How a Cold Call Led to a Deal with Scottrade for ASI’s Rebalancing Software

It was an idea born of convenience.  Neal Ringquist, President and Chief Operating Officer of Advisor Software Inc., was planning a trip to St. Louis to meet with one of their clients, EverBank.  He knew that Scottrade® Advisor Services was also headquartered there.  The thought seemed natural to him to give them a call and see if he could arrange a meeting and pitch his company’s portfolio rebalancing solution?Scottrade Logo The Chinese philosopher Lao Tzu said, “A journey of a thousand miles begins with the first step.”  Ringquist’s call was the first step a journey that led to the recent announcement by Scottrade that they would be integrating ASI’s Portfolio Rebalancing Solution® into their new custodial platform. Brian A. Davis, who has since left the firm, but up until last month was Head of Scottrade® Advisor Services, was the recipient of the cold call.  “Your competitors use ASI for rebalancing,” Ringquist told him, referring to Schwab Advisor Services and TD Ameritrade Institutional, so why not see if it would also be a good fit for you a well?ASI Logo Ringquist’s pitch apparently resonated with Davis and his team because one of their core principles is always looking for ways to simplify the advisor’s workload.  Since so many of their advisors were already familiar with ASI’s software, they believed it would be a burden for them to be forced to learn how to use a different rebalancing tool.  Ringquist got his meeting.

White Labeling

Scottrade, whose RIA custody business serves over 1,000 advisors, will be licensing ASI’s rebalancer and white labeling it with their own brand, which is similar to what Schwab and TD Ameritrade have done, according to Ringquist. While they do not have access to detailed statistics about the number of accounts or number of trades generated by their software, Ringquist did say that they have seen substantial growth in the number of total rebalancing sessions at both custodians. ASI’s relationship with TD Ameritrade started back in 2005, two years before they acquired iRebal.  This deal means that TD Ameritrade will offer two realancing solutions to their advisors.  Ringquist feels this is because iRebal is not as efficient for advisors that manage their portfolio using models, which is the majority of Scottrade customers. (See TD Ameritrade Comes Out Swinging with iRebal Update)

GadgetThrowAwayOut With The Old

Not only has Scottrade replaced the head of their RIA unit, but this deal also replaces their former technology partner for portfolio modeling and rebalancing, MyVest.  Scottrade and MyVest announced their tie-up a little over a year ago, but it seems that one of the last decisions Davis made was to bring in ASI.  Neither of the vendors would comment on the reasons behind the switch.  Scottrade would only say that it has “ended its relationship with MyVest to provide modeling and rebalancing”. Based on my discussions with MyVest and review of their rebalancing software, I can’t see any reason related to technology that would cause Scottrade to make this change.  MyVest’s product is solid and they are especially strong in UMA\UMH functionality.  My guess is that ASI simply offered them a better deal.  (See Is MyVest the Right Portfolio Rebalancing Software for You?) Since Scottrade launched their new custodial platform back in February, they have been looking to cut costs and increase their revenue per client.  According to an article in, they recently announced that they were hitting advisors that have less than $7 million in assets on their platform with an annual fee that could reach as high as $12,000.  That should be a strong incentive for the smaller RIA firms to jump ship.

Rebalancing Features

ASI offers a proposal-generation mode as part of their rebalancing solution that is similar to their Client Acquisition Solution, with just a bit less functionality.  Although both products do share the same portfolio analytics including Current vs Proposed, backward-looking analytics like Morningstar rating and forward looking analytics like Monte Carlo Simulations The standard rebalancing software provided by ASI supports multiple custodians, but Scottrade clients will only be able to rebalance assets on their platform with the integrated version.  Of course, RIA’s can always contract with ASI directly to take advantage of this capability. The ASI software provides a lot of flexibility in the modes that an advisor can use in a rebalancing session, Ringquist explained.  It has a lot of flexibility for management of cash-in/out logic, tolerance bands, and restricted securities, he said.

Will ASI Ever Become a TAMP?

While ASI does own an RIA and provides outsourced asset management products for other RIA’s, they have no plans to become a full-fledged TAMP, Rignquist stressed.  Analytics are their core competency, he added, they do not want to be seen as a competitor to their clients or partners and want to work on as many platforms as possible.


Ringquist noted that his vision for ASI is “marrying technology and asset management to provide solutions”.  One way they are doing this is by providing technology to help advisors to build a digital persona.  This web presence will deliver lead generation workflow, proposal and document delivery, and account opening, to name a few.  There will also be an option for an entirely online service model for smaller accounts or for more tech-savvy clients (like Millenials).  It could also be packaged with ASI-provided model portfolios that fit into a goal-based model mapping functionality that advisors can brand as their own, he observed.

Deepening the Relationship

Scottrade already offered ASI’s financial planning app, goalgamiPro™, which constructs a Household Balance Sheet to validate whether a client can reach their goals.  (See Financial Planning in 10 Minutes or Less with goalgamiPro) With the addition of portfolio rebalancing, the relationship between the to firms is strengthened and the ASI brand is more visible to advisors.  Scottrade benefits be reducing the number of vendors they have to support and possibly reducing their licensing costs.  ASI also gets their foot in the door at another of the top five RIA custodians.   That’s a win-win deal in anyone’s book.

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Fee-Based Advisors Clamoring for Muni Bond Ladders

Are fee-based advisors looking to move more managed account assets into municipal bonds?  There is evidence that this is the case and that muni bonds as a percentage of managed account assets could grow over the next few years.

Research from MMI/Dover shows consistent growth of fixed-income SMA objectives that corresponds to a consistent decline in domestic equity objectives. In mid-2010, domestic equity held a scant lead, 40% to 37%. Among model portfolios, taxable fixed income leads the list with 22.4% of assets, ahead of large-cap value (19.1%) and large-cap growth (17.8%).

Some of the broad investment trends that have surfaced in recent years–alternative investments and tactical asset allocation–can be found in managed accounts.  Jean Sullivan, from Dover Research, says that these programs generally have become more conservative, with an increase in fixed-income strategies.

While taxable fixed-income SMAs are the leaders, municipal fixed income doesn’t even make the top 10, holding less than 2% of portfolio assets. “Many investors in fixed-income SMAs are nontaxable, such as 401(k)s and pension plans,” says  “They hold taxable bonds, Treasuries, agencies, corporates and some asset-backed securities.”

Why would investors want to hold bonds via managed accounts instead of a bond mutual fund or a low-cost ETF that tracks a bond index? Financial Planning Magazine quotes Randy Dry, managing director of the institutional group at Thornburg Investment Management in Santa Fe, N.M.:

“For the same reasons that you’d use separate accounts for equities,” Dry responds. “Investors own the underlying securities, not shares in a fund. You can make trades that improve your tax position. And you avoid the ‘flow shock’ that may affect mutual funds.”

Dry explains that investors get bond ladders with his firm’s fixed-income SMAs. About one-tenth of the portfolio matures every year and the proceeds are reinvested in 10-year bonds. This strategy, which some other fixed-income SMAs also follow, can protect long-term bond investors against rising interest rates because money would be available for reinvestment at the higher rates.

Thornburg, which offers muni bond SMAs, has a $2 million minimum. With smaller amounts, investors may have less diversification and face wider spreads on trades, Dry says.

One of my previous blog postings, Current Challenges for UMA Sponsors, covered a session from the MMI 2011 Spring Convention. Representatives from both UBS and Merrill Lynch both reported that their advisors had requested the ability to provide muni bond ladders to their managed account clients.  However, there are issues that have blocked these offerings being made available, such as determining the proper minimum account size and the amount of alpha that muni managers can bring.

While UBS and Merrill are still considering bond ladders, other large sponsors have moved ahead to make them available on their managed account platforms.

For example, in March 2010, Schwab Managed Account Services™ partnered with PIMCO and launched a bond ladder offering called the PIMCO Municipal Bond Ladder Separately Managed Accounts—five professionally managed strategies that seek to generate income by leveraging investment opportunities in the municipal bond market.

According to Schwab:

PIMCO conducts continual credit surveillance, reinvests maturing securities, and provides institutional purchasing power, all for a highly competitive fee. The SMAs have an investment minimum of $250,000 and a program management fee of 0.35% for the first $1 million invested, 0.30% for the next $4 million and 0.25% for investments above $5 million.

PIMCO selects investment-grade municipal bonds with an average credit quality rating of A- or better at purchase. These are assembled in laddered portfolios with 1- to 6-year, 1- to 12-year, or 1- to 18-year maturity rungs.

Some of the benefits of adding a muni bond strategy to a managed account include:

  • Periodic income generation—The strategies seek to generate tax-efficient, periodic interest payments, which can be distributed as they accrue1 or reinvested into new bonds in the ladder. Of course, investing in bonds carries risks, including the risk that a bond may fail to pay interest or principal, and the risk that it may lose value.
  • Ongoing credit monitoring—The manager selects investment-grade municipal bonds and regularly monitors the credit quality of your account holdings.
  • Bond replacement—When a bond matures, the manager will reinvest the principal by purchasing a new bond, typically at the longest maturity range or “rung” of the ladder. The ladder is extended until you request a payout of principal or your account balance falls below the $250,000 minimum.
  • Direct ownership and transparency—Unlike fixed income mutual funds, a municipal bond ladder offers direct ownership of the underlying bonds.

LPL Financial also claims that their proprietary fixed income trading platform that allows financial advisors to build bond ladders, select products, and process trades online for municipal bonds, corporate bonds, new issue corporate notes, and FDIC-insured CDs.

An article from, Trends in Separately Managed Accounts: UMAs, ETFs and Alternatives, confirms that Envestnet is also seeing an uptick in requests for bond ladders.  The article quotes Mike Henkel, managing director of Envestnet/PMC and Tom Simutis, an Envestnet/PMC senior VP in charge of relations with SMA managers:

Fixed income alternatives are of particular interest to advisors now—“no one wants to be on the long side of fixed income,” says Henkel. Simutis confirms that Envestnet/PMC is always getting requests for strategies that are “noncorrelated” to the broader stock indexes, but also “replacements for fixed income. SMA managers are using ETFs, they can use synthetic shorts, can buy bundles of equities.”  There’s a growing use of ETFs as a component of a SMA manager’s strategy, he says, “where the rest of the portfolio may be invested in stocks or bonds.”

What else are advisors looking for? Simutis says that on the fixed income side, in addition to alternatives “it almost seems like a move toward a more traditional approach; we’re getting a lot of calls” for bond ladders, because “they’re cheap and easily understood.”

While this evidence is far from conclusive, it does appear to be a trend that should be monitored.  It would advisable for sponsors to investigate offering muni bond strategies on their platforms, so that they will be ready to respond when their advisors start demanding it.