We enable wealth management advisors to do a lot more for their clients. But we're not for everyone. Here's why.
We don’t just improve a firm’s existing workflow. We transform it. The results are amazing (if we do say so ourselves). But workflow transformation is not a small thing, and it’s usually not worth doing for firms just looking for incremental improvements in their business. Which is why we will sometimes refer prospects to other vendors who, superficially, would seem to be our competitors.¹ We’ve previously written about how we can help firms. In this post, we wanted to mix things up a bit and write about firms where we are not the right answer.
When we started Smartleaf, our goal was more than to just make a better rebalancing tool. It was to automate personalization and tax management — to make these tasks effortless, so that every portfolio could be managed as if it were an advisor’s only portfolio. Achieving this can’t be done by simply automating each step of existing manual workflows. It required a new approach to portfolio review, rebalancing and trading.
The payoff is impressive. Relative to existing workflows, you can simultaneously cut costs, generate more tax alpha, offer more customization AND reduce dispersion — on average, our clients reduce both dispersion and taxes by about 60%. For most clients, you can document that your active tax management saves or defers more in taxes than you charge in advisory fees.
But despite these payoffs, it’s not for everyone. We’ve found that there are three types of firms where we’re not the right fit:
Firms satisfied with current operations and growth
Change is costly, not necessarily in terms of dollar outlays, but in terms of management's time and attention. You can’t prioritize everything, and there’s a maxim of “if it ain’t broke, don’t fix it.” If their existing rebalancing system and workflow is working for them, even if somewhat clumsily, they’re probably better off implementing incremental improvements.
Firms that build their client experience around trading and stock selection
For many advisors and investors, talking about which securities to buy or sell is what wealth management means. Client meetings focus on evaluating past decisions and making new ones. And the portfolio’s performance is the ultimate measure of the advisor’s success.
We give advisors unprecedented power to deliver customized, tax-optimized solutions to all clients, but this type of scale precludes advisors spending a lot of time worrying about individual trades
Firms that need "sleeves"
Smartleaf’s system manages portfolios without carving them into sleeves (AKA sub-accounts or partitions). This is because it's not possible to use sleeves AND deliver the highest levels of tax management and customization. We’ve made the case against sleeves elsewhere.
But some firms need sleeves, either because 1) they want to use third-party subadvisors to trade different portions of a client’s accounts, or 2) they want to provide clients with separate performance reports for each manager or model in a portfolio.
In principle, Smartleaf could be used in conjunction with a sleeve-based system, providing customization and tax overlay for each sleeve. In practice, we don’t see this. The “sleeve/non-sleeve” divide seems to be fairly fundamental. Product-oriented firms choose sleeves. Firms that aren’t product-focused choose non-sleeved "holistic" approaches.
We don’t like turning prospects away, but we also know we can’t be all things to all people. We’re pretty confident the industry is moving in our direction — away from product-oriented value propositions towards value propositions centered on being the overall guardian of the client’s financial well being. Having advisors spend large portions of their day managing portfolios will become economically unviable (as one client put it “in the long run we won’t be compensated to do anything a robo can do just as well”). At the same time, high levels of customization, tax optimization and direct indexing are going to become “table stakes.” These are trends that work in our favor. Which means that, going forward, we expect we’ll be turning fewer prospects away. And that, we think, is good for all concerned.
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1. In the 1947 move, "A Miracle on 34th Street," there's a scene where, to the shock of management, the Macy's Santa sends a client across the street to archival Gimbels. We really do send prospects to competitors, but not because we're Santa.
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