Firms Combine Tax Management, Risk Adverse Strategies

By Edward Hayes

Frontier Asset Management, a Sheridan, Wyo.-based asset manager, and 55ip, a Boston-based investment technology developer, are combining their areas of expertise to offer advisors a unique set of model portfolios that will minimize risk, while seeking ideal tax management solutions.

Maximizing client portfolio returns in turbulent markets takes more than a midas investing touch—reducing risk and tax exposure in asset allocation and portfolio rebalancing are two important keys to success.

In addition, given the demand placed on advisors to be more than investment managers, many have turned to model portfolios to make their job more efficient and get their client what they want. 

Recognizing a need in the economy, Frontier and 55ip inked a deal this month that will apply 55ip’s tax management solutions to Frontier’s ETF Strategies so advisors can utilize both techniques within model portfolios. 

“Being able to utilize 55ip’s tax overlay service within our risk-managed services gives a really unique product in the investment advisor space,” said Rob Miller, CEO of Frontier. “We’re hoping that investment advisors will get the best of both worlds with tax and risk management for their clients.”

Sachin Shah, chief operating officer at 55ip, recognized the desire advisors have to minimize their risk exposure.

“In this environment where there’s lots of uncertainty, there may be more of an appetite for risk managed solutions,” he said.

Frontier does not have any proprietary ETFs, but publishes its investment strategies, which are then used by advisors and asset managers, according to Miller. 

The firm establishes a downside risk target for each strategy that represents the expected one-year loss potential over a 12-month period. One particular strategy, Frontier’s Balanced Strategy, has a downside risk target of 10%, for example. The strategies are built around the idea of not losing more than the downside risk target 95% of the time, Miller said.

To keep that target, Frontier’s investment team meets monthly to go over the strategies to see if any changes are required in the underlying investments, according to Miller. In most instances, the team will make alterations to the strategy about once a quarter but will make more or less frequent changes if necessary.

“We look every month, we’re changing maybe once a quarter moving five to seven percent of the portfolio,” Miller said. “In times of high volatility, there will be more movement then as the markets move less you won’t see as much [movement].”

Since the firm does not manage its own proprietary funds, it has the flexibility to move assets around to whatever investment makes sense to accommodate the necessary risk factor. These underlying investments can include managed futures, floating rate securities, or high yield bonds, according to Miller.

55ip, meanwhile, offers tax management for a variety of products including model portfolios, ETFs, direct indexing, and active separately managed accounts. It does that through proprietary algorithms, which keep track of the different portfolios the firm oversees along with every tax position and tax law related to those portfolios.

The system identifies the proper tax-loss level and based on that makes a decision on when it makes sense to execute and move assets into a similar investment strategy where they continue to be used in a similar investment style. The system makes these moves automatically so advisors need not worry about having to make any changes themselves.

By incorporating its technology into Frontier’s risk management solutions, 55ip is hoping to provide advisors and their clients with more and better investment options.

“Combining a risk-management product with automated tax management ... makes a unique offering in the marketplace,” Shah said. “Combining the risk and the tax together and doing that in a way that is automated, [means] advisors can use it for different sleeves of their advisor practice.”

Given the tumultuous market conditions, advisors are seeking to limit their exposure to risk. By using Frontier’s ETF Strategies, they can do while maximizing their returns even in a down year. And with 55ip’s tax management technology overlaid on the ETFs, advisors can even turn tax losses into future gains.

“When portfolios are down, this gives us big opportunities to then book losses that will carry forward into the future,” Miller said. “So, the gains we have in years coming, will be able to offset some of those taxes because of the active tax management that was done now.”

Frontier has made a name for itself when it comes to risk-adverse investment strategies and has more than $6 billion in assets under management. Whereas 55ip, which has been enjoying significant growth largely due to an increased interest in tax harvesting technology, services about $11 billion through its more than 30,000 accounts. 

The current arrangement between the firms only covers Frontier’s ETFs, however Miller is optimistic the deal will expand to include more of its strategies in six months.

55ip is looking to offer its advisor clients its tax management services for other investment strategies it currently not available on its platform through either partnerships or organic growth. It is specifically looking to enhance and broaden its access through unified managed accounts (UMA). It is also focusing on adding tax smart solutions across additional passive and active SMAs, fixed income securities, and private investments, according to Shah.

“We are actively looking to serve the advisor and focus on how to deliver our services to a larger number of advisors,” he said. “We have a product roadmap that is focused on broad adoption of tax-smart portfolio implementation, setting the industry standard.”

In terms of the risk management aspect of the relationship, Miller is optimistic that the partnership will bring more attention to the importance of risk management.

“I don’t think the risk management equation has been tackled in the industry as much as it needed to be,” he said. “There has been so much focus on returns that we let the risk fluctuate.”