Why Intelligent Tax Optimization is the Next Shift in Advisor Trading

By: Dane Kurtz
Senior Product Manager – Trading, Nitrogen

As the independent advisor model has taken hold through wealth management, a parallel movement has risen up in technology built to support those advisors.

From dedicated CRM platforms created just for advisors, to portfolio management, to risk and portfolio analytics like what we’ve created at Nitrogen, advisor technology has taken off and drastically changed and improved the day-to-day operations of advisors across the country.

But there’s one all-important area of an advisory firm that hasn’t seen similar leaps and bounds as others. I’m talking about the way in which advisors trade.

There have been a whole host of advisor trading applications created, of course, but by and large many advisors still rely on spreadsheets or even good old pen and paper to rebalance accounts and figure out what to buy and sell.

Let’s be honest: It’s not efficient, and it can end up hurting an advisor’s clients’ returns as much as it hurts an advisor’s own productivity.

For advisors to be their best, this needs to change. Last year, we announced our vision for where we see the future of advisor trading going.

I’ll let you in on that vision in this article. But first, we need to understand where advisor trading has been, and where it is now, before we can appreciate where it’s going.

Let’s dive in.

How Advisors Trade—Then and Now

When you think about how advisors trade, and especially the trading software built for them, you can approach it in two ways.

1. How scalable does the trading approach make a firm? Does it give them additional time to do other things?
2. How easy is the trading workflow to learn and use? Can an advisor intuitively exercise discretion and control over a portfolio, or is it simply a manual process dressed up with a fancy design?

About 70% of advisors today still take the manual approach, where they enter one trade at a time (or even in a batch using a spreadsheet) into their custodial platform.

This isn’t all that different from how most advisors were trading back in 2005.

While it’s not a scalable process, it is rather simple. It gives advisors clarity into what’s happening in each account—but that’s because they’re being traded one at a time.

So what about the other 30% of advisors who use rebalancing software? It definitely provides some scalability—but let’s face it, these products are like the VCRs of wealthtech.

They have a rigid, models-based approach to trading and try to force a one-size fits all. And even worse—they don’t provide any ease of use benefits. They’re so complex, it’s hard to click into any one account to see what’s going on immediately, and even though they claim to automate the process, they’re still crazy manual.

Here’s one example.

One rebalancing tool claims to offer tax-sensitive rebalancing. In practice, that means it gives the user a rules-based approach to sell loss positions first, then long-term gains, then short-term gains.

It’s better than nothing, but it’s not “smart.”

When it comes time to rebalance, you have to sync or export data from one part of their system to another. Then you run model rebalance analytics. Then you actually run the rebalance. Then you create orders. Then  you approve them. Then you process the orders. Then you approved the block orders. Then you execute them. Then you highlight the allocations. And then, by the grace of God, you finally execute the allocations.

Ten arduous steps later, you’re done. And this is considered “state of the art.”

With “innovation” like that, it’s no wonder so many advisors choose to continue rebalancing in Microsoft Excel.

We could also write an entire blog post about how “automated” tax loss harvesting requires the same amount of review and number of steps for advisors.

Suffice to say, “automated tax loss harvesting” in rebalancing products today amounts to little more than the advisor getting an alert that there’s an opportunity, and then having to go through another ten steps of settings and confirmations to actually execute on that information.

Any scalability promised by these rebalancing products is quickly eaten up by how ridiculously hard to use they are.

It’s clear that a rebalancing product has to offer advisors more scalability, but it also has to save them time while offering powerful features.

And as valuable as those benefits are, rebalancing software is even bigger than that.

It’s not just about saving time; it’s about changing the very value an advisor can deliver to clients.