Technology Shifting In Portfolio Management

November 01, 2017

[This article originally appeared in our November issue of ETF Report.]

In the financial advice industry, like many industries, there’s a pendulum that swings between automation and the human touch.

Pressures like regulatory compliance, convenience and cost compression push the pendulum toward computerized solutions, while advisors’ fiduciary duty and their desire for autonomy pull it back toward high-touch, human service. Eventually, the pendulum usually settles somewhere in the middle.

For investment management technology, that pendulum may be coming to a rest (for now).

That’s because today’s fintech tools allow overworked advisors to pick and choose exactly which portfolio creation and implementation tasks they wish to delegate, and which to handle in-house. Advisors can retain as much—or as little—control over their clients’ assets as they like.

That’s especially appealing to newer or smaller firms, like Clint Thomas’ Integrity Wealth Solutions, which opened its doors last year.

“The all-in-one approach—where we hand everything off to an Envestnet or even a robo-advisor—I just couldn’t bring myself to do,” he said. “If someone called me needing money for, say, a roof replacement, I’d rather figure out myself where to pull the money, versus having someone else make that decision for me.”

In TAMPs We Trust
For decades, advisors who couldn’t or didn’t want to handle portfolio management themselves had two main options. They could hire somebody to do all the research, security selection, trading, rebalancing and so on—a cost that many smaller shops couldn’t bear—or they could delegate the whole shebang to a turnkey asset management program (TAMP).

TAMPs take care of investment management from soup to nuts. With advisors’ permission, they create professional-grade investment strategies and fully implement them; most also handle tedious back-office tasks, like onboarding, billing and compliance. They do all this through a blend of proprietary technology solutions. Some modern TAMPs even interface with brokerage and custodian platforms, making them a one-stop-shop solution for busy advisors.

“We allow advisors to outsource their investment department entirely, as opposed to a robo advisor, where you still have to go through account involvement, statement generation and investment thought process,” said John O’Connor, president of 3D Asset Management, an $840 million TAMP based in Hartford, Connecticut.

TAMPs are such a handy resource that they now represent a $250 billion market, according to a report by Wealth Advisor. The billion-dollar heavyweights—like Envestnet, AssetMark or SEI—are already household names (at least in the advisory world). But there are also plenty of smaller shops—like 3D Asset Management, which serves roughly 250 advisors.

TAMPs’ biggest selling point is that they free up time and resources so advisors can focus attention on what actually makes them money; that is, finding and retaining clients. Using a TAMP can also be much faster than developing similar processes internally, which can be make-or-break for advisors who are just hanging their shingles.

But TAMPs aren’t cheap. The typical service charges anywhere from 75 to 150 basis points for an all-ETF portfolio, says Wealth Advisor, and fees may go higher for larger accounts or complicated and/or blended portfolios.

Furthermore, the main characteristic of a TAMP—that it’s an all-in-one solution—can also be its biggest downside. A traditional TAMP is an either/or proposition: You either invest all your clients’ assets with a TAMP, or you don’t use one. Some advisors, however, bristle at the idea of handing over the keys to all their clients’ assets without any say in how their portfolios will be constructed and managed. Or perhaps they already have investment strategies they’ve developed, and they just need some help streamlining trades or back-office accounting.

That’s where fintech can help.

Not Just Rebalancing
There’s no shortage of trading and rebalancing software available. Tools like TradeWarrior, RedBlack and tRx allow the DIY crowd to step away from TAMPs and handle the automation of portfolio implementation in-house.

Instead of using a TAMP, for example, Greg Lessard, founder of Colorado-based Aspen Leaf Partners, builds his ETF portfolios using the risk analytics software Aladdin. He then implements them using iRebal, TD Ameritrade’s rebalancing tool.

“Based on these tools, there’s no need to use another platform where we can’t control overarching asset allocation or which funds are implemented. It would only add complexity and cost,” he said.

Integrity’s Thomas also builds all his own portfolios, and uses iRebal to automate rebalancing and tax-loss harvesting. For him, the fact that iRebal comes free for all advisors who custody their assets with TD Ameritrade was its biggest draw.


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