and gain a strategic advantage in an increasingly dynamic and competitive marketplace. Together with our clients, we are shaping the future of investment management.

Firms worldwide are leveraging our robust technology and services to optimise performance and gain a strategic advantage in an increasingly dynamic and competitive marketplace.

1 “The Future of Asset Management,” Accenture, May 12, 2021.

About SS&C Advent

SS&C Advent is a proven and trusted provider of technology solutions and services to investment managers around the world. We help over 4,000 investment firms in more than 50 countries – from established global institutions to small start-up practices – to grow their businesses, minimise risk, and thrive. We have been delivering unparalleled precision and ahead-ofthe-curve solutions for more than 30 years, working together with our clients to shape the future of investment management.

To find out more and discover our full suite of solutions, visit: www.advent.com