Topics: Blog, Automated Rebalancing, Portfolio Customization, Wealth Management

Why Smartleaf?

Why we do what we do.

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Why Smartleaf? I don’t mean a list of things we do better than the other guy. I mean what’s the point of Smartleaf? Why do we do what we do? And how do we know if we’re succeeding?

When we started Smartleaf, we said, jokingly, that our purpose was to kill the mutual fund industry.  We didn’t then and don’t now have any animosity towards any individual mutual fund company. We just thought the mutual fund — and its cousin, the ETF — were obsolete. Or more precisely, we thought we could make them obsolete. It had long been recognized that a well-managed separately managed account (SMA) could outperform a comparable mutual fund on an after-tax basis. SMAs were also customizable. But they were expensive because managing them (at least managing them well) was manual and time consuming. We thought we could fix this. We set out to automate all the stuff that makes SMAs valuable — constraint management, risk management, tax management. (To most people, this stuff is kind of boring, but computers are good at doing stuff that’s boring.) SMAs were already better than mutual funds. Through automation, we wanted to make them cheaper than a mutual fund. And thereby kill the mutual fund industry. 

As you may have notice, mutual fund companies are still around. So clearly we failed. But not to worry. Our larger purpose was to shake up the financial services industry by dramatically cutting the costs of portfolio management. If you want to understand who we are and what we’re trying to do, this is key. We’re about customization at scale. Real scale. 10X scale. It affects every design and development decision we make. If some features or function doesn’t scale well, we don’t add it. Here’s an example. A client once asked us to round all trade recommendations to the nearest 100 shares. We said..."no”. The reason wasn’t an aversion to rounding. It was that rounding to 100 shares could mess up the trades (think Berkshire Hathaway, priced at $292K/share), which would then demand manual review. Which is unscalable. But we didn’t just say “no”. We offered an alternative: what if we rounded each trade to the biggest, roundest number that wouldn’t disturb the portfolio too much. So Berkshire Hathaway would get rounded to the nearest single share, while a particularly low priced security would get rounded to the nearest 1,000 shares. This alternate approach is, we hope, the best of both worlds — it gives you a lot of rounding, but doesn’t affect scale.

Why is any of this important? Because automation reduces costs and, to state the obvious, costs matter. If you’re an investor and you can save 50 bps a year, earning 5% instead of 4.5% a year, over 25 years, you retire 20% wealthier. Automation also saves time, and, to again state the obvious, time matters. It’s not possible for every financial advisor to be better than every other advisor at picking stocks. But it is possible for every advisor to be the very best at understanding their clients and guiding them. That’s where advisors add value, and, simply put, automation frees advisors to spend more time well.

 

We — and the industry — have come a long way.  When we got started, the standard minimum for a tax-optimized, customized SMA was about $250,000. We wanted to get that down to $25,000. We achieved this goal and then some. The smallest SMA on our system is less than $25. That’s a reduction not of 90%, but 99.99%. To be fair, the reduction is only partly due to automated rebalancing; you also need fractional shares and zero-dollar commissions. Still, we’re pleased. 

But, overall, our mission to change the wealth management industry is best judged as a work in progress. Mutual funds are still around. And there are lots of firms who still do things pretty much the same way they did twenty years ago. We’ll let you know when we’re done...

Topics: Blog, Automated Rebalancing, Portfolio Customization, Wealth Management

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