Topics: Blog, Automated Rebalancing, Tax Management, Wealth Management

Quantitative Finance For The Rest of Us

Applying institutional quality analytics to the needs of individual investors.

Math Board

A local university has a graduate quantitative finance program that invites speakers from companies that hire financial engineers (aka quants) to talk about what they do.1 This includes hedge funds, quant shops, asset managers, trade specialists and us.2 But we suspect we’re a bit different than the others. Most of the quantitative finance infrastructure — the ideas, the tools, even the academic literature — was built around the needs of institutional investors. The focus is usually on beating the market. Taxes, customization and the other needs of individual investors, if they come up at all, are usually an afterthought. 

Not for us. We use institutional quality analytics, with lots of data and lots of fancy math. But we apply this analytic power specifically to the needs of advisors who manage the wealth of individual investors. Among other things, this means worrying about taxes and customization. Normally, financial engineers talk about portfolios on the “efficient frontier”. We talk about portfolios on the after-tax efficient frontier. 

That makes us different. And we like being different. We like that, through their advisors, we’re helping individual investors. But there’s more. We like that what we do is more permanent than much of mainstream quantitative finance. Strategies for beating the market are fickle. If they work, they’ll get copied and eventually stop working. Every six months, you may find yourself starting over. It’s life on a high-speed treadmill, running as fast as you can just to not fall off. In contrast, strategies that help individual investors save taxes and manage risk don’t get competed away. Tax management strategies don’t stop working just because somebody else is doing them, too. This means that it’s not a zero-sum game. All individual investors can be made better off.  

And we think we can make the lives of all advisors better off, as well. In the short (or maybe even medium) run, technology like ours provides advisors with competitive advantages. It enables them to deliver to their clients a higher level of customization and tax management, at lower cost and with less effort. That’s big. In the long run, as the technology spreads, providing high levels of customization and tax management will stop being a differentiator. It will simply become table-stakes — the new normal. (Of course, we’ll try to stay ahead of the curve, but that’s another story). But even if high-quality tax management and customization become universal, it will still leave all advisors better off in the simple sense that all advisors will be able to do more for their clients.  

Our expectation is that, going forward, a larger fraction of quantitative finance will be devoted to the needs of individual investors and the advisors who serve them. There’s lots of wealth owned by individual investors, but it’s spread out over lots of accounts, and, historically, that made them harder to serve. So quants worked mainly for institutional investors. Rebalancing automation changes this. It makes it possible to apply advanced analytics to every account, no matter how small.


1Pre-COVID-19

2Financial engineers make up a sizable fraction of Smartleaf’s development team.

Topics: Blog, Automated Rebalancing, Tax Management, Wealth Management

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