Personalized Investing and Tax Management at Scale

[Personalized, differentiated client investment portfolios across all clients have been a time, money, effort and technology challenge for advisors and RIAs. The added customer experience of a truly bespoke investment offering that encompasses both an individual client’s unique investment preferences and tax circumstances can be a major competitive advantage. Especially compared to many current personalization efforts using paint-by-the-numbers questionnaire-driven asset allocation, modular investment approaches, and generic mass customization efforts approximating a client’s unique financial situation. The time is coming as a more educated customer base increasingly will be aware of a new level of financial technology available and start seeking that level of financial service from their financial advisors.

To understand the new technology advances that are changing the game for investment personalization, we reached out to Institute member Rob Battista, SVP and Managing Director of Vestmark Advisory Solutions – the advisory arm of Vestmark, a leading provider of wealth management software and services, including direct indexing capabilities and the VestmarkOne technology platform. They also just recently launched VAST – an innovative outsourced portfolio management service focused on personalization at scale. We asked him questions to explore how they developed their tech solution to address industry issues like the need for an active, comprehensive, tax overlay across an entire portfolio and how they designed a unique user experience for both advisors and their clients.]

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Hortz: Tell us about your newly launched portfolio management service. What exactly is VAST?

Battista: Vestmark VAST? is an outsourced portfolio management service focused on personalization at scale. It allows advisors to tailor portfolios to each client's unique investment preferences and tax circumstances. Advisors can build diversified portfolios that include index-based and traditional Separately Managed Account (SMA) managers, ETFs, and other securities, with individualized tax optimization across the entire account.

Direct indexing is just one component of VAST and the power of the solution is that it allows an investor to hold multiple index-based strategies, alongside active SMA managers and different types of investment vehicles in a single account. This allows us to provide tax optimization and apply any other important risk, goals, or values-based customization across their entire account.

VAST also includes a tax transition component, allowing for the tax-efficient transition of “money in motion”, regardless of whether assets are moving across firms, between advisors or from a legacy offering to a tax-managed offering at the same firm.

Hortz: Where did the name VAST come from?

Battista: We liked VAST because the word suggests scale and boundless potential. It is not an acronym, though most people assume that it is. Our technology solves one of wealth management’s most complicated problems – how to scale true individualization of portfolios to reflect personal preferences, risks, and goals, while also focusing on optimizing after-tax returns for the retail investor. The launch is just the beginning and we think the potential to tailor for individual needs with VAST is nearly limitless.

Hortz: How did you design your new portfolio management service to benefit advisors in working with their clients?

Battista: Investors today expect highly personalized solutions and services from their advisors. The challenge is scaling the solution. It is time-intensive and often involves manual processes to craft a customized portfolio and to provide truly individualized tax transition and tax optimization of a client’s portfolio. Most advisors face a dilemma - choosing between focusing on customization to create greater value and competitive distinction or concentrating on scale and leveraging volume to grow. A service like VAST removes the need to choose. Advisors can enhance the level of personalization they offer to clients while also saving time spent on manual, time-consuming activities so they can grow their business.

VAST can support multiple custodians, so advisors can choose to use this for all or just certain segments of their business. Portfolios created and managed on our portfolio management service can range from a single strategy (index-based or active) solution that complements the client’s other accounts to a diversified portfolio that can more holistically address the client’s goals and objectives. And because the portfolio management service offers active tax overlay across the entire portfolio, not just one part or “sleeve”, advisors save significant time and effort managing taxes.

Our integrated tax transition feature, which is designed to transition accounts in the most tax-efficient way possible, unlocks new opportunities for advisors. It can help attract new clients (or new money from current clients) who may have previously been hesitant to move because they have investments with embedded taxable gains in their holdings and want to avoid a large tax bill. This can really help an advisor to grow his or her business.

Hortz: What makes VAST different from the VestmarkONE platform?

Battista: We are most commonly known for our sophisticated portfolio management platform, VestmarkONE?, which has been leveraged by some of the largest and most successful wealth management firms in the industry. With VAST, we developed a totally new user experience that allows the advisor to input their client’s preferences, upload existing holdings for tax purposes and collect the client’s values-based restrictions. And then that interface was integrated with VestmarkONE, which is the engine driving VAST, and to a new service that includes an “optimizer” which makes it possible for our portfolio managers to analyze accounts on a daily basis and find the most tax-optimized trades while also keeping the portfolio in line with the client’s directives.

We are very proud of the fact that our technology teams designed a simple, user-friendly interface, an onboarding process that requires minimal setup time, and a seamless experience for both advisors and clients.

Hortz: What was your motivation in launching a service like this which is a new direction for your technology?

Battista: Vestmark has been supporting clients offering tax-managed and index-based SMAs for more than a decade and has been supporting UMA programs since 2005. We established our RIA, Vestmark Advisory Solutions, in 2018 and have already been providing Investment Advisory services via the Vestmark Manager Marketplace and Outsourced Overlay services to a wide variety of clients. So, creating VAST was very much in keeping with our strategic development principle, which is to innovate in areas where we have core strength and the ability to be an industry leader.

?We saw an unmet need in the market and believed that we could offer a solution leveraging our core strengths that would fill those gaps. Developing our portfolio management solution was really bringing together these elements, enhancing the investment services team, integrating the optimizer, and then building out the user experience. It was really not a departure from our focus on technology, but a continuation of building on that foundation.

Hortz: How specifically did your technology and design decisions address industry portfolio management challenges and offer a different solution than your competitors in the space?

Battista: There were a number of conscious tech and design decisions we made in building our portfolio management solution to address advisor needs that really makes us different from the competition.

An advisor can create a diversified, multi-asset portfolio comprised of several index-based SMA strategies, active SMA strategies, and rounded out with ETFs and funds (if appropriate) in a single custodial account. Many direct index providers offer single strategy SMAs, and advisors struggle with the fact that they need to open and manage multiple accounts to create a diversified portfolio for each client.

Our portfolio management service also offers a flexible open architecture platform of investment options – it is plugged into Vestmark’s Manager Marketplace, which has about 200 third-party managers and 1,000 strategies available, in addition to a menu of index-based strategies licensed from S&P Dow Jones.

Building on that, the tax optimization and overlay are differentiated for two reasons:

First, the VAST team performs comprehensive tax overlay across the entire account, not just a single strategy or “sleeve” of a portfolio. We can look across all of the holdings to implement client restrictions or to manage taxable gains and losses. Most firms cannot (or do not) do this, but the VestmarkONE platform enables it at scale.

Second, we tax optimize on a daily basis, while many competitors do this on a monthly or quarterly basis. This is important – especially during times of high volatility - because the market can sometimes move significantly on a daily basis and opportunities to tax loss harvest are missed if you only do this work monthly or quarterly.

In addition, the simplicity of our user interface is game changing for advisors. The set-up time is minimal, and we can work with all major custodians. We tried to really put the entire workflow and output in plain English so it is easier for both the advisor and client to understand.

For example, many firms ask the client to provide a capital gains budget which is required for them to optimize the portfolio. But how many clients really know what their capital gains budget is? Almost none. Instead, we ask them to answer a simple question: How much are you willing to pay in capital gains taxes this year? That is a question they can answer. With us, an advisor can input their client’s information and very quickly generate a proposal that shows the client options for transitioning their portfolio into VAST in a tax-efficient manner. It is a huge time-saver for them.

The?Institute for Innovation Development?is an educational and business development catalyst for growth-oriented financial advisors and financial services firms?determined to lead their businesses in an operating environment of accelerating business and cultural change.?We operate as?a business innovation platform and educational resource with FinTech and financial services firm members to openly share their unique perspectives and activities. The goal is to build awareness and stimulate open thought leadership discussions on new or evolving industry approaches and thinking to facilitate next-generation growth, differentiation, and unique community engagement strategies.?The institute was launched with the support and foresight of our founding sponsors — Ultimus Fund Solutions, NASDAQ, FLX Networks, TIFIN, Advisorpedia, Pershing, Fidelity, Voya Financial, and Charter Financial Publishing (publisher of?Financial Advisor?and?Private Wealth?magazines).

Vestmark Advisory Solutions, Inc. (“VAS”), a wholly-owned subsidiary of Vestmark, Inc., is an investment advisor registered with the U.S. Securities and Exchange Commission (“SEC”). VAS acts as a paid sub-advisor and/or overlay portfolio manager offering VAST and tax optimization services. Registration does not imply a certain level of skill or training. VAS has its principal place of business in Wakefield, MA. Investing involves risk. The value of an investment will fluctuate over time, and an investor may gain or lose money. Past performance is no guarantee of future returns and individual investor results will vary. Please consult our?full disclosure document?for a discussion of risks related to the services provided by VAS.