Overview

The Trade Restrictions Tool customizes trade-building behavior to meet specific account holder needs. For example, a client may need to avoid trading in the shares of their employer. Or, an account holder may wish to avoid selling a particular security, even if this creates drift from a model portfolio’s weights. Restrictions allow for client customization, at the account level, without having to create a new target for each client.

From the left hand navigation:

Accounts > Trade Restrictions

There are three categories of Restrictions: Exclusions, Substitutions, and Equivalent Securities.

Exclusions

Exclusions will either prevent securities from being purchased, or prevent them from being held, depending on the options selected. The Exclusion Restriction can be used for either securities that are already owned in an account, or to prevent certain securities from being purchased in an account.

📘Note: Exclusions apply to all shares of a security. In order for an Exclusion to apply only to a partial number of shares within an account, the shares exempt from the Exclusion must be moved into a Protected sleeve.

To create a new exclusion, click the “+ Create New Restriction” button, then “Exclusion”

A slide-out menu will appear:

First, enter the account number. Then, enter a stock symbol for the excluded security.

For “Replacement Behavior” your options are to “Hold Cash” or “Reallocate to the rest of the portfolio”. Hold Cash will prevent additional purchases of the security and allocate the weight of the excluded security to cash. Reallocate to the rest of the portfolio will prevent additional purchases in a security and allocate the weight of the excluded security to the rest of the assigned target/allocated model’s securities, on a pro-rata basis. (Note in this case that the target allocation to cash does not change.)

The “Behavior” options allow you to Hold Existing Shares, Liquidate Existing Shares Immediately, or Liquidate Existing Shares as Needed.

Hold Existing Shares will keep the existing shares of the security, not purchasing or selling additional shares, as of the start date and follow instructions selected in “Replacement Behavior.”

Liquidate Existing Shares Immediately will liquidate the shares and either allocate to the rest of the portfolio or hold cash -- whatever instruction is selected in “Replacement Behavior.”

Liquidate Existing Shares as Needed will only liquidate shares as needed according to the assigned target, while preventing any new purchases.

Next, enter Start and End dates. The End date is optional, and can be edited later, if desired. If an End date is entered, you will be given options on what the tool should do when the date arrives. These options are:

Immediately rebalance the account to reallocate to the excluded security – SMArtX will process the rebalance automatically on the end date if the security is in a model sleeve. If the excluded security is in an APM sleeve, however, the account will reallocate back into the security the next time the account is rebalanced by the client.
Reallocate to the excluded security when a model or I change its target weight – The exclusion will continue until a model or target change is made

Click “Submit” to create the Exclusion

Substitutions

The Substitution restriction can be used to replace purchases of securities that are already owned in an account or to prevent certain securities from being purchased in an account.

To create a new substitution, click the “+ Create New Restriction” button, then “Substitution”.

A slide-out menu will appear:

Enter the account number, then the stock symbol to be replaced, and then the stock symbol to replace the first-listed symbol.

The “Behavior” options are the same as for Exclusions; see their description above.

Immediately rebalance the account to reallocate to the excluded security – SmartX will process the rebalance automatically on the end date if the security is in a model sleeve. If the excluded security is in an APM sleeve, however, the account will reallocate back into the security the next time the account is rebalanced by the client.
Reallocate to the excluded security when a model or I change its target weight – The exclusion will continue until a model or target change is made.

Click “Submit” to create the Substitution.

Equivalent Securities

The Equivalent Securities Restriction treats a set of securities as being “identical” for trade-building, reducing turnover while maintaining similar investment performance. It is at the advisor’s discretion how to use this Restriction, but, as examples,

Equivalent Securities could be share classes of the same equity, or funds that track the same index. By treating them as equivalent, SMArtX won’t generate a sale of one of them simply to buy another one.

To create a new set of Equivalent Securities, click the “+ Create New Restriction” button, then “Equivalent Securities”.

A slide-out menu will appear:

First, enter the account number.

A set of Equivalent Securities has one or more members. Start by selecting the first symbol and its desired behavior. Then, add another symbol with the “+ Add Another Symbol” button. Continue until all the members of the equivalent group, and their behaviors, are added.

A set of Equivalent Securities can have between one and twenty members.

The options for Behavior are:

No Behavior: (Default) When this option is selected, and the account needs to add to its holdings of the group, securities that are present in the model portfolios will be bought first. When the account needs to trim its holdings, securities not in the model portfolios will be sold first. Among sets of securities that are all in/out of the models, relative buy/sell preferences are undefined. To be prescriptive about these preferences, use one of the options below:
Buy First: When the account needs to add to its holdings of the group, buy this security first. Conversely, when the account needs to trim the group’s weight, sell this security last.
Do not sell: Don’t sell this security. The other securities in the group will be sold instead when the group’s weight needs to be reduced. If the other securities have no remaining positions, keep this security in the account with a “no sell” restriction
Do not buy: Don’t add to the position of this security, or establish a new position if there isn’t one already. Buy the others in the group instead when the group’s weight is increased
Do not trade: Combination of Do not sell and Do not buy

📘Note: That an equivalent securities “group” can consist of a single member, in which case the Do not sell, Do not buy, and Do not trade behaviors will still have an effect. However, in a “group” of one security No Behavior and Buy First are meaningless and will be ignored.

Equivalent Securities restrictions always take effect immediately; the Start date cannot be changed and is recorded only for informational purposes.

Optionally, enter an End date. If an End Date is entered, it must be in the future, and the Equivalent Securities Restriction will expire after that date (the restriction is still in effect on the End Date). After expiration, the system will not take any specific action, but will simply build trades without the Restriction. If no End Date is entered, the Restriction will not expire, but can still be deleted from the “Trade Restrictions” page.

Click “Submit” once everything is entered

Multiple Trade Restrictions

In order to avoid inconsistent instructions, the same security cannot be part of more than one Trade Restriction for the same account. If a user attempts to create a new Trade Restriction on a security with an existing Restriction, they will be prompted to delete the other Restriction first.

The exception to this limitation is that a security can be part of an Equivalent Securities Restriction, and also be the substitute (but not the security being replaced) security in a Substitution Restriction. In this situation, the substitution is into the Equivalent Securities group, and SMArtX will use the behavior options for that group to determine which member of the group serves as the actual substitute when building trades.

📘Note: That this means that the specific security designated as the substitute may not actually be purchased.

As an illustration, consider this example:

A Substitution Restriction exists on an account, naming GOOG as a substitute for AAPL.
The same account also has an Equivalent Securities group of two securities: GOOG and GOOGL.
The account is invested in a model that holds AAPL.

In this example, the account could hold GOOG, GOOGL, or a combination of the two. Which of them is held would depend on the Behavior options selected for the Equivalent Securities Restriction, and possibly also on any legacy holdings in the account prior to the Restrictions being implemented. The fact that GOOG was named as a substitute for AAPL in the Substitution Restriction does not give it preference within the Equivalent Securities group.

Editing and Deleting Trade Restrictions

To edit an existing Restriction, find the account and click on the pencil icon to the far right. To delete a restriction, find the account and click on the trash can icon to the far right.

When editing a restriction, you can only update the end date and the instruction when the rule ends. To make changes to other fields, you must delete the rule and create a new one

APM Sleeve Trades and Equivalent Securities Trade Restrictions

Trade Restrictions are intended to give an Advisor control over how investment models are implemented in individual accounts. It is assumed that directly-entered APM (Advisor as Portfolio Manager, aka “Managed Portfolio”) trade instructions take precedence over account-level Equivalent Securities Restrictions. APM Trades created through the Portfolio Editor will be sent to market, as specified by the Advisor, irrespective of any Equivalencies.

For example:

if an account had an Equivalent Securities group of SPY and VOO,
and an Advisor created separate target weights for SPY and VOO in the Managed Portfolio using the Portfolio Editor,
and both buys and sells were needed to implement the target weights

Buy and sell trades are both sent to the market, and not netted against each other.

The assumption in this case is that the instruction to sell one security and buy the other, in spite of their “equivalency”, is an intentional action taken by the Advisor.

Long-Short Accounts and Equivalent Securities Trade Restrictions

The behavior of Equivalent Securities Restrictions in accounts with short positions can be unintuitive and it is recommended that Advisors contact SMArtX customer support before attempting to use these Restrictions with long-short accounts.

For example: Do not trade behaviors still hold; securities assigned this option will not be traded. But, Do not buy allows buy-covers and sell-shorts, while Do not sell also allows buy-covers, while preventing sell-shorts. Since Equivalent Securities groups calculate trades based on the sum of the group’s weight, long-short accounts with long and short positions both within the same Equivalency group generally won’t produce the desired result; short weights will be netted against long weights, and trades will be built to achieve the overall net weight for the group.

Please consult with SMArtX customer support for guidance before using Equivalent Securities in these cases.