when an investor has separately managed portfolios assets are placed under the control of different managers this set up can cause inefficiencies if the managers begin making transactions that either increase the risk of the overall portfolio have negative tax effects unbalance the investor s positions or work at cross purposes for example if one of the separately managed account traders purchases an asset and another trader sells it the investor is left with a neutral position and two transaction fees 
overlay management seeks to improve the communication between the separate managers allowing for increases in transaction efficiency in traditional separately managed account structures clients capital is delegated to multiple outside managers to invest but in anoverlay system the assets and the ultimate responsibility stay togetherin a unified managed account overlay portfolios should have a stated purpose and specific guidelines to avoid issues arising for instance the overlay manager may determine maximum allocations across an entire portfolio or require that investments are made in a particular asset class as a pamphlet from ostrum formerly natixis asset management charmingly puts it advantages of overlay portfolio managementprofessional asset management and allocationnear automatic rebalancing risk managementtax managementsingle contact for investortime consuming to establishcompliance approval neededongoing communication meetingsaccounts assets all at one firmlimitations of overlay portfolio managementif the different portfolios have complex investment strategies an overlay system may be time consuming to set up gathering documentation from various fund managers and understanding their approach toward portfolio construction and risk management may require numerous meetings to ensure effective coordination not just initially but ongoing also an overlay portfolio typically needs to be approved by various compliance departments before it can be established real world example of overlaymany wealth asset management firms and trust companies offer overlay services to their clients piper jaffray is one such clients who opt for a unified managed account are assigned an overlay portfolio manager who has responsibility for the day to day management of the assets based on the client s stated goals needs preferences risk tolerance etc this manager in turn receives investment advice from other investment managers in the form of a model portfolio a recommendation of specific securities and transactions the overlay portfolio manager decides whether or not to execute these recommendations and to what degree in line with the client s tax situation current asset allocation and degree of aggressiveness 