The Case for Converting Traditional Managed Account Assets to Overlay

Abstract

Wealth management firms traditionally have used mutual funds and separate accounts to diversify client portfolios. However, these investment vehicles, particularly mutual funds, are often more tax inefficient, expensive, and inflexible in terms of client-specific restrictions than a models-based solution known as overlay. In the article, the overall cost and tax savings differential between a mutual fund solution and a comparable overlay offering is quantified using a sample equity allocation. In addition, non-financial benefits of overlay, such as holistic client management, increased client personalization, advanced tax optimization capabilities, and transparency in holdings and expenses, are examined. The article documents a compelling case as to why wealth management firms should consider using overlay models in place of mutual funds and separate accounts for many of their affluent and high-net-worth clients.

TOPICS: Wealth management, mutual funds/passive investing/indexing, legal/regulatory/public policy, performance measurement