The SMA Advantage for Modern Advisors with Josh Rogers

How do these structures help firms scale efficiently while maintaining the high degree of personalization clients expect from their advisors?

[00:00:30] Josh Rogers: Yeah, yeah. And this is a huge trend in the industry, right? Trying to obviously build scale in advisor's practices, while also creating a customized experience for clients, right? And usually when you think about scalability and customization, they don't usually intertwine too well. That said, the trends that we are seeing, is actually that advisors are using SMAs as a way to incorporate some of that client level customization while at the same time allowing them to truly, at the same time scale their practice.

The way that it actually works, and what we're seeing for advisors who are using more SMAs in their practice, is many times it does take a little bit more upfront effort for those advisors to set up the process, ensuring that they are getting the right kind of target experience for a client.

And then really, once that is set up and on its way, then all of the management generally falls to us. And so that does help them to scale their practice. But customization for every client does require, again, some of that setup at the onset to ensure that everybody's aligned in how we're managing the portfolios.

Now again, to go a further step, what we have done here at Invesco is truly try to partner and continue to expand the ways that advisors can customize their portfolios to ensure that clients are getting that right experience. And being able to offer that custom experience I think is not just important for existing clients for advisors, but also as they look to continue to grow their practice, grow their business, having those clients come in the door and feel that customized experience, I think is a very powerful differentiator for a lot of them.

[00:02:16] Doug Heikkinen: As we know, SMAs have come a long way over the years. How have they evolved from their early forms into flexible technology driven solutions that are available today?

And what makes them such a powerful lever for RIAs looking to expand their investment capabilities?

[00:02:34] Josh Rogers: Yeah. As we look at the kind of landscape for SMAs, and I almost like to take a step back and talk a little bit about the evolutions that we've seen just across the industry in all sorts of different structures of investment products.

We see, especially looking back maybe 20 years ago, mutual funds were a much larger part of advisors' practices. We've seen an evolution towards ETFs to offer more tax efficiency, exchange traded ability, lower minimums, potentially lower fees. We also though, see this trend towards SMAs.

And again, if you look back maybe 10, 15, 20 years ago, what did an SMA mean at that point in time? It basically meant that the advisor was getting maybe a list of 20 stocks from a manager and they had to do all of the implementation to actually buy those stocks or trade them when they would get an updated portfolio.

And it was a very clunky process. As technology has evolved, there are so many different facets that we've seen have become so much more efficient in the implementation of these SMAs. And that's truly why we're continuing to see growth, so much growth, in this space.

So the first evolution really was around the technology to be able to have a manager traded SMA. And again, what that means is that we take a lot of that onus in terms of managing, maintaining these portfolios onto ourselves, right? And that takes it off of the advisor's plate so that they have one less thing to worry about.

One of the other big, I think, benefits of the SMA wrapper, is that by having these individual equities as a client's portfolio, tax management comes into play, and more explicit tax management comes into play. And that's really where we've seen this other big drive for SMAs becoming a bigger part of client's portfolios, is that by having an opportunity to find tax losses while still trying to achieve the same types of outcomes of growth, out of the portfolio, I think it's been a huge benefit.

And really all of that is possible with technology, right? As you could imagine, we need to get information from clients, from advisors, from the custodians, from potentially index providers, from all these different sources, and having ways that we can have that all together and use that to the client's advantage effectively to give them both the investment objective that they're seeking, but also try to really manage it for tax efficiency as well, again, I think has been such a big driver. And that would not be possible without all of this kind of enhanced technology that we've seen across basically everybody in the ecosystem over the last, 5, 10, 15 years.

[00:05:28] Doug Heikkinen: Are there specific innovations with technology and trading data or portfolio management platforms that are making it easier for RIAs to deliver institutional quality portfolios, customized for each client?

[00:05:42] Josh Rogers: Yeah. At every step of the way, technology is a core piece of the puzzle for, not only having access to these types of strategies, but being able to scale it like we were talking about.

When I think about the core pieces of technology, it's all about the entire kind of ecosystem, right? So number one for an advisor, probably what might be most important is actually onboarding clients, right? Engaging with us to figure out what that actual path is that a client wants to go down.

So getting information from the advisor about what the client's current kind of situation is. In fact, with many of our portfolios, we can actually take on existing securities. So having that engagement upfront. Having the right way to engage on that. And that may not just be email, right? It can be portals and things like that can help advisors to input that information in a very efficient manner.

So number one, the onboarding piece, that has become, I think, just continued to streamline that process as technology has gotten better. And I think us, along with all other managers, are trying to make that process ever more simple and easy for advisors. But really, the more important piece from our perspective, obviously, as an investment team, is having good access to the data of the client's portfolio that we are managing.

So we do need to pull in all of that information from the proper sources, like I was alluding to. You can't manage taxes unless you actually have a true understanding of the tax impact of every single position that's in a client's account. So getting that information. And really pairing that with more quantitative and scalable capabilities.

And that's really where a firm like Invesco who manages over $2 trillion in assets, that's been in the SMA space for many years, we have very big advantages relative to many others. Having basically these strategies take into account and use the best of every facet of management that we've built, technology to be able to not only create a custom portfolio and a custom glide path, candidly, for every client who's funding with securities, but also at the same time being able to do that efficiently, and being able to do that as well in a tax advantaged manner, I think has been, again, it's the game changer for I think all of our clients.

[00:08:12] Doug Heikkinen: Yeah. Speaking of tax concerns, which are always top of mind for clients, how do modern tax optimized strategies, such as direct indexing or tax efficient long/short SMAs, help advisors deliver better after tax outcomes and differentiate their client experience.

[00:08:30] Josh Rogers: Yeah. Look, I think as I was alluding to with the kind of growth of the SMA industry, the technology, right?

Direct indexing is at the core of that. And we do believe that direct indexing can be extremely powerful tool for clients. Especially those focused, in terms of trying to create more tax efficiency in their portfolios, right? Our platform we launched actually about four years ago.

And some of our strategies that I think have been really powerful for clients are things like our QQQ tax optimized SMA, and our S&P Equal Weight Tax Optimized SMA. You can think of those playing in the direct indexing space. So we're trying to effectively deliver something that looks, feels, acts like those benchmarks, while at the same time providing basically ongoing tax management. So tax loss harvesting.

So if you can actually get the same or a similar outcome to, let's say buying a pooled vehicle, maybe an ETF, that gives you that exposure, versus owning the individual securities, that again is where the client can actually, we can trade on the client's behalf and harvest any losses.

So when we have drawdowns like April of last year, we can actually step in and add value when the markets are selling off. And I think that truly provides a great kind of silver lining in the client advisor experience and relationship, in terms of being able to add value even when markets are selling off.

Now we're taking that a step further. And we at Invesco have actually been one of the leaders at the forefront of these new, long/short tax optimized SMAs. We've actually been in that space since the end of 2021, so over a four year live track record there. And I think, as I look at that space, it is the next evolution in terms of the SMA wrapper and what you can deliver for clients.

The interesting thing about those strategies is they're not really direct indexing. They are trying to actually deliver, in many cases, excess returns versus, let's say a benchmark. But at the same time, by having both long and short positions, the interesting thing is if we go into an upward trending market, like we've been in the last, candidly, probably 15 years, obviously with some blips. But upward trending markets, by having short positions as part of the mix, it actually allows for tax loss harvesting, even in an upward trending market.

And so these types of strategies can provide a lot more flexibility. They can provide flexibility to almost be able to as well fund these accounts with concentrated stock and be able to work them down tax efficiently.

So there's a lot of flexibility. And again, when I think about the efficiency that can provide and the value that can provide for an advisor and their client, again, these SMAs across the board are starting to become a game changer for, most of the advisors that we work with.

[00:11:36] Doug Heikkinen: We often hear about mass customization in portfolio design. How realistic is it for advisors to offer truly customized investment solutions at scale using SMAs, and what are the key operational considerations to get there?

[00:11:52] Josh Rogers: Yeah. So look, I think what we always want to try to do is offer the customizations that are appropriate and that, candidly, our clients want, right?

So in many instances, some of the customizations that we do, number one, that simplest that you can think of are like restricting individual stock positions. So let's say, an advisor has a client who works at let's say Apple, and they are unable to trade Apple. They shouldn't trade Apple. What we can do is actually restrict that out of the portfolio and create a custom benchmark for that client, or a custom investment universe that excludes Apple.

And so that I think is a, number one, a great tool. That client might be overexposed to Apple too. And so if you're buying an ETF or a mutual fund, you can't control that, but you can control it in an SMA. in addition to that, the other really big lever that we see and I like to talk about as a customization is that tax piece, right?

And really what I mean by that, is when a client walks in the door to most RIAs or most advisors, they generally are not coming with a big bag of cash. They don't have fresh cash to invest in. They've invested their career and have existing positions. And the, again, the beauty of an SMA is that it actually allows for customization of how you fund that account.

So as a specific for instance, you can fund our SMAs with existing stocks that the client may have. In some instances we can even take ADR, so international stocks. We can take, even again in some instances, ETFs and manage that as part of the total separate account. And so again, the beauty of that is it takes away some of that work that the advisor needed to do previously to say, okay, I'm going to open up a spreadsheet and see what do I need to sell? What do I need to buy? How can I manage the tax consequence of all this stuff that the client currently owns? And again, we can take that work off of their plate and create that glide path in conjunction with them and the client to ensure that everybody's aligned in terms of what the expectations are.

Again, I would just reiterate the point, there are lots of customizations. We continue to try to further expand those customizations. I'll give you one other example real quick that I think is really interesting. Today, we talked about those long/short type strategies. Another customization is actually how much leverage you use.

And the interesting thing about those strategies, and especially as it relates to maybe concentrated stock or clients who are dealing with more of those types of issues, is it actually allows you to have these different types of levers that you can pull in terms of how quickly you can de-risk a portfolio how much kind of tax benefits you could potentially have from the portfolio.

So again, we continue to constantly evolve the capability based on what clients are giving us from feedback and the customizations that they need to be able to really address the challenges that their clients are facing.

[00:15:05] Doug Heikkinen: Risk management is another key factor. How do SMAs allow advisors to address portfolio concentration, style drift, or factor exposures in a more controlled and transparent way than through pooled vehicles?

[00:15:21] Josh Rogers: Yeah. And I was starting to get there, but maybe we can take it a step further. Let's talk about, for a minute, concentrated stock, and the challenges that that carries with it, right?

And we deal with that a lot in terms of the advisor and clients that we are seeing come to us. In terms of traditional direct indexing, and we were talking about this before. With traditional direct indexing, let's say you have a client who has a million dollar NVIDIA position, right?

And that is more and more common as the days go on. And we also know that NVIDIA is, candidly, a pretty risky stock, right? it moves around a lot. And so there are plenty of clients who would like to de-risk those portfolios over time.

So in a traditional direct indexing portfolio, and we do this a lot, the client would fund the account, at least in part or in whole with that NVIDIA, and they would basically tell us, Hey, you can take $50,000 of gains each year, and we'll slowly work out of that NVIDIA position and apply that quote unquote "tax budget" to the process to be able to chip away at it.

And again, that's what I mean when I say that we can create a glide path for clients to slowly de-risk the portfolio. Now, to take it a step further again, when we talk about those long/short type portfolios, the really interesting thing about those is if that same client funds that same million dollars of NVIDIA, what's effectively able to happen and occur is we can borrow off of that NVIDIA using margin, and basically create these extensions around the NVIDIA. And that allows us to, number one, manage the risk of that position so we can buy things that are diversifying to NVIDIA, maybe staples or healthcare or utility stocks, and we can short things that are more similar to NVIDIA, maybe technology stocks.

And Interestingly, again, this is another step in the ability for advisors to be able to manage the risk, especially of these really challenging types of situations that they had before, where a client is way overexposed to an individual stock, but hasn't really felt the ability to be able to work that down, especially with the embedded tax consequence that's in it.

Again, I think that those are all really important pieces. We take risk extremely seriously as you could imagine. Our other strategies like our S&P Equal Weight and our Nasdaq SMAs, we take risk very, very strategically in those portfolios because we are also trying to deliver something that looks, feels, and acts like that benchmark, right?

Clients see the NASDAQ on CNBC every day, and when it comes down to it, they want to know that they're getting similar performance. So whether it's something that's funding with a portfolio that's more extremely concentrated, or whether we're just trying to keep the risk of these portfolios in alignment, it's something that is extremely topical to us, and we definitely take that very seriously.

[00:18:28] Doug Heikkinen: Let's talk about client relationships. How do SMAs and the transparency they provide deepen trust and engagement between advisors and their clients, especially during volatile markets?

[00:18:41] Josh Rogers: Yeah. Yeah. Look, I do think that relative to, ETFs and mutual funds, I will say that I think, again, that level of customization does help to really further expand that client and advisor relationship, right?

If the advisor can tell that client, Hey, this is what you came to me with. This is where we're trying to go. We are going to do that tax efficiently in a unique way for you that is not built the same as any other client that we have. I think that adds a tremendous amount of value to that relationship.

To your point around, how this actually helps play out as well in volatile markets. We all know, and we've experienced plenty of volatile markets over the last few years, that those can be really challenging times for clients to stay invested.

As the market's selling off dramatically, we all know that our first reaction in many instances is to, Hey, maybe we should take some of those chips off of the table. And again, if we can, and what we are trying to do with these SMA, is deliver a more tax efficient experience, if we can tell a client, Hey, yes, look, this is a challenging market environment.

Markets are down, let's call it 10% to 20%. But if you can tell a client, also, by using these types of SMAs, we've been able to tax loss harvest on the way down and add value so that your tax bill is lower either this year or the following year, whenever you're able to use those losses, it really does help to dampen the blow.

And I do think that there's so many clients who find so much value in the tax benefits, in terms of tax loss harvesting, that we do proactively, that again, the advisor does not need to do themselves. So it makes it a very efficient experience for advisors and it makes it, again, a value add experience for their clients as well.

[00:20:40] Doug Heikkinen: From a business standpoint, what advantages do SMAs offer RIAs who want to broaden their value proposition without overextending their internal resources or compliance teams?

[00:20:51] Josh Rogers: Yeah, I would probably go back to some of the comments around the evolution of the SMA industry. And I can tell you, look, like maybe five to 10 years ago, SMAs were a real challenge from an investability and an efficiency perspective.

However, as technology has improved, and I can assume that we're only going to continue to improve from an efficiency perspective, I think that having that customization and the efficient implementation, I think is going to continue to be a game changer for advisors that are looking to continue to grow their business.

What I can tell you is SMAs are never going to be the kind of point and click and buy of an ETF or something like that, right, because the experience is unique to each client. So that is something, and we do actually see a lot of advisors really incorporating both sides. ETFs and funds on one side, but also using SMAs to help drive that customization, that tax experience that I think can, again, be a bit of a game changer. As advisors are looking to grow their business, it's a great client acquisition tool to be able to say that we can customize this experience, this exposure for you, and do so in a scalable way.

[00:22:14] Doug Heikkinen: Invesco works with a range of advisor practices. What best practices have you seen from RIAs who are using SMAs not just as an investment solution, but as a strategic growth platform for their entire firm?

[00:22:29] Josh Rogers: Yeah. Yeah. I think, what I see as best practices from the RIAs that are using these SMAs and, truly, I will say I think RIAs of all of the places in the industry today, tend to have an advantage, especially as it relates to some of the things that I've talked about today, right?

Direct indexing has been around for a long time. It is becoming a more commonplace type of exposure, but it does allow that customization, which I think is great. RIAs have had a distinct advantage in access to these long/short types of strategies, right?

The RIA custodians, the big ones, have been ahead of the curve in terms of being able to offer those. And so I'll tell you what I tend to see is that that is an extremely strong and very powerful tool for client acquisition. Like we talked about before, clients who have these concentrated stock positions.

Well, if I help one client who has a concentrated stock position, maybe with that long/short SMA that they never had access to or thought about before, they're going to tell their friends, right? And they're going to, maybe they work at a company with a lot of executives that have those same problems. And so we are seeing it as a very powerful acquisition tool for advisors. Not just to help scale their business, but candidly, to grow it and to be able to take in clients without handing them a huge tax bill at the onset, right? Because that's the last thing you want to do when you're bringing on a great new client is say, Thanks for coming in. Here's a tax bill to get you into my process. By having a way to deal with some of these more complex tax situations in a unique way, again, it's just been a huge value add for the RIAs that are using it.

[00:24:20] Doug Heikkinen: All right, last one for you. And looking ahead, where do you see SMA innovation heading in the next few years, and how should advisors think about integrating these evolving capabilities and into their long-term growth plans?

[00:24:35] Josh Rogers: Yeah, it's a great question. And I feel like the SMA business and industry on the whole has just been growing and evolving so quickly with the use of technology, right?

Because of all of this customization that we can potentially bring to the table, I think us, along with every other manager that are in this space, are really focused on providing more and more of that flexibility that clients want.

As I look forward over the next couple years, I do believe that these long/short strategies will be, and continue to be, towards the top of the list of ways that advisors can truly add a, differentiated portfolio management function and client management function within their practice. I think they will become a bit more commonplace. Again, I do feel like there is a true use for traditional direct indexing strategies like we've talked about. And those long/short ones are not necessarily for every client, but I think they can be a powerful tool in the tool set.

Again, looking forward over the next few years, what I would see is really, that continue to expand. The customization, the ability to bring in actually other structures. So, what if, or what would happen if we can bring in, let's say, not just single stocks, but ETFs and maybe mutual funds under one umbrella.

Take all of that work of rebalancing and management off of the advisor's book while adding, again, potential pre-tax benefits, tax benefits. I mean, there's almost an endless array of things that could potentially happen. But again, what we're focused on is really trying to, number one, create little bits of guardrails around the portfolios.

We want to guide clients, right? We want to make sure that they're going to have a good experience. And so continuing that customization, continuing that flexibility, allowing advisors to offload more of the work that they don't want to do, and candidly, can be better done by a manager like us in terms of managing everything under the entire umbrella.

So I'm really excited to see kinda how things continue to evolve over the next few years, and I'm excited that Invesco is at the forefront of what's happening in this space.

[00:26:50] Doug Heikkinen: Josh, thank you so much for sharing with us the world of SMAs and how it can help advisors and their clients. Thank you so much for being with us today.

[00:26:59] Josh Rogers: It's my pleasure. Thanks, Doug.

[00:27:00] Doug Heikkinen: To learn more about SMAs and Invesco, please visit Invesco.com. We are on all social media platforms @Advisorpedia. Please give us a follow. For our producer Tory Miller and everyone at Advisorpedia, thank you so much for listening.