(Intelliflo) Advisors continue to shift from account-based portfolio modeling to householding as a way to meet increased client demand for improved tax efficiencies, asset location preferences, and personalized risk profiling. Householding encourages more holistic client conversations centered around family relationships and intergenerational wealth.
With a greater focus on value-added services and understanding what makes up a client’s full picture of wealth, advisors can reliably improve investor outcomes by reducing costs, managing risk, and minimizing taxes. Ernst & Young found when these outcomes are effectively achieved, after-tax returns and income improve by 33% over an investor’s lifetime.
If advisors are looking to make this shift from individual account-level management to householding, it’s important to understand that the right rebalancing and trading technology is necessary for mass portfolio modeling and customization at the household level, as well as to streamline an otherwise long and complicated transition process.
Here are three ways to use rebalancing technology to transition to household-level portfolio modeling and performance management:
1. Aggregate data and model targets
Given the additional accounts and positions available at the household level, data aggregation combined with rebalancing and integrated trading is a critical component of shifting effectively to householding.
As a first step, the advisor must be able to view positions across accounts, risk profiles and aggregated model targets, and determine the drift per asset class and security across the household. A truly robust rebalancing solution should be able to suggest trades on drift and enable the advisor to quickly see potential tax consequences across the overall household in a single portfolio, rather than many different accounts.
2. Determine tax efficiencies
For many advisors, their clients’ increased demand for location preferences and tax efficiencies is the catalyst for moving toward a householding structure. Reviewing risk profiles across accounts within a household is also crucial to assess the proper alignment between risk tolerances, preferences and capital gains budgets.
Liquidating securities to cash across all those accounts, putting them into a household, and using location preferences to dictate where the securities should be held is a clean-slate approach, but may present significant tax consequences. By contrast, a natural drift approach prescribes slowly moving or weighting securities according to the household model as changes in prices or managers occur.
A rebalancing solution should be able to help the advisor reduce or eliminate the client’s tax consequences and offer wash sales logic across the household to maximize tax efficiencies.
3. Drive flexibility, scale and growth
The true value of a rebalancing solution comes down to its flexibility – can it support desired imports and ultimate output? –and its ability to scale. Advisors should be able to define location preferences across taxable, tax deferred and tax-exempt statuses. The ability to create an unlimited amount of location preference sets is especially valuable for assigning the appropriate set when it runs through a rebalance. A solution should be able to import restrictions, equivalents, and account and household attributes, as well as customize the rebalance settings for a group of portfolios.
Most firms who manage clients at the household level do so at scale by using rebalancing and trading technology to make the process more efficient. Being able to rebalance portfolios at the household level demands efficiency at scale, which enables the firm to bring on more clients and give each the same high-quality service without the additional overhead.
Making the transition to householding
Householding drives better outcomes for investors and advisors alike. Advisors who have not yet embraced householding are missing a major opportunity to work more efficiently, improve their clients’ experiences and ultimately build stronger relationships.
A technology platform like our RedBlack solution that offers asset location, tax-loss harvesting, and household-level rebalancing can help advisors make the shift. Coordinated, multi-account household management is feasible only with rebalancing and trading capabilities that remain in sync with clients’ risk profiles and tax requirements, while also providing personalization and scalability.