High-end portfolios have traditionally been managed one trade at a time, with portfolio managers working off of a buy-list and asset allocation guidelines. This is time consuming and expensive, but many think it is the only way to support high levels of customization and tax-management. In contrast, a “models-based” approach, while much more efficient, is often viewed as a one-size-fits-all "cookie-cutter" solution.
This belief in the limits of models is common wisdom — and it is wrong. A models-based approach enables more customization and tax management, not less.
The reason is simple: with a models-based approach, customization and tax management can be automated. And if you automate something, you can do more of it — lots more. You can provide year-round, not just year-end, loss harvesting. ESG (social criteria) constraints are easy to implement, so there’s no barrier to offering it more widely. The same applies to customized asset allocations and product selections, tax budgets, transition plans, etc.
A models-based approach will also be more consistent. When firms move from traditional portfolio management to a more automated, customized and tax-managed approach, our research shows both tax burden and dispersion drop by about 60% — it’s a win/win of greater customization and greater consistency.
Models are not just a cookie-cutter solution. They’re, well, a model for the future.
For more on this topic, check out Automated Rebalancing & Specialization.
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