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One Tool With Six-Figure Savings Potential

Implementing rebalancing software can yield significant savings in both overhead and time spent managing client portfolios.

Bill Winterberg, 06/14/2012

Managing investment portfolios on behalf of clients is a core service offered by nearly all financial advisory businesses. Regardless of whether a passive or active investment philosophy is followed, advisors can spend considerable resources aligning portfolios with their clients' needs and goals. The resources required to manage portfolios can grow considerably as a firm acquires more clients and gathers more assets under management.

Advisors at growing firms want efficient portfolio trading and rebalancing solutions that not only save time and overhead, but also considerably cut down the rate of trading errors that can directly impact the firm's bottom line. One solution that offers the potential for a significant return on investment for advisors is Total Rebalance Expert.

Total Rebalance Expert
San Diego, Calif.-based Total Rebalance Expert (TRX) was founded in 2007 and first introduced its eponymous rebalancing software to the financial-services market in 2010. TRX is the product of a collaboration between Sheryl Rowling, the company's current CEO, and Cheryll Lurtz, TRX's CIO.

The company advertises TRX as a tax-efficient and easy-to-use rebalancing solution for financial advisors. Rowling, a self-described "compulsive perfectionist CPA," brings more than 25 years of experience managing registered investment advisory firms and is also the principal of Rowling & Associates, a registered investment advisory firm and CPA firm also in San Diego. Lurtz directs the technical development behind the scenes at TRX, overseeing software engineering efforts and new integrations.

Implementing TRX
TRX originally integrated exclusively with Schwab Performance Technologies® PortfolioCenter. Today, integrations have grown to support many of the most widely used portfolio management software programs, including both Black Diamond and Axys from Advent Software Inc., as well as Morningstar Office, Orion Advisor Services, and FinFolio.

TRX supports flexible installations, as advisors can load it on their own local server, use the cloud-based solution from TRX, or elect to have a third-party provider host the program on outsourced infrastructure. Once advisors identify the location of their portfolio management software database, TRX imports necessary data on account positions and security pricing through an automated import process. Portfolio rebalancing depends heavily on accurate asset class identification of mutual funds and ETFs, so TRX allows advisors to either obtain asset class information from their portfolio management software or specify their own asset classes manually.

The main screen of TRX has two menu tabs at the top, one labeled TRX Manager and one labeled Configuration. The Configuration menu is where advisors will find an extensive list of options to define settings and preferences to be applied globally across the program.

Global settings allow advisors to set preferences such as the "out-of-bounds" tolerance percentages (before TRX recommends rebalancing an asset class), minimum account cash requirements, ordinary income and capital gain tax rates, and much more. While there is some effort required to define these settings, I suspect advisors won't have much need for continual adjustment once they've completed the initial setup process with the help of TRX support.

The TRX Manager menu is where advisors will likely land each time they use TRX. This menu opens new windows to view portfolio data sorted by household, accounts, fund holdings, portfolio model, and historical activity. Also available in the TRX Manager menu are the Analysis Expert and Review Summary windows.

Efficient Portfolio Review
The heart of TRX is the Analysis Expert window, which shows a summary of all household accounts managed by the advisor. Each household lists the name of the active portfolio model applied, total value of all holdings, dollar amount and percentage of any out-of-balance asset classes, cash reserve requirements, excess cash to be invested, tax-loss harvesting opportunities, and any account errors.

"You can review all of your clients' portfolios in a few minutes [using Analysis Expert], zero in on what needs to be done, click a button, and TRX will produce the trades so that you can upload them directly to your custodian," said Rowling. She added that no other software offers anything like the Analysis Expert screen, compelling the company to apply for a patent on its design and functionality.

At the bottom of the Analysis Expert screen are six buttons to launch different trading scenarios in TRX. Advisors can determine trades needed to rebalance client accounts, execute trades to raise cash, identify and perform tax-loss harvesting trades, trade mutual funds prior to realizing capital gain distributions, and replace a fund held by multiple clients with a suitable alternative.

All trades proposed by TRX can be previewed before they are submitted for execution in the Review Summary window. The window is analogous to a trade blotter, detailing each trade with its associated account, security symbol, cost basis, gain or loss, and proposed trade amount. TRX also supports a simple workflow process for trading, allowing compliance officers the opportunity to review pending trades prior to submitting them for execution. Approved trades are exported into CSV (Comma Separated Values) files formatted for each of the major custodians' trading applications, including Schwab Advisor Services, Fidelity Institutional Wealth Services, TD Ameritrade Institutional, and Pershing Advisor Solutions.

Continued Innovation
Modeling the tax implications of portfolio management is a major focus of TRX's features. "I wanted to make sure that every potential tax strategy was built in to TRX," said Rowling. "When [advisors] are able to add tax benefits to their clients' portfolios, it's a way of adding alpha that's risk free."

Another patent-pending feature of TRX is Capital Gain Distribution Avoidance, where advisors can avoid realizing taxes on reinvested dividend income (i.e., phantom income) in clients' taxable accounts. No central database of pending capital gain distributions exists, so advisors must manually enter distribution information as fund companies provide it, and identify substitute funds to swap prior to fund distributions. Still, what used to be a laborious, spreadsheet-based process around the end of each calendar year can now be addressed with a few button clicks in TRX.

Implementing TRX
Rowling emphasized that TRX aims to build rebalancing software that is easy to use. "Most of our clients are up and running in three to four weeks," she said. New TRX clients typically participate in about a half-dozen individual, one-hour remote training sessions using live client data rather than generic portfolios. Advisors conduct several rebalancing and trading exercises with the assistance of TRX support looking over their shoulder to become comfortable with the software's interface and functionality.

Regardless of the vendor, pricing on rebalancing software varies by advisory firm depending on the total amount of assets being managed. Generally, purchasing rebalancing software requires an investment typically starting in the low five figures.

"We don't want our cost to be the deciding factor, but we want it to not be a negative," said Rowling. Firms managing a few hundred million in assets will spend around $10,000 for an annual license, and TRX offers discounts for smaller firms and firms that elect multi-year agreements or are affiliated with certain professional organizations.

Return on Investment
What kind of return on investment can advisors obtain using TRX? To answer that question, TRX surveyed 20 of its users ranging in size from less than $50 million to more than $1 billion in assets under management in December 2011. From their responses, TRX illustrated that the annual benefit of implementing its software is $325,000, reflecting the value of labor costs saved plus additional AUM revenues generated by participating firms. Full details on the survey statistics appear in TRX's white paper Measuring the Return on Technology Investment, available for download from the company's website.

Clearly advisors have the potential to realize significant cost savings by implementing rebalancing software such as TRX. It not only allows advisors to operate more efficiently, but also manage client portfolios with greater tax efficiency. TRX offers scalability to firms of any size and liberates advisors so they can provide more attention to a larger number of client relationships.

Bill Winterberg, CFP, is a technology and operations consultant to independent financial advisors. His comments on technology have been featured in a variety of financial industry publications. You can view more information about Bill and see his schedule of upcoming speaking engagements at his Web site, FPPad.com. The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.

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