Adviser technology can be overwhelming. Which
CRM system is the best? What about
financial planning software? Portfolio rebalancing tools? Is it better to use a rebalancing tool, or to outsource that work to a third-party manager — or even a robo-adviser? Speaking of robos, how many other tasks can benefit from automation? Can any of this be offloaded onto
Alexa?
When considering how investment management — and the technology that supports it — has evolved over the past couple of decades, there's been a trend away from treating a client's accounts individually and toward coordinating those accounts in a unified way. While legacy technology can make change more difficult, new technology can help advisers clear hurdles and move forward. As new tools become more readily available, they are not only becoming an engrained part of the retirement landscape, but something investors are beginning to expect. Advisers can stay ahead of the curve by adopting some of the technologies that are already available.
Despite long being a topic of discussion, the unified managed household hasn't fully emerged as a product an investor can access easily. Evolution in household
portfolio management has gone in that direction, moving from single asset class investments, funds and
separately managed accounts through multi-asset class funds and
unified managed accounts. Custodians are already able to report across multiple accounts for the same client or household. Meanwhile, individual investors are making use of aggregation software to track their various assets and liabilities – from investments held by multiple custodians to bank accounts and real estate – in a more convenient and centralized way than using multiple websites or apps. Clients clearly want an aggregated view of their financial world, but what's stopping their investments from being managed in a similarly universal manner? There's some technological baggage the industry as a whole has acquired over the years that makes this change quite challenging.
For example, it's still common for individual investment accounts to be set up with their own specific risk profiles. This can mean an onerous exercise of repeating risk tolerance questionnaires for each new account. If clients tend to answer risk questionnaires in a similar way, their accounts will have similar allocations. Should an adviser want to implement more recent investment management techniques, such as greater tax efficiency through optimal asset location across accounts of different types, one might feel a need to game the system.
While account management still tends to be fragmented, the same is not true of
financial planning tools. Rather than worrying about account-specific risk, planning tools consider an entire household's assets. The adviser faces something of a chasm between the results of a financial plan—often an overall target asset allocation representing the client's risk level—and the investments assigned to individual accounts. At this point, spreadsheets, rules of thumb or approximations often come into play, and some consistency and scalability are lost.
Tax efficiency is another consideration at the individual account level. Many tax-efficient managed account programs exist, looking for the best tax lots to sell, and avoiding short-term gain realization. Unified managed accounts take this one step further, potentially reassigning tax lots between sleeves when beneficial. While that's an improvement over tax management within a single account, it still doesn't look outside of the UMA. Annual tax-loss harvesting is also a common strategy but again, that tends to be run account-by-account. The recent publicity over mandatory use of the first-in, first-out rule — which was eventually cut from the final GOP tax bill — just added to the focus on tax harvesting and per-account management.
Meanwhile, a new genre of software helps coordinate activity across accounts — something advisers should expect to become the norm. Increased after-tax returns through optimal asset location across accounts, regardless of the products they contain, not only makes the implementation of a financial plan more straightforward, but also helps advisers differentiate themselves, justify their fees and generate more fee revenue due to less tax erosion of client assets.
So, while asset location may not be something Alexa is able to handle just yet, an increasing number of investment firms are implementing it today. Multi-account investment management is here to stay.
(More: Most popular adviser software by category)
Martin Cowley is executive vice president of product development at LifeYield, a provider of digitally enhanced advice to registered investment advisers and wealth management firms.
