Skip to content
Contact us

Tax-Efficient Transitioning

Are you still lifting and shifting legacy assets? 

Authors

Walid Bandar,
Axioma Wealth Management Specialist, SimCorp

The last several years have seen increasing M&A activity in the RIA space as firms grow and scale.

According to Cerulli Associates, the number of RIA firms has grown at a rate of 2.4% (CAGR), compared to other channels that have declined or were flat. 

This type of growth and consolidation comes with a unique set of challenges – namely the onboarding of accounts with legacy assets into a separately managed account, using a new model portfolio. We sat down with former portfolio manager and wealth management specialist Walid Bandar to talk more about the growing pains RIAs and the wider wealth management industry are experiencing and importantly, the ways to tackle them.

Let’s start with the practical implications of bringing together two – sometimes three – organizations into the fold in quick succession. Thinking about it from a portfolio manager or CIO perspective, where do you turn your attention to first? 

You need to start with coming up with a strategy to start transitioning those legacy assets that you’ve now acquired. How are you going to bring all those assets over and what assets will you have to buy and sell to maintain proper tracking of the new model? What are the tax implications of these trades? What are the associated transaction costs? How will this affect the overall portfolio performance? As you can see, there are a lot of considerations and to do it across hundreds, perhaps thousands of portfolios is a tall order.

So what would a portfolio manager do next?
There are a few options. If there’s no existing technology for this purpose, then the most straightforward action would be to literally sell everything without any consideration to some of those questions we just covered above. In this worst-case scenario, the manager is basically shooting from the hip. As an example, there wouldn’t be any consideration to tax efficient management so tax events could be triggered, which will get passed on to the end client. In reality, this is a situation that is avoidable. 

Obviously that’s the worst-case scenario. What’s another way to transition these legacy assets? 
It is a worst case. But if you don’t have the resources or the technology, then this is the quickest way to do transition management. However, another (incrementally) better way for the manager who is moving over individual securities and funds, is to go line by line and make decisions on which stocks and funds to move over and which ones to keep. One of the downsides is that this is an incredibly laborious and time-consuming process.

With the portfolios that include funds, is transition management easier?
The difference is marginal. The manager may not have to go through each individual stock, but the general process is still the same. The manager will consider each fund and analyze the asset allocation to see if it fits in with the new model. All this is done on a best-efforts basis with the manager manually trying to decide whether the new fund is a good replacement using very few data points. 

At the very least, a manager should incorporate a risk model into the process. This would allow the manager or advisor to make more informed decisions about what to buy and what to hold while staying within a specific tracking error and at the same time, aligning to a defined strategy.

Walid Bandar

Axioma Wealth Management Specialist, SimCorp

Are those the only two options?
No, there are better ways to deploy a transition management strategy. At the very least, a manager should incorporate a risk model into the process. This would allow the manager or advisor to make more informed decisions about what to buy and what to hold while staying within a specific tracking error and at the same time, aligning to a defined strategy. If a risk model is then used with a financial optimizer, this is even a more efficient way forward. What you can do with this tool, is to better manage the trade-offs between tracking the model, the tax implications, asset allocations while also incorporating constraints to manage different portfolio guardrails. The optimizer really comes into its own especially when trying to buy replacement securities to the ones that were sold in a tax efficient way.

What are some other advantages of doing it this way?
Having an optimizer not only offers a flexible process for transition management, but when combined with a robust risk model, it also solves for the operational risk of being able to have full coverage of assets that were previously managed by someone else. Traditionally, transitioning has been an area that is at the discretion of each advisor or manager or Home Office and what you end up with is a lack of standardization across how assets are transitioned. A client is at the whim of whoever is handling the account and one manager might be willing to take on more risk than another.

Ultimately, one client could have a completely different experience to the next. At the end of the day, RIAs, like the rest of the wealth management industry are feeling the pressure to justify higher fees, to increase performance and to manage even higher volumes of portfolios – without adding more human resource. Technology and robust risk models like the Axioma Portfolio Optimizer and Axioma Risk Models, can be a win-win. 

Learn more about tax-efficient transition management at Transition Management.

  • Privacy policy
  • Cookie Policy
  • Terms of Use
  • Trademark guidelines
  • Copyright © 2024 SimCorp A/S