As part of my series of articles on portfolio rebalancing software, I met with some folks from Interactive Advisory Software (IAS), who were kind enough to give me a demo of not only their rebalancing tools, but their entire wealth management platform, called Solution 360.
IAS is based in Egg Harbor Township, NJ and was founded in 2000. They have 55 employees to support around 200 firms using their platform, of which 90% are RIA’s. They are a fully-owned subsidiary of Hanlon Investment Management, which purchased IAS from their VC backers in 2012.
I had the pleasure of speaking with Nathan Burke, CEO of IAS and Matt Wolf, Regional Sales Director who provided a high level overview of their product. They handed me off to Wade Waller, Director of Product Management and Ryan Jotkoff, the Product Manager for Rebalancing to answer my more in-depth questions.
Tax Management Sets IAS Apart from the Competition
Tax management is probably the area that most sets them apart from their competitors, according to Wolf. Since their platform includes financial planning and their rebalancer is tightly integrated with the rest of their system, it has immediate access to a lot of additional client information. This helps the rebalancer make better decisions as well as generate detailed tax estimates with multi-year projections and taking into account gross income, itemized deductions and client expenses, he explained.
While I usually advise clients against ‘re-inventing the wheel’, in this case, the time and effort it took IAS to develop their own financial planning functionality has paid off. Whereas other firms force clients to import data manually or use programming interfaces that are sometimes unreliable, IAS has immediate access to all the data.
And they use this data to their full advantage across the system in ways I haven’t seen many other vendors offer. The system has an automatic exercise feature that converts employee stock options into an underlying equity position going forwards, captures dividends and can even project the client’s future tax rate, Wolf added.
IAS did an excellent job balancing ease of use with a robust list of features in their rebalancing software. The user is presented with a short list of options before kicking off a rebalance that keep the look and feel simple. Rebalancing batch runs can be scheduled on a calendar basis, as often a every night. The built-in logic is location aware and will assign securities to taxable vs non-tax accounts based on their estimated tax efficiency. (i.e. securities that throw off dividends and interest go into non-taxable accounts while the rest go into a taxable account.)
One omission I noticed was that the Trade Order List doesn’t highlight proposed trades that would generate short-term capital gains taxes. You have to click on each trade amount in order to see a Taxes & Fees Recap window that includes the tax impact of the order.
Also, the Rebalance Options page doesn’t include a switch to avoid them, either. I think any rebalancer with more than a modicum of intelligence should make sure to point this out to the user before the trades are sent for execution. Burke agreed with me on the usefulness of this feature and promised to get it into a future version.
That being said, this is a smart rebalancer that offers a number of different options including:
- Withhold cash to cover fees at the household level – sets aside enough cash from buy orders to cover the upcoming quarterly fees. There is a separate screen to upload the fees into the system for this.
- Attempt to use up tax loss carry forward – part of their built-in financial planning functionality that keeps track of client’s taxes, will perform a scan to see if any positions with capital gains can be harvested to offset a loss that was carried forward from a prior year. Other systems require the advisor to manually enter this information for each client, or import from a third-party planning tool, which is not as efficient.
- Calculate and Withhold RMD – this is a very useful option that will tell the rebalancer to check with the financial planning module to see if there is a required minimum distribution that must be withdrawn from a retirement account.
- Override Household Tax Brackets – allows the advisor to run a what-if scenario to see the impact of changes to the client’s state and federal tax brackets on the trades that would be generated.
- Minimize trading costs – for accounts that are subject to ticket charges from the custodian, this option will restrict the rebalancer to only look at asset classes that are outside the predefined tolerance limits, as opposed to trying to bring every asset class back to its target allocation.
There is a well-designed screen that displays the rebalance results for a particular account (see screenshot). It shows pie charts for the current holdings vs the proposed holdings after the recommended trades are executed.
Manual Trade Order Management
The results of each rebalance can be automatically exported to into the required file format for each custodian. The advisor or back office staff would then upload the files through the custodian’s web interface and then wait for confirms. However, Burke confirmed that they are working on straight through processing with TD Ameritrade where approved trades would be sent directly to them over a secure Internet connection.
Advanced Support for Held-Away Assets
One feature that I have only seen on higher-end products is support for held-away 401(k) accounts. The IAS rebalancer will generate proposed trades for a 401(k) so the advisor can send the list to their client. When their calendar window for changing allocation comes up, they will be able to implement the recommendations. While the advisor doesn’t benefit directly from this account, it will create a lot of goodwill with clients and some advisors may even be able to charge up to 50 basis points for advising on the held-away assets.
According to Burke, IAS partners with three third party providers for data aggregation; ByAllAccounts, CashEdge, and Accumulate, which provide direct connections to over 40 custodians.
Solid Model Management
The IAS platform provides solid model management functionality that gives advisors the ability to create and maintain their own models and leverage them to control the investment strategy of potentially thousands of accounts. Models can be created with broad asset allocation weights or using individual investment products with sector and style box data sourced from Morningstar.
Even though their average client AUM is only around $80 million, they offer a number of features that would be quite useful for larger firms. There is the ability to setup a trade approval process to require a manager to approve any trades submitted by an advisor. Or the trading tab can be completely hidden when management wants their back office to control everything.
The model manager also allows advisors to share their models with other advisors inside their firm, if the firm allows this. There can be different DBA’s and disclaimer messages for each model to stay within compliance rules.
How do you convince advisors who still rebalance manually that software automation can do it better?
Every morning the advisor can come into their office and see a report of all accounts that are currently out of tolerance, Burke pointed out. This would require a significant amount of manual effort for someone who was rebalancing their accounts by hand. An automated software rebalancer saves this time for the advisor so they can use it for other tasks, he said.
Can you describe your level of integration with external products?
IAS currently supports integration with financial planning software MoneyGuide Pro and are working with Salesforce to connect to their CRM platform, Burke noted. The most interesting connection under development is with Baer Software, a company that has an integration hub concept in beta test.
The idea is that a firm would only have to build connectivity to Baer and they would provide automated integration to a wide variety of third party vendor products. This harkens back to the Silver Bullet Project, an industry concept that died on the vine a few years back. If Baer can get this working, it would be a game-changer for smaller firms like IAS who would be able to spend their development dollars on building new features instead of integrating with every external vendor their clients request.
How much does your product cost?
Their wealth management platform, Solution 360, is sold as a fully-integrated unit and individual modules can not be purchased individually, Burke informed me. That being said, their platform fees are account-based and start at $5/account, with a 100 account minimum/month. The per account cost goes down with volume. $500/month gets you 400 acts and steps down to $3.50/account when you hit the 2,000 account level.
These prices include daily data reconciliation, peer-to-peer performance reports, financial planning and a client portal with a built-in document vault, Burke pointed out.
Does your product update portfolios using real time prices before rebalancing?
Does your product have customizable asset classes to support long/short strategies?
No. But it does support support short positions and trading on margin, Burke stated.
What is the average implementation time for your product?
Since their entire platform is implemented together, there is no way to break out the time required for just the rebalancer. But Burke suggested that there is a standard three-tier implementation timeframe they quote for new clients:
- 30 Days – convert the CRM, establish Households, connect to the RIA, setup reconciliation process
- 60 Days – setup Financial Planning, Client Portals, Report Packages and Fee Grids
- 90 Days – convert all historical client data
What is your recommended frequency for rebalancing?
It depends on the firm’s business model, Burke specified. For their own RIA, they are tactical asset managers, so they would normally trade no more than twice a month.
Does your product support hierarchical modeling (models of models)?
Not yet. But this feature is in progress, and is due by the end of the year, Burke promised.
Who are some of your direct competitors?
What new features do you have in the pipeline for the rest of 2014?
Burke and Wolf were very open with me regarding their pipeline and even shared a few of their internal product management slides to give me a better understanding of their plans. I can’t go into too much detail, but suffice it to say that they have some great ideas planned for the remainder of this year.
Here is a brief list of a few of the features in their rebalancer pipeline:
- Avoid certain tax events or specify a limited range of allowable tax impacts
- Adjust rebalancer priorities between 1) taxes, 2) asset class model and 3) product mix
- Option to ignore tax consequences during rebalancing
- Wash Sale Alerts
- Invest New Cash without Full Rebalance
While IAS doesn’t get the kind of press coverage that other TAMP platforms garner, they have a solid product offering that should appeal to RIA’s in the $50 million to $3 billion AUM range. I plan on expanding my coverage on IAS since I would like to know how they stack up against Envestnet’s Tamarac product. Based solely on their rebalancing functionality, they are well on their way to matching and possibly exceeding their offering at some point. Stay tuned.