Frequently Asked Questions

Smartleaf automates the transition and rebalancing of complex, customized and tax-managed portfolios. Your firm benefits from greater nimbleness, lower costs, greater consistency and enhanced compliance.

We enable firms, if they wish, to expand the market segments they serve. Greater efficiency makes it possible to profitably serve lower net worth clients. Greater customization and tax management makes it possible to go upmarket.

We enable your firm to manage every account as if it were your only account – to manage wealth without compromise in the manner you think best serves your clients.

And we do this with a system that is easy to implement.

For each portfolio you’re managing:

• You select a “target.” The “target” is simply the hypothetical portfolio you would buy for a client if they started with cash and no restrictions. Typically, there are somewhere between 5 and 50 different targets per firm, one for each client type (e.g. “Aggressive Growth” or “High Net Worth - Taxable -Aggressive Growth”, etc.).
• You specify any customization criteria you want to apply. This includes “never buys,” “never sells,” tax & expense management preferences, minimum trade size, etc.
• Every day, Smartleaf compares the portfolio to its target and, consistent with the customization parameters you’ve set for that portfolio, suggests specific tax-lot level trades that will keep the portfolio close to its target.

Every portfolio tracks – with adjustments for tax, expenses and customization criteria –a blend of one or more model (idealized) portfolios provided by investment analysts. This approach separates research (market beating ideas expressed in the form of model portfolios) and customization (tax management, social criteria constraints, etc.).

This lets you take advantage of the best investment research available while making it easy to customize your clients’ portfolios for individual tax management, risk management and specific investment selections. It automates customization and tax management, making it possible for you to simultaneously increase customization and consistency.

This “start with models then customize” approach is sometimes called “overlay portfolio management” (OPM).

Smartleaf divides responsibility for managing portfolios among three groups: the investor-facing advisor, the investment policy committee, and a central rebalancing group. 

The Investment Policy Committee (IPC)

The IPC constructs asset allocations and suggests products (e.g. mutual funds, ETFs, weighted lists of securities) for each asset class. As importantly, the IPC sets compliant limits on the construction of custom asset allocations and alternate product choices. The IPC may also set limits on asset class and/or security drift. And the IPC will set firm-wide rebalancing policy.

The Investor-Facing Advisor

The investor-facing advisor constructs, largely by making selections from pull-down menus, custom solutions for each account. Specifically, the advisor:

• selects, for each account, the IPC-created asset allocation.
• {as needed to meet the individual investor’s needs} modifies this asset allocation and/or product mix.
• {as needed to meet the individual investor’s needs} sets transition, tax management, ESG/Religious value screens and other settings.

The Central Rebalancing Group

The Central Rebalancing Group trades each account in a manner faithful to the joint instructions of the IPC and the customization parameters set by the advisor.

Relative to traditional approaches, Smartleaf’s approach:

• reduces the incremental cost of customization and tax management to zero, so it becomes economical to provide high levels of customization and tax management to all clients.
• frees advisors to spend more time with their clients.
• is more consistent. Similar accounts will have similar outcomes. And policy changes of the IPC will usually be implemented across the entire book of business in one business day.
• is more compliant. By capturing client customization criteria and automating much of implementation, compliance becomes a “built in” feature of the process — not just an after-the-fact review.

1. Managing a customized portfolio is no more time consuming than managing an uncustomized portfolio, so your clients’ portfolios can:
   • Enjoy industry leading tax management that generates higher after-tax returns
   • Be customized without compromise to fit each client’s needs
   • Environmental/Social/Governance (ESG) constraints
   • Security & sector constraints
   • Custom asset allocation
   • Custom product selections
   • Benefit from the recommendations of your investment policy committee, even when the portfolio is customized
   • Get access to “best of breed” third-party research that complements your proprietary strategies (open architecture)
2. Smartleaf reduces the time you spend on rebalancing and compliance, so your clients get more time with their advisors.
3. You will be able to document your work and value, which gives your clients increased confidence and comfort that they are in good hands.

Other portfolio management solutions are “command based”, and they don’t do anything unless you enter specific commands, like “sell F and buy IBM” or “rebalance my large cap holdings to model weight”. These command-based systems will then generate the trades needed to execute your command across a specified set of accounts and also show you the impact on each account so you can make adjustments as needed.

In contrast, Smartleaf acts more like an automated assistant. You set up parameters for each account, then Smartleaf reviews every account every day and generates actionable trades obeying your parameters and instructions. It’s more efficient, supports higher levels of customization, higher levels of tax management and lower levels of dispersion.

Our clients tend to be financial-planning centric. Their mission – their core value proposition – is to be their clients “lifetime financial coach” or “overall guardian of their financial wellbeing” (these are both phrases we’ve heard). These firms look to us to enable them to accomplish two goals: 1) free their advisors to spend more time with clients – ideally spending zero time rebalancing or trading portfolios, and 2) offer every client very high levels of personalization and tax management.

Yes. We’re not a good fit for firms whose value proposition is dependent on client conversations about individual security trades. We’re not a system for helping evaluating individual securities or implementing one-off trades. We’re a system that enables investor-facing advisors to provide high levels of personalization and tax optimization, while spending zero time reviewing, rebalancing and trading portfolios. 

More generally, we are not a great fit for firms whose value proposition is centered on delivering market-beating products (e.g. mutual funds, ETFs, SMAs, hedge funds, etc). It’s not that we get in the way of delivering great products – in fact, we make it easier, since there’s no operational complexity to changing products in a way that is faithful to each client’s personalization and tax management preferences. It’s that firms that focus on product and returns simply tend to place less emphasis on the importance of personalization and tax management.

Because that’s where we think the market is headed. We also think it’s in the interest of both investors and advisors. 

Historically, the main focus of wealth management has been on the search for performance. The advisor’s value proposition was that they were experts on stocks and bonds — and, at least implicitly, that the client would benefit from the advisor’s security selection acumen and access to alternative investments. Most advisors and firms are not able to deliver performance superior to index investing, and virtually none can do so consistently. Moreover, involving clients in trade decision making is inefficient. Worse, it’s counterproductive: it focuses clients on performance, which they can’t really control, and away from planning, which they can.

This is changing. Firms are moving away from value propositions centered on the uncertain task of beating a benchmark, and towards value propositions centered on services that the firm knows it can deliver, such as financial planning, coordinating financial service providers, education, etc.

With Smartleaf, security selection is largely replaced with product/model selection. That is, for each asset class, rather than choose individual securities, client-facing advisors choose from a list of solutions vetted by their firm. The list of solutions available to advisors for each asset class typically include one or more ETFs, actively managed mutual funds, direct indexes and actively-managed security-level models (“unwrapped mutual funds”).

Smartleaf takes a menu driven approach to personalization, with implementation delegated to specialists within the firm or to a third party, who oversee a largely automated process. This:

• reduces costs.

• increases consistency and compliance.

• increases the level of customization and tax management that can be economically provided.

Yes, Smartleaf can add alpha (market beating ideas) by enabling you to more easily:

• Implement your alpha-generating ideas, including tactical asset allocation, model selection or stock selection
• Become open architecture (if you’re not already) and/or make your existing open architecture program more flexible and less costly
• Add “tax alpha” by providing more consistent tax management

Yes. Smartleaf Experience Engine lets you show the work you do and the value you provide. We generate automated reports that let you show your clients:

• How much you save them in taxes
• That you review portfolios daily and efficiently address issues as they arise
• Explanation of individual trades

Yes, the Smartleaf solution is powerful enough to support automated rebalancing platforms—and not just for simple ETF portfolios. Smartleaf can automate the management of complex portfolios, including:

• Individual equities
• Open architecture UMA
• Tax sensitive transition
• Environmental/Social/Governance (ESG) social criteria constraints

There are two basic approaches to overlay portfolio management:

1. With sub-account overlay, each client account is divided into sub-accounts. Each sub-account is typically assigned one model, and each sub-account is rebalanced and traded separately.
2. With holistic overlay, there are no sub-accounts. Instead of multiple sub-accounts each tracking one model, the unified account follows a single blend of multiple models.

Smartleaf employs the holistic approach, which greatly simplifies implementation and operations. More importantly, by enabling risk trade-offs across the entire portfolio, it supports a higher level of tax and customization and lower levels of drift and dispersion.

Smartleaf implementations are simple and non-invasive, and we’ll work with you every step of the way.

Integration is limited to:

• A daily upload from your system of record
• An export from Smartleaf of a trade file to your trade management system

Smartleaf is offered as a hosted service with a full disaster-recovery capability, so no new software is installed on your premises. There is no reconciliation process, and none of your other systems depend on the Smartleaf system.