Serving Registered Independent Advisors (RIAs) is at the heart of what we do at CDI. Numerous RIA partners have come to us wanting to either incorporate or diversify their clients’ portfolios (more specifically, to add separately managed accounts (SMAs) to the index and mutual funds those clients currently hold).
To that end, a lot of our RIA partners have compliance questions. Yes, we know… it’s not the sexiest topic. But as you’re well aware, when you work in finance, there’s a host of operational and compliance questions and concerns to consider.
So, being that we’re getting a lot of the same operational and compliance questions from our RIA partners, we wanted to put together an FAQ to help answer some of the more common questions we’re fielding. These answers are specific to a subadvised, single-contract relationship, but generally apply to dual-contract SMAs as well:
General
What client information is required by CDI prior to opening an SMA account?
The Advisor is required to fill out a one-page client profile which includes information such as tax status, client name and address, US Citizenship, custodian, etc. This does not require the client’s signature and helps fulfill CDI’s “Know Your Client” rules.
Can the RIA be removed from the account?
No. The RIA chooses whether or not to hire CDI as a manager on the account. The RIA would request the custodian add CDI to the account, but CDI would not be able to remove the RIA from the account.
How do contributions and withdrawals work?
Just like any other account. The Advisor would inform CDI of the requested money movement, and we would trade appropriately.
What account fees could apply, and who is responsible for them?
CDI charges quarterly investment management fees (which can be debited directly from the client account or invoiced to the advisor). Additional fees may be applicable via the custodian based on strategy trading, account type, etc.
What happens to a separately managed account if the underlying account manager closes the strategy?
We would inform the Advisor well beforehand and agree on a path forward. Importantly, the client owns the underlying securities. The Advisor could find a replacement manager to take over the account, or the Advisor could assume control of the portfolio and liquidate/maintain the underlying positions at their discretion.
Do these answers differ in a dual contract SMA versus a single contract SMA?
Most of these answers apply to both dual contract (between client and CDI) or subadvised single contract (between advisor and CDI) SMAs. The main difference between the two contracts is who is contracted with whom.
Reporting and Communication
What communication occurs between CDI and the client? And the RIA?
Communication between CDI, the RIA, and the client can be tailored to the RIA’s preferences. Communication between the custodian and client is prescribed, so customization is limited to material delivery options such as electronic or paper. Confirmations, statements, tax documents, etc., are required to be sent from the custodian to the client/advisor.
Can we tailor Black Diamond reports to report like an individual fund rather than individual holdings?
Yes, Black Diamond and other reporting tools can be tailored to report an SMA as an individual strategy as indicated here.
“Daily reporting on each SMA at the aggregate level as a single asset line item, with drill-down capabilities to individual holdings.”
Operations
Can a separately managed account be taken over by another separate account manager (transfer in-kind)?
Yes, CDI can accept in-kind transfers of account (TOAs) to fund our SMAs. We ask that we receive notice beforehand to know what securities we will receive. Conversely, the RIA could deliver our SMA via TOA to another manager.
Can an SMA be transferred out of a separately managed account in-kind?
Yes. That said, the details would need to be confirmed with the receiving custodian to ensure they can accept the assets that are being transferred.
Can transfers be made directly from the underlying shares of stock in a separately managed account…to a Fidelity Charitable Account? Other Charity or Foundation? Other non-charities?
Yes, shares can be transferred out of the SMA accounts. This may, however, create the need to rebalance the portfolio to keep it in line with the model.
Can individual tax lots be identified when transferred?
Yes. Our default tax basis is high-cost, but we can specify individual lots. This would need to be established before completing the transfer. We also allow for tax loss harvesting in our strategies. Generally, if a security is sold for tax loss, we default to placing that cash in a predetermined ETF until we can repurchase the security.
IMPORTANT DISCLOSURES
This information has been prepared for educational purposes only and does not constitute financial, investment, tax, or legal advice. These materials reflect the opinion of City Different Investments on the date of publication or use and are subject to change at any time without notice due to various factors, including changing market conditions or tax laws. All investments are subject to varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy or product referenced directly or indirectly herein will be profitable, perform equally to any corresponding indicated historical performance level(s), or be suitable for an investor’s portfolio. Past performance is not an indicator of future results.