The relationship allows Addis & Hill a cost-effective way to tap professional analysts without the expense of adding new staff (or buying extra software). The firm can talk with quantitatively savvy finance professionals regularly in order to make strategic investment decisions. Perhaps the biggest advantage is that the relationship helps the small firm make better use of its time. "We're a growing practice and we need to develop new business," Addis says. Outsourced Financial is helping the firm achieve that goal by shouldering some of the research workload.
Stan Richelson
Scarsdale Investment Group, Blue Bell, Pa.
Recommends: A proprietary list of muni broker/dealers
The world of bonds may appear more serene and uncomplicated than stocks to the casual observer, but appearances can be deceiving. Those who buy and sell individual bonds-as Richelson prefers to do-face Byzantine variables. That's particularly true for his fixed-income preference-municipal bonds, which suffer from illiquidity, variations in call provisions, etc. The only way to navigate this maze is to develop a network of broker/dealers that specialize in munis, says Richelson, co-author of the book Bonds: The Unbeaten Path to Secure Investment Growth (Bloomberg, 2011). Otherwise, there's little alternative, since there's no consolidated, liquid marketplace for munis.
It's taken Richelson years to piece together his trusty list of 15 B/D sources, he explains, a critical resource if he's to find specific munis at competitive prices. "It's not like trading stocks," he emphasizes. "There are 500 big stocks and another 2,500 smaller ones, and they're all available, whomever you call." Bonds are different. "There are over 1 million discrete issues, and I'm just talking about munis."
He says it's no small advantage that 15 brokers are routinely advising him on their inventory. On any given day, he may be investing several million dollars for clients, although most of that comes from rollovers with maturing issues.
In the old days, he says, you could call Merrill Lynch and they'd quote from a huge inventory. But the muni market has evolved, and inventories at any one broker tend to be lean these days. Richelson's network also comes in handy when he's selling. In those instances that he's a seller, his ability to review five or 10 bids from brokers at once is a powerful advantage for securing a fair price.
His network includes several familiar names-Morgan Stanley, Merrill Lynch, Wells Fargo-along with less-conspicuous players such as small regional banks. But the real advantage-his proprietary edge, as he sees it-is his long-standing relationships with the individuals at these firms. "We've found brokers who spend the bulk of their time in munis."
You can ask Richelson just about anything on the topic of munis and he'll respond authoritatively and at length. But just don't ask him to name names in his network. That's the one subject in fixed income on which he's speechless.
Nancy Bryant
Greenspring Wealth Management, Towson, Md.
Recommends: Total Rebalance Expert software (trxpert.com)
Rebalancing is a critical part of managing portfolios, but some aspects can be mind-numbing and time-consuming. Fortunately, a new generation of rebalancing software eases the burden and helps optimize the investment decisions along the way. Of the several competing products available, Greenspring favors Total Rebalance Expert (TRX), which is designed to work with Schwab's Portfolio Center portfolio management system (the successor to what was known as Centerpiece).
Bryant's firm uses TRX for three primary facets of rebalancing: 1) picking asset weights to maximize the expected risk-adjusted return, while 2) minimizing the taxes and 3) lowering trading costs. Greenspring, which manages money via several model portfolios built around ETFs and mutual funds, has been using the software for about two years. The firm has roughly 150 clients, so this method is far superior to the old one (crunching the numbers on a spreadsheet), Bryant says. "Last year, we rebalanced [client portfolios] twice due to market moves." The spreadsheet approach would have taken a week, maybe longer. Now the job is completed in a few hours.
The software also allows advisors to customize rebalancing rules for each client, choosing how and when the rebalancing trades are executed. In addition, "the technical support from TRX is tremendous," Bryant says. And since the software runs on a cloud system, the users don't have to worry so much about problems on their local computers.
Perhaps the only thing to worry about is the ancient problem of human error. "The software assumes that I know what I'm doing," Bryant says. So all bets are off if, say, an equity ETF is mislabeled in the rebalancing process as a bond fund. As in any software system, the results are only as good as the information put in. Software, in other words, still has a hard time overcoming the limits of wetware.