I began this series of articles on portfolio rebalancing software with a panel of four product vendors at last year's T3 Conference. (see Which Portfolio Rebalancing Software is Right for You?) One of those products was iRebal and since then I have been looking forward to writing a more in-depth review of it.
I recently had my chance when I was able to speak with Danielle Fava, Senior Product Manager at TD Ameritrade (TDA), who gave me a demo and discussed some of the new features that will be part of the upcoming May release of the cloud-based version of iRebal.
iRebal on Veo, as TDA refers to it, was built by following the blue-print for rebalancing set forth by the desktop version, which was acquired by TDA back in 2006, Fava explained. iRebal on Veo has been offered for free to RIAs for use with accounts that are custodied with TD Ameritrade Institutional, since last year.
According to Fava, most RIAs that use automated rebalancing tend to stick with the solution that is provided by their custodian, if they offer one. Advisors that are more technically adept will often buy their own rebalancing solution. However, since the software is not directly connected to the custodian, this requires downloading positions daily and then uploading them into the rebalancing software.
None of this work is required when using iRebal with TDA-custodied accounts through their Veo platform. All accounts are automatically kept up to date versus the custodial platform, she noted.
iRebal offers a wide range of rebalancing options:
- Fully rebalance securities and cash – this option evaluates drift in all positions in each selected account, buys andor sells to adjust each position to its model target and will raise additional cash for any scheduled customer withdrawals
- Manage cash only – only invests excess cash in each account
- Directed trading – used as a tactical tool
- Adjust one security to target – generates trades for only a single security across all accounts
- Replace securities – swap out one security for another across multiple accounts
- Tax harvesting – find and realize qualifying losses across portfolios and buy replacement securities
Accounts can be rebalanced individually or in groups with multiple criteria available for selecting portfolios. These include the assigned model, number of days since previous rebalance.
Before monthly or quarterly billing cycles, it is important that all accounts have enough cash for fees. The RIA can export a file from their billing system with account numbers and their corresponding fees. This file can then be imported into iRebal and a rebalance executed that raises the correct amount of cash needed in each account.
Automated Portfolio Monitoring
The first new feature that we discussed was the ability to schedule rebalances on a calendar basis. This is a critical feature that all rebalancing software should provide for RIA's that need to scale up to support hundreds of discretionary accounts.
Annual rebalancing has been proven to deliver almost a 1% bump to the average annualized return of a portfolio. A good article on this was just posted on the Helping Advisors Blog from Russell Investments that provided some of these statistics. (see Value of an advisor is still more than 1%)
Without a scheduling function, it would be up to the advisor to keep track of which accounts needed to be rebalanced using an external method outside of the rebalancer, which would be inefficient and prone to error. Setting up schedules for each account and letting the software manage the workload saves time and headaches and ensures that each account will be rebalanced at the correct interval.
Another rebalancing strategy is to assign upper and lower bands around each asset class in iRebal. If any of the securities move past one of the bands, the system will automatically generate orders for the account and create an alert.
The cloud version of iRebal is tightly integrated into TDA's Veo platform. One of the advantages of this is that iRebal alerts are displayed on the advisor's TDA Institutional home page. (see screenshot) Clicking on a link displays the list of proposed orders This creates an active task list the advisor can use to manage his work for the day.
Most automated rebalancing programs offer configuration choices that will help minimize the number of trades that are generated and avoid unnecessary transactions. iRebal's equivalent securities option can help with this. It provides the ability to define one security as equivalent to another. This prevents iRebal from trying to sell a position, even though it is not part of the account model.
One example of how this could be useful is for grandfathering positions. Let's say you have a model that uses GLD for exposure to commodities and most accounts own some of it. But then you decide that IAU is better, but only want new clients to buy it. You could create an entirely new model for the new clients, which is another model you have to maintain, or you can set the two securities to be equivalent. Once this is done, iRebal doesn't distinguish between the two and won’t sell any legacy positions. This avoids unnecessary transactions and is a popular feature for advisors who primarily use ETFs, Fava pointed out.
According to Fava, one of the most requested new features was tax loss harvesting, since it can be the most important tool for reducing a client's tax bill. iRebal will handle tax harvesting through the security master screen and has a lot of intelligence built in to provide a smoother process for the advisor.
The process starts by setting a loss threshold amount as a percentage or in dollars along with a replacement security. iRebal will then search for all positions (or individual tax lots if you're willing to sell partials) that meet the criteria. Buy orders will be generated for the replacement security for any losing positions that are sold.
The smarts built into system mean that if you rebalance any of the affected accounts within the wash sale window, iRebal won't try to sell the replacement securities. After the 30 day window has passed, iRebal will remind you that a rebalance is required for the accounts. It will then swap out the replacement securities with whatever is in the model.
There is a lot of customization that can be done with this product that gives an advisor a lot of flexibility. There is a tax loss prioritization for selecting positions to harvest that selects only short-term losses, only long-term losses or all losses but minimizing the number of trades.
The results of the tax harvest function will display all accounts that were included, how many orders were generated for each and the total estimated long and short-term losses that will be generated. You can review all orders and modify or delete any of them before they are sent for execution.
One feature that I think advisors would find quite useful is what iRebal refers to as Security and Trade Action Notes, but what I would call, "Why did you recommend that trade?" It provides an explanation both for orders generated and reasons why orders were blocked, such as being below minimum trade amounts. Considering how many tasks the average advisor has to go through in the day-to-day management of their practice, this kind of built-in commentary will save hours of calls to the customer support line.
TDA has made significant progress in upgrading the cloud-based version of iRebal. While it is not as customizable as the desktop version, it offers more than enough functionality for independent advisors to manage their book of business. There are around 20 advisors currently using the new version in a Beta test, with the official launch scheduled for sometime in May.
The addition of what I would consider table stakes features like scheduled rebalances, tax harvesting and asset location should be enough for any RIA to consider using iRebal for Veo to manage accounts that are custodied at TDA.