The Trick on Repositioning Client Assets
I’d like to share my views and get your thoughts on a specific part of the money management process. As I gain new clients for whom I manage money the list of securities I hold continues to expand. Although I have my “chosen” funds and ETFs, as client accounts transfer in from their former advisors’ firms, the number of funds I hold gets larger and larger.
At this point, I hold about 98 mutual funds, 20 ETFs, and a few individual stocks. I am working on reducing this to a more manageable number and I’d like to share my process with you. I’d also like to hear how you approach this, so if you are willing, your responses would be appreciated.
I don’t believe it’s a good idea to simply sell the clients’ old funds and replace them with my funds, especially in a taxable account. The first thing I try to do is determine if the transferred funds are in a category I like and if the fund is a quality fund. If I don’t like the category, or, if I don’t like the fund, I look for an opportunity to get out.
To assist with this, I’ve created a spreadsheet into which I export the funds from TradePMR’s Web site into Excel. Then I copy the exported page and paste it into my spreadsheet which reads certain cells and gives me a snapshot of the account. It shows the percentage and the dollar amount of each category and what the gains and losses look like. It also compares the account to the assigned model and shows whether it is overweight or underweight.
The ultimate goal is to reposition with the least tax impact. I am finding as my asset base grows, my need for this type of process is becoming more important.
Here are a few questions I have for you.
• How many different securities do you have in your book of business?
• How do you manage the process of repositioning the account after it is transferred to you (assuming it is not in cash)?
I realize every advisor has his own way of doing things. I’ve often thought if we could share our “best practices” it would benefit the industry, the client, and each of us individually.
Thanks for reading and I look forward to hearing your comments.
I have roughly 20 different securities in my book. I find my clients have one of two primary objectives: growth or income. Therefore, I have 3 growth models, and an 3 income models. Each model differs based on asset allocation (essentially the maximum % of equity allowable in the good times, a way to incorporate a clients risk tolerance) however, the securities held in my income models also differ as I place an emphasis toward income producing instruments. I also only use ETF’s as mutual funds don’t fit in my investment strategy and quite frankly are inferior investment vehicles. Therefore, all models are naturally tax effiecient.
I’m not sure why taxes would be an issue in the current environment. Almost any taxable account you may transfer probably doesn’t have any unrealized capital gains given market performance the past decade.
I’d share that your current management style is not effectively scalable, which in my opinion means you may run find inefficiencies as you continue to grow. Systematize your portfolio management and you’ll gain scalability and improve management effectiveness.
James,
Thanks for your comment. Actually, I do have a new account with gains. Yes, there are some losses in the portfolio which I will use to offset gains that I may sell. I was speaking more in general as to how you might manage this process in “normal” times.
As to your scalability comment, I agree. That’s exactly what I am trying to do. I am finding it more difficult with so many securities to manage. I fully attempt to reduce this and have been doing so (the number was higher than 98).
Question – How many holdings do you typically include in a portfolio?
Mike,
I own a very small RIA and am also trying to streamline and create efficiencies which is a lot harder than I anticipated. To answer your question to James, I have found that somewhere between 8 and 14 different holdings is appropriate for my clients (I use ETFs and mutual funds) – depending on the size of the portfolio.
To get to the issue of securities and how you manage them, I’ve really found that my screening process (based on a few years of research) warrants me to stick with ETFs and passively managed/index mutual funds. The closer they adhere to the asset class I’m looking for, the less work I have to do in “monitoring” the funds because I’m really just sticking with asset class management – some exceptions still apply. This has made it easier for me to worry less about having to manage the securities and focus more on the allocations.
My practice isn’t big enough for me to have scalability problems yet, but I’m always searching for new ideas.
PS I enjoy reading your updates. You’re doing a great job.