ADVISOR FORUM

Third-Party Solution Aids Pinnacle's Trading and Unique Tactical Asset Allocation Approach

Ken Solow, chief investment officer of Pinnacle Advisory Group, shared how his company uses iRebal with PortfolioCenter in their trading and asset allocation processes—which involve both rebalancing and adjusting portfolio models to changing market conditions.

Pinnacle Advisory Group is a private wealth management firm that does comprehensive financial planning for approximately 460 clients. Until recently, the firm built live model portfolios in PortfolioCenter that were priced every day. Traders manually updated transactions to keep the model portfolios current with market conditions. In addition, individual client accounts were manually traded to stay consistent with the current model, which involved accounting for transactions, taxes, positioning of the assets in taxable or tax-qualified accounts, and short- and long-term cap gains.

Solow described what sets their firm's rebalancing and asset allocation processes apart, and how iRebal has helped make them more efficient.

SPT: What led your firm to consider using a third-party system?

Solow: Well, our firm has been growing at a fairly rapid pace. We've had as many as four full-time portfolio traders along the way. As a private wealth management firm, any portfolio activity must be done through multiple accounts with a great deal of sensitivity for tax issues and asset allocation. We also follow a tactical asset allocation philosophy, which means we're more active in our trading approach than many other firms. With all the complexity, it was becoming apparent that without some kind of software tool, we would rapidly reach a place where our growth would be constrained. So those were our motivations in looking for a tool.

Understanding Tactical Asset Allocation And Rebalancing

Solow explains how the firm changes portfolio models as the market changes, a process they call tactical asset allocation.

SPT: Now that you've been using the iRebal system for three months, can you describe your process and workflow for rebalancing?

Solow: At Pinnacle Advisory Group, we do things a little differently. While we have multiple asset classes in the portfolio, they're not fixed. We change the percentage weightings of those asset classes as the market moves and our perception of the market's risks changes. So the weightings in our models and portfolios are not at fixed percentages—they're changing. Movements in market prices changes them, which is the same for other firms, but also we change them to minimize risk for our clients, based on our assessment of the risk inherent in the various asset classes.

Our process involves evaluating all the asset classes to make sure we have a diversified portfolio and then assessing the relative risk in those asset classes. If we think that the risk is lower in one asset class than another, we might add to the lower-risk asset classes and take profits out of the higher-risk ones. That process of changing in the shorter term from one asset class to another to tactically manage risk is what we call tactical asset allocation.

SPT: How does that affect your rebalancing process?

Solow: The iRebal software helps rebalance our portfolios to the models we've built in PortfolioCenter. What happens in our process is that we're much more active in changing our models within PortfolioCenter. That's how we implement our tactical asset allocation strategy. We change those models often inside of PortfolioCenter—it could be three or four times a quarter. When the models are changed, iRebal will trade our accounts so that they reflect the current version of the model. In our view, that is not rebalancing. That's simply us making changes to our model, and iRebal is facilitating the implementation of those changes by “rebalancing” to the new version of the model.

Once we've made our changes, the markets could move—and unless we change the model, then substantial shifts in portfolio weightings due to market movement will be rebalanced back to the model by iRebal. That is the classic application of rebalancing most of iRebal's users apply, but it is important to differentiate this application from the changes that occur because we change the model itself in PortfolioCenter as part of our tactical asset allocation strategy. Fortunately, iRebal works phenomenally well for implementing our tactical asset allocation trades with its rebalancing technology, to reflect model changes across multiple asset classes, dealing with tax issues and other complexities, in addition to implementing classic rebalancing trades.

Realizing Workflow Benefits

Automated trading translates into better research and analysis—and better money management for clients.

SPT: Maybe you could talk about who does what in terms of making the decisions to update the models. What about your workflow for trading decisions—who is involved in the process?

Solow: At Pinnacle Advisory Group, it's the investment team, working with our senior client advisors and the principals, as a broader committee that makes major decisions about trading policy. However, it's the core investment team that handles the day-to-day activity of updating the models and implementing trades—that's all very centralized.

SPT: So you have a centralized team-based approach. How did the third-party solution impact your workflow?

Solow: What iRebal has done is allow us to free up firm members who had to spend a lot of time on day-to-day trading issues. Before we had iRebal, more than half of our investment team's time was spent trading. Now, two full-time investment team members spend more than 90% of their time on research and 10% or less on actual trading. It's been an amazing change in productivity. What that allows us to do is explore in a lot more detail and depth investment issues and our investment strategy. Generally speaking, it should allow us to be a lot better at managing money for clients.

SPT: Well, you've led right in to my next question: it sounds like the third-party solution has helped you achieve your firm goals by streamlining your back office. Is that right?

Solow: Yes, it has. We've gone from four full-time traders to one full-time trader and two full-time analysts.

Customizing Software To Client Needs

Solow describes iRebal client service, software customization and value.

SPT: Now we'd like to find out how satisfied you are with your decision to go with this solution. How has it met with your expectations so far?

Solow: So far it's been fantastic. That's a credit to [iRebal developers] Gobind Daryanani and Anand Jha, who view this as an organic product. As different users suggest additions, everybody benefits. And certainly, along the way we've suggested numerous changes that they've incorporated in the software. I will say that it has been a longer and more complicated process than I would've hoped when we first started. On the other hand, I recognize that we're high maintenance. We've wanted a lot of things added to the software—and they have done a terrific job of accommodating us.

SPT: And they've leveraged all those changes to the software across the board?

Solow: Yes. In fact, they send out a newsletter to keep users up to date on all the new features. Everyone benefits from the collective wisdom of the user base. I think as more clients use the software and apply different approaches to the markets, the software will continue to be more productive.

SPT: How well would you say the solution integrates with PortfolioCenter?

Solow: I think it does a very good job integrating with PortfolioCenter. One of the challenges in the beginning was just that we do things a little differently. So whereas a lot of advisory firms using this might build things at the asset class level—cash, bonds, stocks—we build it in at the security level. That said, it has integrated well for us.

Delivering Value And Scalability For Future Growth

Using iRebal, Solow says, Pinnacle can double in size without needing to hire another trader.

SPT: How about the value? Have you found it to be a good value in terms of the benefits it delivers?

Solow: By all means, yes. They price the software to be about the cost of a full-time employee. You've got to look at it from the standpoint of a firm like ours, if we double the size of our firm, from 450 clients to 900 clients, how many traders would we need? Early on, we came to the decision that a portfolio trader could handle maybe a couple of hundred accounts. Under our current business plan we can double the firm through growth without needing to add another trader. There's no reason this software tool can't just as easily trade 900 accounts or 900 clients as it trades 450 clients. That represents a huge value when you're thinking about the growth of your company and how you can allocate resources going forward.

SPT: Do you have any advice for advisors considering a third-party solution?

Solow: It depends on where they are in their business, but I would definitely recommend it to any advisor who is “hitting the wall,” so to speak—when it becomes obvious that you're either going to have to start hiring more people or slow the growth of your company. Most advisors are going to recognize that tipping point, and when it happens, my strong advice would be to consider some kind of software tool, now that they're available. I was looking for software tools for years that would do this and I really hadn't found one that I felt was even close to the complexity that we needed. Whether it's iRebal or other tools out there, I think advisors should look at them because they may find that it's a good investment. It certainly has been for us.