For some advisors, it's the best $50,000 you'll ever spend.
Even the best financial planning firms experience some inefficiencies. Perhaps one factor that separates the "best" firms from the rest is that the former consistently try to identify and eliminate inefficiency, thus improving productivity and profitability.
At a recent meeting of the Alpha Group, a study group that includes many prominent advisors, Christopher J. Cordaro explained how his firm, Regent Atlantic Capital LLC of Chatham, N.J., had targeted "rebalancing" as an area requiring optimization. In partnership with two other firms, Balasa, Dinverno & Foltz LLC of Itasca, Ill., and Kochis Fitz Tracy Fitzhugh & Gott in San Francisco, they had developed a technology solution to the rebalancing problem.
The solution, a software program called iRebal, was built for them by Gobind Daryanani, president of Digiqual Inc. Daryanani, CFP, Ph.D., a consultant who specializes in high-end financial planning tools and technologies, is the inventor of the "Beyond Monte Carlo" simulation method, and the author of "Roth IRA Book: An Investor's Guide." He also developed the Stock Options Risk Analyzer, which is distributed by Brentmark Software.
Daryanani currently is installing iRebal version 1.0 at the three firms. Once that task is accomplished, the partners will begin selling the software on a limited basis to outsiders, at a cost of $50,000 per firm. They plan to offer iRebal to a maximum of five firms in 2005, and possibly ten more in 2006.
Sound expensive? Consider this: Three Regent Atlantic analysts currently spend 50% to 75% of their time monitoring and rebalancing client portfolios on a weekly basis. Once iRebal is fully operational, Cordaro estimates that it will take a single analyst less than 50% of his or her time to monitor the same portfolios on a daily basis. So, at the very least, Regent Atlantic should save the equivalent of the salary and benefits of one skilled analyst, which I'm guessing far exceeds $50,000 in the New York Metro area. In addition, they are getting increased productivity (daily vs. weekly monitoring), better reporting and possibly better rebalancing solutions.
What iRebal Does
The primary goal of iRebal is to rebalance across
accounts at the household level. In addition, iRebal is designed to
help manage cash flows into and out of the portfolio. "Sometimes a
client will make a sizable deposit into an investment account without
informing us, says Cordaro, CFP, CFA, MBA.
Right now, it might take us a few days to identify
the deposit and initiate the trades. When iRebal is fully operational,
we should be able to act faster."
Reporting is another iRebal feature. As a firm
grows, management reports become more important. "I used to be able to
stick my head out of my office and know what everybody was up to," says
Cordaro. "Now, I rely more upon management reports," Cordaro adds that
iRebal's reports provide an excellent audit trail for both internal and
compliance purposes.
Additional features are already being planned. Once the initial installation is complete, Daryanani says he will add features, such as proactive tax-loss harvesting and proactive asset relocation.
iRebal's Core Functionality
The typical "client" of a financial advisor has
multiple accounts. Usually, there is at least one taxable and one
tax-deferred account. If the "client" is a couple, it is likely that
each spouse has one or more taxable and tax-advantaged accounts. Often
additional accounts are involved, but for now let's keep it simple.
Under these circumstances, the most efficient method of managing money for these folks is to treat the accounts at the "household" level; that is, for purposes of asset allocation and rebalancing, create target asset allocations that apply to the combined "household" account, and rebalance at the household level when necessary. This approach should result in fewer, larger trades, which leads to lower overall transactions costs over time. Initially, the more tax-efficient asset classes would be purchased in the taxable accounts, and the less tax-efficient assets would be purchased in the tax-deferred accounts.
For example: The couple owns a small-cap value
mutual fund in three separate accounts, and the value of that fund has
appreciated rapidly versus the rest of the portfolio, triggering a
rebalancing event (a sale of a portion of this particular fund and the
purchase of another portfolio asset). It makes more sense to sell the
position from one account, and make the necessary purchase to one
account, rather than selling a proportionate share of the holdings in
each individual account and making a corresponding purchase in each
account. With a single purchase and sale, only two trades are required.
Using the individual account method, six trades are
required. In addition, under the individual account method, you are
more likely to run into minimum purchase restrictions because the
trades are smaller.