Advisors shifting from account-based portfolio modeling to householding continues across the wealth management industry at an accelerated pace. As household modeling is certainly not a new phenomenon, advisors who have not yet made the shift are likely falling short of meeting client demand for improved tax efficiencies, asset location preferences, and personalized risk profiling. Householding can generate a more holistic client conversation, from an individual level with multiple account types, to one consisting of family relationships and intergenerational wealth.
A greater focus on providing value-added services and gaining better control of the key levers can enable advisors to reliably improve investor outcomes such as reducing costs, managing risk, and minimizing taxes. Ernst & Young found when these outcomes are effectively achieved, after-tax returns and income improve by 33% over an investor’s lifetime.
But without the right rebalancing and trading technology, achieving mass portfolio modeling and customization at the household level is difficult and time-consuming. It also makes the transition to householding a long and complicated process.
Here are three main ways rebalancing technology can help advisors strengthen client relationships by shifting from individual account-level conversations to household-level portfolio modeling and performance management.
1. Aggregate Data and Model Targets
A growing amount of data can be leveraged across a household given the additional accounts and positions. Data aggregation combined with rebalancing and integrated trading are vital to shift effectively to householding.
As a first step, the advisor must be able to view positions across accounts, risk profiles and aggregated model targets, and determine the drift per asset class and security across the household. A rebalancing solution should be able to suggest trades on drift and enable the advisor to quickly see potential tax consequences across the overall household in a single portfolio, rather than many different accounts.
2. Determine Tax Efficiencies
Many advisors are moving towards householding structures due to their clients’ increasing demand for location preferences and tax efficiencies. Reviewing risk profiles across accounts within a household is also crucial to assess the proper alignment between risk tolerances, preferences and capital gains budgets.
Liquidating securities to cash across all those accounts, putting them into a household, and using location preferences to dictate where the securities should be held is a clean-slate approach, but may present significant tax consequences. In contrast, a natural drift approach prescribes slowly moving or weighting securities according to the household model as changes in prices or managers occur.
A rebalancing solution should be able to help the advisor reduce or eliminate the client’s tax consequences, and offer wash sales logic across the household to maximize tax efficiencies.
3. Grow through Flexibility and Scalability
The true value of a rebalancing solution comes down to its flexibility to support desired imports and ultimate output, and its ability to scale. A solution should enable the advisor to define location preferences across taxable, tax deferred and tax-exempt statuses. The ability to create an unlimited amount of location preference sets is especially valuable for assigning the appropriate set when it runs through a rebalance. A solution should be able to import restrictions, equivalents, and account and household attributes, as well as customize the rebalance settings for a group of portfolios.
Most firms who manage clients at the household level do so at scale using rebalancing and trading technology that makes the process more efficient. Being able to rebalance portfolios at the household level demands efficiency at scale, which enables the firm to bring on more clients and give each the same high-quality service without the additional overhead.
Householding can create big wins for investors and advisors alike. Advisors who have not yet embraced householding are urged to do so now. Technology can help advisors launch their journeys to household modeling and strengthening client relationships today and in the future. A technology solution that offers asset location, tax-loss harvesting, and household-level rebalancing is crucial to make the shift. Coordinated, multi-account household management is feasible only with rebalancing and trading capabilities that remain in sync with clients’ risk profiles and tax requirements, while also providing personalization and scalability.