ADVISOR FORUM

Poised for Growth, Firm Takes Giant Steps Toward Efficiency

A small, but growing firm retools for the future. John Cress, principal, Access Investment Advisors, shares his perspective.

In recent years, steady growth at Access Investment Advisors has led them to re-examine their back-office operations. The firm has gradually outgrown manual, time-consuming processes that worked on a smaller scale. John Cress reports the firm has made great strides toward streamlining operations, including a systematized approach to using client models and rebalancing using the Schwab Account Rebalancing Utility, a new capability of the PortfolioCenter® Export Wizard.

SPT: Please tell us a little bit about the firm and your role there.

Cress: We’re located in Manitowoc, Wisconsin. We have $55 to $60 million managed at Schwab, and use one other custodian for a smaller amount of assets. My business partner and I have been doing this for more than 20 years. Our current firm was organized about 10 years ago. We’re probably what Schwab would classify as a small, emerging, growing firm.

We’re fairly automated for an office of our size. We want to stay as current as we can with contemporary uses of technology. It allows a firm of our size to deliver on our commitments to clients; without those tools we would not be as competitive as we are.

The rebalancing utility comes at a very critical time for us as we’re trying to streamline our processes and deliver a more consistent investment experience to our clients. This tool is coming at just the right time in our growth.

SPT: It sounds like you’re ramping up to grow the business even further. Do you have any defined growth goals for the firm?

Cress: Our goal is to have a million dollars of revenue. When we’re going to achieve that, I don’t know. We’re determining that right now. Where you want your business to be depends on your back-office capabilities as much as on your front-office. They’re critical. If it’s not efficient and running consistently, you can’t have a consistent client experience. You will not grow.

SPT: It sounds like it will take a team effort to reach your goal. Who are your partners and associates and what do they do?

Cress: My partner is Will Casey. We both do general financial planning and advisory work, and we also manage assets, mostly at Schwab. We just brought a new associate on board, Cindy Vana. We have two people, Marge Stokes and Alex Olson, who are really multi-purpose players. They are both familiar with portfolio management, and they communicate directly clients, answer questions and solve problems. We really don’t have dedicated assistants or secretaries here.

SPT: Speaking of your clients, what is their typical profile?

Cress: Most people we serve are business owners and professionals—individuals as opposed to entities. Right now, our average client is probably close to 56 or 57 years old. The common threads are with the complexity in people’s lives and a lack of time. They’ve decided they don’t want to do these things alone. And that is really our niche.

We really don’t do asset management unless we have financial planning information on a client. That gives us the insight to use the correct modeling and tools to make sure that the management of those assets aligns with their financial planning requirements.

Our clients come to us partly because we’re independent—and they like the Schwab connection. They want national depth, but they want local servicing and knowledge. So, we’ve been very successful in being able to deliver that here.

SPT: What kind of asset mix do your clients generally have in their portfolios?

Cress: I would say as a shop, we’re maybe 50-70% equities and the remaining asset classes would be split between mutual funds and then bonds.

With mutual funds, lately we’ve been using more and more exchange traded funds versus the mutual funds we’ve used in the past. The area that’s going to be expanding for us more and more is bonds. Our clients are maturing and switching from asset accumulators to people who need to convert their assets back into income streams. They’re looking more to bonds and laddering those to make sure the maturities match their cash flow needs.

Outgrowing Manual Processes

As their firm grew, Cress and his partner realized they needed to systematize their rebalancing process.

SPT: Now let’s talk about how you’ve incorporated models into your rebalancing process. Until recently, you didn’t assign models to client’s portfolios. What was your process like before in terms of making trading decisions?

Cress: I would describe our old process as manual rebalancing. For the last few years, we’ve used the tools that came with Centerpiece, but until recently not the modeling functionality. One account at a time, we would use those tools and a lot of legal paper, do a lot of Excel spreadsheet work and try to come up with ways to optimize portfolios and get them to the desired shape. That is a very time-consuming process and it’s nothing that you can translate easily from one portfolio to another.

Over the last two years, we’ve refined our process so we know at what points during the year we should be rebalancing. For us, the year really starts and stops between the months of November and December when much of the rebalancing is done with respect to managing for tax efficiency. Beyond that, we reassess quarterly performance reviews to see if there is anything we could provide on an interim basis to get more efficiency.

SPT: So you refined your approach over the years, but it continued to be a manual process?

Cress: Yes, it was all a matter of sitting down and doing the math. We would have tables filled with pieces of paper showing the normal tolerances we wanted for a different asset class or a different security. Then we’d run Centerpiece reports and get some idea of what rebalancing would do for securities out of tolerance. We would end up just doing all of that mentally and manually by sitting down and doing the math.

SPT: That does sound very time consuming. How much time would that take you?

Cress: It would take Will and me a solid week to rebalance for approximately 250 accounts. Sadly, the week after the end of a quarter was spent doing really nothing but that task.

And it worked, but that’s sort of a tiny office methodology that only succeeds because you’re small. For us, fortunately, the growth we’ve experienced has made us bootstrap ourselves to a much higher level of sophistication, and we need to extend that. We need to be able to use these tools many times for many different clients. I think the Schwab Account Rebalancing Utility will let us do that.

SPT: So would you say maintaining your growth, and probably your sanity, is going to require a better process?

Cress: We’re now at the point where our growth depends on imposing structure on this very important part of our job. I can see this being a real sticking point for a fledgling shop if they don’t adopt tools for things like streamlining rebalancing. I don’t really see how you could grow. And I know that, without it, there’s a greater potential for error.

Systematizing Models Across The Practice

Designing models for client portfolios requires consideration of client needs, including age and retirement goals. Cress explains his firm’s rationale and steps for putting them in practice.

SPT: Once you decided models could help you grow, how did you choose which models to use?

Cress: We have 12 models—basically four primary models, each with three modifications depending on the client’s time horizon. A lot of that has to do with proximity to retirement or to the point where someone needs to use their assets for income.

Some of the models use bonds as a counterweight to equity positions so we can control standard deviation. When clients start needing income from their investments then it’s more than just a counterweight. At that point, we actually need to start consuming those assets, which requires more maintenance on the bond side to optimize performance and match up with the client’s income requirements.

SPT: Did you roll models out to all your clients? Or did you start that only with new clients?

Cress: We did it in a couple of steps. We started with our best clients and then added new clients, because they’re easier to work with. They don’t have a history, and you don’t have to modify things.

Transitioning to a New Process Using the Schwab Utility

Instituting models enabled a consistent approach to rebalancing—and significant time savings—once they were applied to all clients.

SPT: What is your rebalancing process like now? What is your workflow?

Cress: As of the end of this year, we internally assigned models to every client. The portfolios may not meet the models perfectly now, but we know that as we review quarterly, if there are positions that we need to liquidate for income needs or if there are positions we need to change for performance reasons, we can use rebalancing to figure out what should we be putting in to replace them. So, that’s a fairly systematic approach.

We run the Schwab Account Rebalancing Utility to output a list of trades, but so far, we’ve been double-checking our work. We let the utility do the math and then we just put in the trades ourselves. So I think now our confidence is high enough that by next quarter we will send most of the trades generated by the Rebalancing Utility straight through to the schwabinstitutional.com Web trading application.

SPT: That’s a great tip: Use it awhile, get comfortable with it, and check it against the math you’re familiar with.

Cress: You’re going to have to do that. You’re going to have to really know how to map tolerances at the security level. If you don’t know where those are, this tool will not be useful to you and it’s not the tool’s fault. There is that commitment that you need to make. Mastering rebalancing itself, I think, is very intuitive. There’s really not that much of a learning curve if you know how to manipulate things in Excel. Frankly, the most complicated part of the process has nothing to do with rebalancing and everything to do with familiarity with Excel. So, the biggest challenge is to get your data, your client profiles, in tip-top shape to really allow the tool to do its magic. That takes an investment of your time but it’s time that can be leveraged again and again.

SPT: Have you found that the tool has helped you so far?

Cress: It helps us a lot—I expect it will cut our time in half, probably more as we get better at it. We should be able to get a couple of weeks of our life back this year, just by eliminating manual rebalancing. The savings for us were immediate because of all of those calculations across the different securities. Our average model just for equities alone probably has between 30 and 40 positions. We could go through and trust our own judgment, but it’s easier to run the report which shows quite clearly whether they fit within our settings.

SPT: So what are you doing with that time that you’re saving?

Cress: We’re spending that on all the compliance we have to do now [laughter]. It affords us the time to take on new associates, like Cindy, and time to market our services. It also gives us more creative time and time with clients.

SPT: That’s exciting to hear, John. Software like PortfolioCenter should automate things so you can do what you want to do.

Tips For Getting Started

Cress advises new users of the Schwab Account Rebalancing Utility to prepare your models, be proficient in Excel and have a process for handling excluded securities and other exceptions.

SPT: Overall, what do you think of the rebalancing feature so far? Has it been easy to use? And do you have any tips for new users?

Cress: I think the tool is very well thought out and consistent with all of the other features in PortfolioCenter. If you’re familiar with PortfolioCenter, the new utility should be a very comfortable extension of those capabilities.

Using those capabilities requires preparation. That means commitment to the whole process of assigning clients one at a time to models that you carefully build. The rebalancing tool will not eliminate that step and it’s an ongoing process. It’s not something that happens one time, at least not in this shop.

In terms of using it, it’s very intuitive. It’s no more complex than running any other report in PortfolioCenter. Once you’ve dedicated the time to keeping the settings in a fashion that reflects your methodology, it does its job reliably and well. You do need to be proficient in Excel.

Finally, you will need to document all the steps that you develop for your firm’s rebalancing routine, including your procedures for maintaining the “out of balance” settings and a central list of securities that are excluded from rebalancing. Good documentation can make your system easier to learn and operate reliably.

SPT: We really appreciate you sharing your perspective, John.

To learn more about the Schwab Account Rebalancing Utility:

• Watch the short Flash video for a quick demonstration.
• Read the simple, six-step Schwab Account Rebalancing Utility Guide to get started.
• See February’s Advisor Forum, which highlighted King Dodson Armstrong Financial Advisors and their use of the new rebalancing tool.

Next issue, the Advisor Forum will feature firms that opted for third-party solutions that work with PortfolioCenter to integrate rebalancing and trading across multiple custodians. We’ll find out what the solution adds to their back-office capabilities and why they chose to go that route.