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The process was not without pitfalls, but the longterm gains outweighed the pain
September 13, 2011 — 3:16 AM UTC by Guest Columnist Gerald E. Gasber CFP®, CFS, CIMC, CIMA
Management gurus often talk about the importance of setting big goals for your company. They say things like this: “The only way to get big results is to have big goals.”
I believe in the philosophy of setting ambitious goals. I want Gasber Financial Advisors, LLC to deliver great value to our clients and produce consistent profits and growth for me and for my staff. To that end, I made a decision to get rid of our proprietary rebalancing program and purchase one of the commercially available software systems, despite the cost and the learning curve associated with its adoption. The bottom line, as I saw it, was that I could cut our rebalancing time from nearly three months to two weeks or less.
The project came with some anxiety. I understood that it would test the adaptability of our staff members and that it would require significant upfront expenditures and training. But I felt that the rewards would be immense. I did the research, and selected Tamarac’s rebalancing software.
At the crossroads
Just as the financial crisis hit, I had been thinking about the next step for my businesses. At 115 clients, my experienced staff was approaching maximum capacity. The rebalancing system we’d been using had become a barrier to growth. More than a decade earlier, a staff member and I had created an Excel spreadsheet for managing the rebalancing process. The system worked well, and at the time there were really no alternatives.
But as my clients grew in number, the system became cumbersome to use, limited in its scope, prone to errors and—worst of all—it was totally dependant on the unique knowledge of the staff members who operated it. Two staff members sat side-by-side for large parts of the day, entering data into the rebalancing spreadsheet, then re-entering it into a client account database, and then re-entering data yet again if a trade was made. The system would spit out rebalancing recommendations for even small deviations from the planned allocation – and without putting them into the broader context of the client’s needs. Almost on a daily basis, the staff members would need to consult with me about whether a particular account needed rebalancing, and I would have to stop what I was doing, research the issue and give them an answer.
Back to school
I knew there were better ways get the job done. I had long considered purchasing rebalancing software, but hesitated because I faced resistance from longtime staffers who did not want to see their familiar system jettisoned. But I saw no reason why we couldn’t adopt one of the sophisticated rebalancing systems that have been developed in the last several years.
I looked at several options, and selected Tamarac’s Advisor Rebalancing. I liked its easy interface through Microsoft Outlook and its automated downloads of client account information through Schwab PortfolioCenter.
Unfortunately, the staff members who oversaw the rebalancing process decided to retire the very week we sent our database off to Tamarac for implementation. As a result, a new hire and I wound up serving the guinea pigs for Advisor Rebalancing at our firm. We attended the three-day training session in Seattle. Thankfully, it wasn’t one of those lectures with one instructor at the front of the room, droning on with PowerPoint slides.
At this training, four RIAs sat at my table along with a knowledgeable Tamarac Implementation Consultant. As the trainer delivered the content at the head of the room, I worked with the expert at my table to define our own workflows on the system.
I got lucky because there was another advisor at my table who, like me, was a client of Dimensional Fund Advisors, and his firm had been using Tamarac’s rebalancing software for a few months. Among other challenges, we talked about how to account for DFA core funds that don’t quite match up with traditional asset classes. Advisor Rebalancing is built with flexibility to handle our way of building a core investment and the funds around it. The best-practice ideas I received from the other advisors during the training were an unexpected benefit.
Fast forward to today. I have replaced those two full-time staff members with a single portfolio trader. He works on rebalancing for a little more than half of his workweek, and then he handles other tasks related to client servicing and marketing. Our productivity has increased tremendously, enabling us to increase our cash flow during the recession. Going with the Tamarac software is one of the smartest financial decisions I have made.
Because Tamarac Advisor integrates seamlessly with our PortfolioCenter database, we have significantly reduced data entry time and substantially reduced the potential for error in client accounts. Advisor Rebalancing is flexible, too. Even in the year that my firm has been a client, Tamarac has upgraded its software almost monthly.
Long term gains
Here’s an example of our new world: We can define bands for each asset class that our client holds. In other words, we might say that a client should have 13% in a specific asset class, but we can give it a band of 20% of target in either direction. So, the system will not recommend a change in that asset class until the allocation falls to 10.4% or rises to 15.6%. In our old system, we were limited to an absolute percentage change, which resulted in frequent missed trading opportunities and required numerous judgment calls.
As another example, the old system ignored the negative impact of short-term capital gains in a sale. The staff would interrupt me to ask whether the cost of the short-term gain outweighed the importance of being within the allocation limit. We have set Advisor Rebalancing to never take a short-term gain.
Another benefit has been how much more quickly we can respond to market conditions and clients’ needs. With our old system, we couldn’t rebalance a client’s account more than quarterly. Now, we look at all accounts every 10 days. Usually, we don’t make a change, but sometimes we see a chance to lock in a gain or to harvest a tax loss. This doesn’t mean we’re making a lot of trades. Of the hundreds of accounts that we review, we might only make a few trades, but it’s a benefit to our clients that we simply couldn’t perform in the past.
We see even greater dividends ahead. As I have been released from the daily interruptions and inefficiencies of the old rebalancing system, I’ve started to put into action one of my projects for doubling the size of the firm in the next five years. We have obtained our first few 401(k) plan clients because we now have the bandwidth to serve that market. Recently, I did a presentation
at a law firm that had decided to use our 401(k) services, and the three partners of the firm approached us after the presentation about financial planning services and managing their personal accounts, as well.
Finally, Advisor Rebalancing gave us a benefit that can’t be quantified, but which is perhaps the strongest of all: peace of mind. Several of us at the firm can run the new system, so we have backup capabilities that will enable us to maintain our services even if one person leaves or is disabled. We faced a mini-crisis last year when the only two people who knew the rebalancing
program left on the same day, and we never want to go through that experience again.
Rebalancing is a simple concept. It shouldn’t be so hard to implement but it had dominated our firm’s operations and generated massive inefficiencies that undermined our value proposition and our ability to grow. Now, thanks to a commitment to implementing change—and to a great software partner—we’re on the right track.
Gerald E. Gasber, CFP®, CFS, CIMC, CIMA has over 25 years of experience as a financial advisors. He can be reached at his website, www.gasberfinancial.com.
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Mentioned in this article:
Envestnet | Tamarac
Portfolio Management System, CRM Software, Trading/Rebalancing
Top Executive: Stuart DePina
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