Separately managed accounts (SMAs) offer a host of benefits for affluent investors, including the ability to minimize capital-gains tax liability through tax gain/loss harvesting and customize portfolio holdings, but building a diversified portfolio with traditional SMAs also presents a variety of challenges. To address these challenges, managed-money pioneer Smith Barney created the Multiple Discipline Account®. Other leading financial services firms quickly created their own version of this product, which became known as a multi-discipline, or multi-strategy, account. A comparison between traditional separate accounts and multi-discipline accounts highlights the features and benefits that multi-discipline accounts provide.

How They Came into Being

Should the investor wish to construct an even slightly more complicated portfolio, such as one that divides the equity portion into equal allocations of large-cap and small-cap holdings, additional money managers are required. This creates further complications because each manager has a required investment minimum of $100,000. If the investor allocates $100,000 to each of the equity managers, an additional $100,000 will need to be allocated to the fixed-income manager in order to maintain an overall balance of 50% equity investments and 50% fixed-income investments. The minimum investment requirement to create this portfolio is now $400,000. Increasingly complex portfolios further increase the required investment minimum to levels that are out of reach for many investors.

Portfolio Management

In a relatively uncomplicated portfolio, such as the 50/50 equity to fixed-income investments example, meeting the investment minimum is the primary hurdle. In a portfolio that includes a broader mix of investment styles, an additional challenge arises. Because separate accounts are, well, separate, theres no coordination between the money managers. Each manager conducts trades without regard to the activities of the other managers. This can result in a duplication of holdings and may even result in one manager buying a certain security at the same time another manager is selling it. The lack of coordination between managers may also result in adverse tax implications. With each manager acting independently, there is no coordinated, strategic realization of gains and losses across the portfolio as a whole.

Performance Reporting

In a traditional multi-manager separate account portfolio, separate performance reporting information is provided for each money manager. In this scenario, it can be difficult to determine the overall portfolio performance. Reviewing the portfolios holdings is also inconvenient, particularly when there are a significant number of managers in the portfolio and holdings overlap.

How They Work

Multi-discipline accounts offer all of the benefits of a diversified, multi-manager separate account portfolio but without any of the associated challenges. The accounts provide access to the same level of investment management expertise and portfolio management strategies that traditional SMAs offer, but the minimum investment requirement to create a diversified portfolio is significantly less.

The majority of the assets in a multi-discipline account are generally managed exactly like a traditional SMA, with money managers buying and selling individual securities on behalf of a specific investor. A single money manager, known as an overlay manager, coordinates the trading across the entire portfolio and provides automatic portfolio rebalancing to maintain the desired asset allocation. Just as in a traditional SMA, investors have the ability to customize the portfolio by providing instructions to avoid investing in specific securities and/or industry sectors.