If there is one thing financial advisors could use more of, it’s time. More time means you have greater flexibility to meet with clients and grow your practice. How do you find more time? You identify the ongoing tasks that do not generate revenue and then determine how to delegate.

More and more advisors are reaping the benefits of outsourcing investment management. However, if you aren’t ready to relinquish this duty, another option is to start by outsourcing the transactional tasks of investment management or trading. When you outsource trading, you benefit from streamlined model portfolios, reduced liability, and ongoing tax overlay management.  

Once the decision has been made to outsource trading, the bulk of your work should be completed during the first couple of weeks. Our analytics team will work with advisors to analyze their model portfolios, refine their scope, and look for implementation and trading efficiencies.  “When we work with a financial advisor who says they have five to 10 model portfolios we often find they have significantly more,” Sieg Johnson, Portfolio Analyst for Financial Advocates. “It’s not uncommon for us to find out that an advisor is managing fifty portfolios.” 

Many financial advisors have models within models that have been created to accommodate various clients.  If you have variations of the same model, performance varies resulting in some clients doing well while others may not. Having models within models increases the advisor’s liability. Before virtual trading can begin, an upfront analysis is done to make sure all the advisor’s model portfolios streamlined to a manageable range; usually around 10-15 models containing around 15-20 products. 

For advisors using stocks and multiple sector ETFs, as well as greater than 40 holdings, a separate analysis must be done to mitigate the trading costs that this format would incur.  Typically, our trading service is designed to implement and maintain mutual fund and ETF models based on a more holistic strategic asset allocation strategy.  Using trading automation in this way makes the models possible. The financial advisor only needs to contact the analyst when they want to make a change to one of their models, either at the sleeve or position level. 

An additional feature of the trading service program is a tax management overlay.  This a la carte service is account specific and tailored to the needs of the client.  The advisor pays an extra charge for service on a per account basis. The tax overlay consists of tax loss harvesting throughout the year to generate losses when they become available and tax workout strategies based on moving positions from one allocation to another. 

Tax loss harvesting is completed with both long- and short-term gains taken into consideration.  For current portfolios, the embedded gains are calculated and analyzed for offsetting losses that occur during the year.  Short term losses are prioritized since they offset higher tax rates.  However, in most accounts, there is a mix of losses and so managing those losses and letting short term losses mature to long term status is another approach. 

The second feature of the tax overlay involves transitioning a pre-existing portfolio to a model.  In this case, a new account can transfer in, and gains are calculated. Transitioning from the current positions to the proposed model can be worked out to minimize gains while maintaining the risk allocation profile.  Most workout strategies can be completed in 3-5 years, and careful planning is needed.  “In most cases, advisors with $35 million to $100 million in AUM tend to be in the sweet spot for outsourcing their trading,” explained Sieg. “This is because, at this point, trading is not a full-time job. However, once a firm exceeds $100 million in AUM, there is a stronger case that can be made for trading in-house.” 

To learn more about Financial Advocates’ Virtual Trading Services email Sieg Johnson at sjohnson@financialadvocates.com.