Which Portfolio Rebalancing Software is Right for You? (2/2)

This is part 2 of 2 of a summary from a panel discussion at the Tools and Technology Today (T3) Conference, which took place February 11-13, 2013 in Miami, FL.  You can read part 1 here.

Moderator: Tess Downing, Financial Advisor, Fox, Joss & Yankee, LLC

Panelists:

• Sheryl Rowling, CEO, Total Rebalance Expert (TRX)
• Brandon Rembe, CTO, Envestnet/Tamarac
• Danielle Fava, Sr. Product Manager, TDAmeritrade/iRebal
• Janson Evans, VP Sales, TradeWarrior

Does your product update portfolios using real time prices before rebalancing?

iRebal retrieves the latest pricing as soon as a rebalance is run, Fava stated.  All of the recommended trades are created using dollar amounts instead of number of shares, since they believe this provides a better picture of how the trades will impact cash levels.  They convert this to the number of shares when trades are approved and also refresh the pricing, she noted.

Tamarac also offers real-time pricing as part of their rebalance and also real-time execution reports for equities and ETFs, Rembe said.  Also, when you tell the system to update the cash positions, it evaluates T1 and T3 settlement to ensure that the accounts won’t be short cash.  If they are, then it provides an option to put those trades on hold and execute them on a later date, he said.

TradeWarrior receives real-time pricing from an external feed that can be used to update positions before running a rebalance, Evans said.

Rowling pointed out that TRX was designed to focus on trading of Dimensional Fund Advisors (DFA) funds, so they haven’t previously had a need for real-time pricing.  However, in response to recent requests from clients, they plan to support real-time pricing in a release sometime in the second quarter of 2013, she said.

Can your product help advisors to build their own investment strategies?

None of the products include functionality to build strategies.  Tamarac, TRX and iRebal all partner with other firms and products to accomplish this.  Tamarac offers access to research from Envestnet and Prima Capital, which EnvestNet purchases in 2012.  iRebal offers similar services via Morningstar while TRX integrates with MacroRisk Analytics, which for an additional charge of $50 per month, allows you to build and compare models, review them pre-trade and post-trade to help with decision-making and all of the risk-return  characteristics, Rowling said.

The only outlier in this category is TradeWarrior, which doesn’t currently offer any ability to build strategies, but they are exploring an integration with HiddenLevers to provide this, Evans reported.

I think that this is one of the areas where vendors can add significant value to the investment management process.  For those advisors who are  build their own models, it would cut out a few manual steps if the modeling tool was tightly integrated with the rebalancer.  Especially for Rep as PM advisors who adjust their models on a regular basis.  Having the ability to hit a button and export the updated model right into the rebalancing software would be a time saver.

Does your product have customizable asset classes to support long/short strategies?

All asset class in Tamarac, TradeWarrior and TRX are customizable and support basic option trading (like selling covered calls).  However, none of these product would be a good fit for advisors that primarily use options strategies like long/short, since they do not have any automated processes to support this kind of trading.

In contrast, the iRebal stand-alone version does support long/short and other option trading strategies, according to Fava.  Although, the upcoming cloud-based version does not, she added.

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What is the average implementation time for your product?

TRX, TradeWarrior and the iRebal standalone version can be fully implemented in between 1-3 weeks, including user training, their representatives claimed.  Rembe said that Tamarac usually requires a 90 day window to get to the point where the system is being operated effectively.  Fava claimed that the soon-to-be-released cloud-based iRebal could be fully implemented in just one day since.  This evoked some  it will be tightly integrated into Veo and will only support assets custodied at TDA.

What features do you offer that sets you apart from the other vendors?

iRebal offers a flexible tax harvesting feature that allows you to set various thresholds such as loss greater than $X at the position or tax lot level, can choose a replacement security for each harvested security, set a portfolio target loss amount that gets the client to net zero capital gains for the year.  The tax harvesting event doesn’t end there for iRebal because it continues the event process for up to 31 days and alerts you to unwind the replacement positions.  Also, if another rebalance is run before 30 days, the system won’t automatically try and sell the replacement securities and won’t buy back the harvested positions, she said.

TRX also offers a tax-loss harvesting feature at the fund-level, Rowling stated, which is extremely efficient.  It would take only five minutes to analyze all portfolios across your entire client base for tax losses, she claimed.  Another interesting feature is charitable lot identification, which locates the most appreciated long-term lots for a client to donate to charity in order to maximize their tax benefit.

To this end, TRX allows you to generate a tax benefit reports that will show your clients how much they’re saving in both total dollars and as a percentage.  The system can also run an end of year capital gains avoidance report for mutual funds, which will identify funds that should be sold in order to avoid capital gains payouts.  On average, firms that use TRX provide a tax benefit boost to their clients’ performance of between 1.0 to 1.5%, she reported.

What is your recommended frequency for rebalancing?

There is no optimal rebalance frequency since every firm uses different parameters to build and manage their client portfolios, Rembe advised.  While some Tamarac clients use calendar rebalancing, most setup drift guardrails of 20% above and below the model targets.  The system will automatically trigger a rebalance when a portfolio crosses this threshold, he confirmed.

iRebal will monitor all portfolios daily, based on the specific drift tolerances that are set up, Fava said.  But the system won’t automatically generate any trades.  The user would need to initiate this action, she advised.

Evans pointed out that a firm’s optimum trading frequency depended on whom they were trying to please.  If the goal is to please their custodian, then they should trade every day!  However, in order to make clients happy, each firm should evaluate their own needs to determine the best rebalancing frequency, he said.

Does your product support hierarchical modeling (models of models)?

Tamarac launched support for models of models about a year ago, Rembe said, and it supports up to nine nested tiers of models.  Advisors are looking to make more tactical moves in response to changing market conditions, Rembe reported.  Tamarac supports a focused rebalance where the user can rebalance only a specific model or asset class across all accounts, he said.

Fava noted that iRebal does support model of models, which is a feature that can greatly improve efficiency.  It allows the advisor to focus on small number of core models and then create a custom blend for each client.  It would be possible to manage just two core models, one fixed income and one equity, yet still have a custom allocation for each client, Fava said, and the system will automatically propagate any changes through all of the blended models.

What is your company’s policy for post-implementation technical support?

iRebal, TradeWarrior and TRX all offer unlimited technical support as part of their standard product offering.  Tamarac has a fixed number of support hours available per month.  However, out of their current base of 550 clients, only one client has ever gone over this number, Rembe assured us.

What new features do you have in the pipeline for 2013?

Rembe said that Tamarac is planning to provide tighter integration with the EnvestNet platform (no surprises there) and also more support for alternatives and options.

The other three vendors said that they were unable to answer this question at the present time.

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This was part 2 of 2 of a summary of panel discussion from the Tools and Technology Today (T3) Conference that took place February 11-13, 2013 in Miami, FL.  You can read part 1 here.