Capitect using technology to deliver ‘mass personalization’ to portfolios

As passive investing and robo-advisers continue to commoditize investment management, advisers are told they need to find new ways to demonstrate value to clients. An increasingly popular strategy is to turn client assets over to model portfolios so that the adviser can focus on marketing, financial planning or high-touch services, such as tax and estate planning.

But not all advisers want to stick clients into one of five or 10 model portfolios. When Edwin Choi left a career as a credit derivatives trader to open a fee-only, registered investment advisory firm, he wanted to customize portfolios for each client.

Mr. Choi developed a database and a system of spreadsheets to accommodate the approach, but he figured technology could streamline the process.

He and business partner Greg Yee founded Capitect in 2015 to tackle the problem. The firm launched Portfolio Architect, a digital version of Mr. Choi’s methodology, on Wednesday. It aims to help advisers offer “mass personalization” to investment management, according to Mr. Choi.

“There’s a lot of room for advisers to be able to provide a differentiated offering,” he said. “One of the paths to do that is to personalize [portfolios] to each one of their clients.”

Advisers can upload their investment strategies to Portfolio Architect and define any number of scenarios or factors they would like to use in creating client portfolios. Those factors are programmed into sliders on Portfolio Architect’s digital interface, which the adviser can use to tweak portfolios to exact specifications based on a client’s unique circumstances and goals.

Instead of having to pick between a selection of fixed allocation ratios, the adviser can set a high and a low and use the scale to pick every iteration in-between, for every portfolio, Mr. Choi said.

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Portfolio Architect also allows for additional sliders to customize portfolios around asset classes or investment philosophies. For example, the adviser could adjust the amount of smart beta versus market capital funds, domestic versus foreign equities and socially responsible versus traditional investments. Advisers can add in as many customizations as they would like., he said.

“In a system like ours, customizations per client are designed to be applied deliberately, precisely and systematically,” Mr. Choi said. “One strategy can be built in our system to be flexible enough to easily produce a unique portfolio for any number of clients.”

This is an easier approach to tailored portfolios than having to evaluate potentially hundreds of options on a model marketplace or turnkey asset management platform (TAMP). He compares those to a restaurant with a large, but fixed menu, while Personal Architect is more like building a burrito at Chipotle, where the creator chooses from a large menu of ingredients that can be added in any amounts and combined in all different ways.

“The concept of model portfolios makes a huge amount of sense from the standpoint of business operations and scalability,” Mr. Choi said. “I think they might be looking from a view that’s shortsighted. We feel the overall trend is not just ‘get more models,’ but actually be able to tailor those portfolios to each my clients.”

Yet offering advisers access to asset managers via digital marketplaces is an undeniable trend among adviser technology firms. Oranj, Riskalyze and Orion all recently launched model marketplaces alongside their core technology offering.

Riskalyze CEO Aaron Klein said he agrees with the value of personalizing client portfolios, but he said advisers use model marketplaces to tap into asset manager research.

Since Riskalyze launched the Autopilot Partner Store in February, some advisers are choosing to personalize their larger accounts while assigning smaller clients to a model portfolio, he said.

Offer too much personalization, though, and it can be difficult to manage and it hampers the adviser’s ability to scale, Mr. Klein said.

“More often than not, the real customization an adviser needs to do is just trade around a few key holdings that either have sentimental value or would generate big tax burdens if sold,” he said.

Riskalyze Autopilot includes the ability to lock positions with a single click, which is a compromise between mass customization and one-size-fits-all models, according to Mr. Klein.

Mr. Choi sees it differently.

Model marketplaces are ultimately just a collection of unrelated strategies, and the only way to get true customization is to put clients into models from an assortment of providers, making it overly complex to monitor suitability, he said.

To avoid a similar problem with Portfolio Architect, Capitect also is launching a rebalancing tool that Mr. Choi said will work across all an adviser’s unique portfolios. Called Rebalance Architect, the tool will calculate, review, and allocate trades before the adviser submits them to the custodian.

Capitect is offering early user pricing of three basis points for both products.

Ultimately, Mr. Choi sees Capitect’s technology boosting the value of risk assessment, financial planning and portfolio analytics. After an adviser goes through the client discovery or financial planning process, that information can feed directly into Portfolio Architect to build a unique portfolio matching the client needs and goals. If the adviser spots an area of concern down the road, they can make quick adjustments using Portfolio Architect’s sliders.

Mr. Choi eventually hopes Capitect can integrate with some of the technology tools in these areas to automate the portfolio creation and customization process.

“There’s room for advisers to add value and not just to financial planning, but to investment management,” Mr. Choi said. “And adding value to investment management doesn’t have to just mean picking stocks.”

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