What ‘householding’ means for advisers, and why it’s the holy grail for technology

Spend enough time around technology vendors and industry executives talking about the future of the advice industry and you’ll inevitably come across the term “householding.”

Helping advisers effectively manage all a family’s financial accounts, not merely a single investment product, is a sort of holy grail for everyone in the business of serving financial advisers. This concept of householding is taking hold, to varying degrees, across wirehouses, broker-dealers, custodians, turnkey asset management platforms and technology vendors.

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It’s a drum that folks like Jack Sharry, chief marketing officer of LifeYield, have been beating for some time. But even Mr. Sharry will admit that many in the industry still haven’t wrapped their heads around exactly what householding means, how it impacts what advisers do and why it would benefit end investors.

Some people have variations on the meaning depending how they fit into the overall technology ecosystem, but for Mr. Sharry, true householding means more than just using data aggregation to see all a client’s accounts in a single location. It means managing those accounts together in a way that tangibly improves outcomes by reducing cost, better managing risk and optimizing taxes.

Most families today have an average of five or six accounts, work with two or three financial advisers and have assets held by as many as four custodians. For example, a dual-income family may have two 401(k)s, an individual retirement account with money rolled over from a 401(k) at a previous employer, a managed brokerage account, a self-directed account with some equities or mutual funds and a 529 plan for a child’s education.

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“The money is all spread out, and they’ve typically made those purchases at different times, from different people and for different reasons,” Mr. Sharry said. With householding, financial advisers can focus on providing solutions that really tie it all together.

For a single account, advisers are experts at keeping investments in line with a target allocation while minimizing capital gains, taking advantage of tax-loss harvesting opportunities and implementing tax-sensitive transitions or withdrawals.

But maintaining a target allocation across a half-dozen or more accounts while continuing to optimize taxes at the household level is something else entirely, said Gerard Michael, president and co-founder of Smartleaf, a digital advice platform for advisers.

“Jointly managing a household’s accounts is not a new problem, but we’re seeing a rising interest in doing it reliably and well,” Mr. Michael said in a blog post. “Doing householding well is complex, and doing it manually would be prohibitively expensive for all but ultra-high-net-worth accounts”

This is where technology plays a role.

“The good news here is that every element of account and household management we’ve mentioned can be automated, which makes it economically feasible to offer high-end householding to all investors,” Mr. Michael added.

That sounds great, but what is the benefit to clients? Beyond providing better service to clients, householding ultimately generates more assets under management for advisers, Mr. Sharry said. He estimates managing at the household level rather than individual accounts could add as much as 200 basis points to a portfolio.

“When you are managing in a risk-smart, task-smart way, you have more assets that are staying in the accounts and less going away due to markets or taxes,” he said. “When you retain more assets, you retain more clients because you’re doing a better job and can quantify the value.”

While many are convinced that householding is the future, it remains very much a work in progress. A lot of it is just integrating the various software and platforms advisers use to make household management a seamless process, Mr. Sharry said, but firms across the industry are working on it. He points to Morgan Stanley’s new adviser technology platform using BlackRock’s Aladdin software as an early example of a movement toward true householding.

But the industry has questions to work through as well. Should a client trust a single adviser to manage all their accounts, or is diversity among financial institutions as important as diversifying investments in a portfolio? What will regulators say about it?

Before the industry gets there, the biggest change that needs to happen is a mindset shift for advisers. The industry has traditionally taken on the role of selling individual products for an investor’s various needs.

To embrace householding, advisers need to accept a new role, that of solving a holistic problem.

“A coordinated approach to improving the outcome of my household savings or investment plan — that’s a solution,” Mr. Sharry said.

Related Topics: Morgan Stanley & Co.