portfolio rebalancing

#ItzOnWealthTech Ep 8: Trends in Portfolio Rebalancing from Orion Advisor Services

“Rebalancing isn’t just an automated process to achieve target allocations, it enables customization of client portfolios at scale.”

— Ryan Donovan

Ryan Donovan joined Orion Advisor Services in 2014 with the goal of empowering advisors in the northeast and furthering Orion’s regional presence. Prior to joining Orion, Ryan had been a Vice President with Citigroup where he was responsible for developing bespoke front, middle and back office solutions for institutional investment advisors. During his ten years with Citigroup he held various leadership roles within Operations, Client Service and Sales. Ryan has been privileged to have been engaged by many of the industries leading institutional investors and work as a strategic partner to address their complex business challenges.

He holds a Bachelor of Science in Finance from Bentley University in Waltham, Massachusetts and is an active candidate in the Chartered Financial Analyst program. When he is not working, Ryan enjoys golf, travel and spending time with his family at home in New York.

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This episode of Wealth Management Today is brought to you by Ezra Group Consulting. If your firm is evaluating new technology or looking to improve your current wealth platform, you need to contact Ezra Group. Don’t spend another day using technology that doesn’t offer an elegant user experience. Your advisors and clients deserve better and you can deliver it to them with the help of Ezra Group.

Topics Covered in this Episode

  • What’s changed with Eclipse since my blog post two years ago [03:10]
  • Statistics on how Orion clients are using the Eclipse rebalancer [05:25]
  • How household-level rebalancing works, and how it differs from single account rebalancing [08:15]
  • Rebalancing best practices [12:15]
  • Tax management and efficiency features, and advisor’s ability to generate tax alpha [14:00]
  • How Orion designed their model manager UI [16:35]
  • Cash management features, and the automation options available [19:40]
  • How restrictions can deliver customization at scale [23:45]
  • ASTRO custom portfolio analyzer and construction tool [25:40]
  • Sleeve-level rebalancing [32:00]
  • Unified Managed Accounts [34:45]
  • Common mistakes advisors make when rebalancing [41:00]
  • Invest in Others Foundation [42:45]
  • Product offering changes since the FTJ FundChoice acquisition [44:05]
  • Proprietary proposal tools with risk scoring – support for Riskalyze? [49:15]
  • Expanding Third Party Integrations via APIs [50:45]
  • How business has been since Schwab sold Portfolio Center to Envestnet? [55:40]
  • What is on the roadmap for Orion’s platform over the next 12 months? [59:50]

Companies & People Mentioned:

If you are interested in more information about some of the topics Ryan and I discussed, these blog posts would be useful:

wealth management consulting

Complete Episode Transcript:

Craig: Welcome to another episode of the Wealth Management Today podcast. On today’s show I’m happy to have Ryan Donovan, who is the Vice President of Business Development for Orion Advisor Services. Welcome Ryan.

Ryan: Thank you for having me Craig, it’s a pleasure.

Craig: I’m glad you’re here, this is going to be exciting. I am a big fan of portfolio rebalancing, which is an unusual thing to be a fan of, but that’s just me. I’ve written a lot on my blog about it, and as a consultant, I’ve done a lot of work for firms, either developing portfolio rebalancing engines, enhancing them, or evaluating and selecting them. So I’m always interested in different services and different products, and I know on my blog I wrote an article about Eclipse, which is Orion’s portfolio rebalancing and trading tool. That was two years ago, time really flies! So just to kick us off, maybe we can talk about what’s changed with Eclipse since the article came out two years ago.

Ryan: Sure. So two years ago, we were in the process of implementing some of the early findings that we had. Orion was in beta in early 2017, as you might recall. The platform was being tested by some select clients and soliciting feedback where they saw the need to enhance features or add additional user interface design features that would make their lives a little bit more efficient and create a more intuitive layout. So we had a lot of the core infrastructure in place, but over the last two years what we’ve rolled out in some of the core features around cash management, tax efficiency, we’ve enhanced the tactical trade tool, we’ve embedded a more robust fix engine in place. So a lot of what you’ve seen is really taking the initial feedback that we’ve solicited from that small group, and then adding the feedback that we have from over a hundred advisors that are now using the Eclipse system (and have been using it for over a year), and adding that to our quarterly releases. So I’m excited to talk to you a little bit about some of those features that are there today, and also if time permits, we can talk about the roadmap for the year ahead.

Craig: There’s always time! So now that Eclipse has been out for two years and a lot more of your clients are using it, do you have any statistics or information you can share about how it’s being used?

Ryan: Eclipse is really flexible, in that we made available the capability to have household-level portfolios, account level portfolios, or even sleeve-level portfolios for our clients who implement a UMA strategy. One of the things that we also made available was multiple portfolios within a household, so creating subgroups or portfolio groups where you might have multiple investment objectives in a single household, and several accounts might be managed under a single objective. So given all of that flexibility, what we found most is probably not surprising: most advisors are managing household-level portfolios. And I think this follows a trend that we’ve seen in the industry.

As you’re aware, we have always had a trading capability. Orion’s history, we began as an institutional RIA that managed models and provided trading services for other RIA’s. And with our previous trading platform, it allowed for efficient model management and trading at an account level. But as the industry evolved over the last 10 years or so, we saw this change toward a desire to create an investment strategy for a client and have all their accounts aligned, not necessarily each holding the same model and all of the same securities, but having those securities that achieved an objective spread out across their accounts based on tax efficiency, whether it’s a tax-exempt, tax-deferred, or a taxable account.

So of our 1,800 RIA clients we have a broad range of diversity, but for most advisors who are managing client money for high net worth or mass affluent clients, they are looking at household-level model assignment and rebalancing needs. We have added some tax-efficient features that allow for an advisor to assign a model, decide which asset classes are most tax efficient and where they should be held in the client’s portfolios, they could set those preferences at a firm level in the system logic, run all the calculations across all of their portfolios, and propose orders to meet those goals.

Household-Level Rebalancing

Craig: You mentioned household-level rebalancing. Can you talk about how that works and how that differs from single account rebalancing?

Ryan: Sure. It really comes back to the tax-efficient rules that need to be established. So within an account, it’s very straightforward. I have an account and we’re going to target these asset classes or these securities that define weights, and we’re going to give tolerance bands that’ll tell me when I need to trade that client’s portfolio to stay aligned with that target allocation. Adding the complexity of grouping several accounts together, it really is going to require the type of logic an advisor might run through on their own, if they were manually deciding which assets should be held in which accounts.

portfolio rebalancing

For example, if I wanted to target my income producing investments in a tax-deferred or tax exempt account, I can make that prioritization. In our system on the buy or the sell side, we have a prioritization between taxable, tax-exempt, and tax-deferred. For each asset class, each subclass, and each asset category, we do give our advisors the ability to add one, two, three, or none in each of those accounts types. As the system is looking at the securities that should be held in the model, they know where to prioritize income-producing securities. If the tax-deferred account is prioritized to hold income-producing securities, we’re going to invest in that first. But if it’s insufficient, has insufficient cash to hold the full allocation of an asset class (like fixed income for example), we’re going to then look to the second priority account type. That type of logic, when structured at a firm level, can be pushed down to all of the client’s portfolios, to make rebalancing and scale very efficient.

One of the things that we’ve built in the preferences is the ability to use that logic and apply it either at the firm level or at the portfolio level, so they do have the ability to add customization for individual clients, which is one of the things that some advisors push back on when they hear the word rebalance. They feel that they lose client level customization there, so when we built our tax preferences into account, we wanted to have that portfolio level capability.

Craig: That makes a lot of sense. Among the 1,800 RIA clients, can you share how many are using Eclipse?

Ryan: I don’t have a good statistic on that today. I know the number’s over a hundred, but I’ll have to get somebody else to reply on that.

Craig: No worries. With the ones that are using, how often are they rebalancing in general, and do most of them do calendar-based rebalancing where they say every quarter or every year we’re going to rebalance, or is it mostly drift-based?

Ryan: Coming back to what I was mentioning about going from more account-level rebalancing and trading to household-level training, that’s also where we’ve seen a trend. As technology has really evolved and made trading more scalable on a more frequent basis, we’ve seen people go from quarterly rebalancing to drift-based alerts that drive the rebalancing timeline. So we do have both as an option, we have both the calendar-based settings if an advisor wants to have an auto-rebalance on a quarterly basis they can program that in. But the overwhelming majority of our clients are using drift based alerts to notify them when portfolios will need to be rebalanced.

Craig: Interesting. Are there some rebalancing best practices you recommend?

Ryan: Yes, we have an extensive training library that’s available for our clients. We also have an onboarding that goes into training them on all of the features available, whether that’s going to be portfolio construction, model construction and maintenance, cash settings and preferences. In terms of the best practices, the majority of clients that work with our rebalancer aren’t just looking to get their client portfolios back within the asset allocation targets; they’re looking for the trading system to help them with their daily workflows. They’re looking for the rebalancer to help them to fund distributions in a tax efficient way, they’re looking to spend new money and allocate it into their model, they’re looking for any portfolios that could have tax loss harvesting opportunities, and have the system automatically identify those.

And with one of the preferences that we’ve given them with their model construction, they can have a tax loss harvesting alternatives automatically proposed. They build the sell and they have the offsetting buy. In terms of the features or best practices, it’s really implementing the rebalancer not just for an automated rebalance, it’s implementing it in a way that it will help you build scale around those workflows.

Tax Management and Efficiency

Craig: And that’s a huge issue, that’s why you move to a rebalancer in the first place, because you want to scale. One thing you touched on was tax management and efficiency. Can you talk about how some of those features are available in Eclipse, and how they enable advisors to generate tax alpha and things like location optimization or tax loss harvesting?

Ryan: So I’ve already touched on the location optimization, being able to identify which asset classes or asset categories or individual tickers you’d like to hold in a taxable, tax-deferred, or tax-exempt account with one, two, three or none prioritization, and that’s going to drive the overall asset location. But some of the other tax preferences you have give you more flexibility. And coming back to that point that rebalancing isn’t about just essentially automating a process to achieve the target allocation; it really provides customization of a client portfolio. So a couple of features that you can add is the assumes tax rates at a firm level, but also at a portfolio level. You can add a max gain setting, you can set the carry forward tax loss amount for a portfolio. You’d be able to define what a tax loss harvesting opportunity is, what’s the percentage that we’re looking to realize for doing that, and what’s the minimum trade amount. So some of those tax preferences are going to provide efficiency not only for the rebalancer, but also those workflows. In our model construction, one of the things that some of our most tax efficient advisors appreciate is even though you might have a security that you want to hold for particular subclass.. Let’s say that I have a large cap security and I’m going to hold that in my model, and I can prioritize the location in the preferences. In the model construction, we add an additional level of tax flexibility there by saying for a particular security, I might prefer an alternate in a tax-deferred or tax exempt account. And those settings can be built into the model creation, even going down to putting tax preferences within the model. But when you’re reviewing trades, we also give you the ability to see days until long-term, short term, long term gain/loss, gain/loss messages, and drill into a portfolio the trades that are being proposed and see the gain/loss details.

Model Manager UI

Craig: One of the things I really like about the Eclipse rebalancer is the model manager UI. It’s really unique and I haven’t seen it in any other product. Everyone has a model manager, but very few have a model manager as robust and with an intuitive user interface as Eclipse does. How’d you guys come about that, how was it designed? Tell me a little bit about the backstory on that.

Ryan: When we were originally looking at the designs for this, it seemed like most rebalancers constructed models in almost an Excel-like, grid format. You started at the top of the model and then you had rows underneath that had the next level model components, let’s say their asset categories, and in a model to model structure you’d have then other levels below that, so you can have your model name, your asset categories, and you can expand each of those and show the asset classes and expand an asset class to show the subclass. But that grid-based model approach wasn’t the way that you can see that when you’re putting together your allocation. So we decided to create this visual model that lays out the structure of the model almost as a tree. At the top of this tree you have your model, you have two lines going down to your asset categories, or three lines going down to your asset categories, and so forth. Each asset category, asset class, or subclass is a circle with its name, and at each one of these levels you can put in your allocation target for the asset class, subclass, and you can put in your drift collar and prioritization for it. So laying it out that way is really visually appealing. When we have people who are looking at Eclipse for the first time and I open up a really complex model that’s four levels deep and 20 across in terms of the classes that are being used, they look at it and immediately can figure out it’s more complex than what they’re currently doing, but they get it. We also have the ability to show it in a grid-like view, but it’s a lot easier for somebody to digest when you put a big set of data in a visual format like that. So that’s really what we were doing there, we wanted to make it a lot easier during the model construction and during the model review for somebody to see their model the way that they’d likely conceive it in their minds. And adding the ability to edit it within that same view is an important feature, because instead of having to go back to that grid and add in your pluses or your minus as you’re adjusting the allocation, you’re able to do that right within the structure of the model.

Cash Management Automation

Craig: Yeah that’s one of the things I really like about it. I also thought the color scheme and hierarchical structure were unique. Can you talk about the cash management features and how that works, and how advisors can automate some of that functionality that used to be very manual.portfolio rebalancing

Ryan: Sure. So I can’t say that there’s a specific way that advisors manage cash, because we do see people handling it differently. Some advisors want to put model cash in place. So I have an 80/20 strategy and it’s going to be 80% equity and 20% fixed income, and they’ll allocate cash in that model somewhere. They might add another node, a model that holds cash. So they might say it’s really going to be 80, and then it’s going to be 17 and 3. That’s one way that some of our advisors will handle cash. Another way is the advisor can set aside firm-level cash; they can say, for all of my portfolios I want to hold a certain cash tolerance or a certain cash amount, and the system would automatically assign that to each of their portfolios and their model could be fully invested, essentially ring fence and cash. And that setting isn’t just at a firm level; you could do it at a firm level, a model level, a portfolio level, or an account level. So giving that level of flexibility, you don’t have to necessarily put cash into your model or hold cash in your model. You can decide what the right buffer should be for the client. How frequently are they taking distributions? How much cash do I need to have for that particular model, based on my trading activity? So going above and beyond just setting a single cash target, we added in a cash minimum, mid-point, and maximum for taxable, tax-deferred, and tax-exempt accounts. And those also can be pushed down from the preferences from the firm down to all portfolios, and edited at those levels that I mentioned. That gives another level of flexibility. Maybe I want to hold more cash in my taxable accounts than I want to in my tax-deferred, or vice versa if I’m in the process of redeeming out of a qualified account. So those preferences are as I mentioned firm-level cash, model cash, or accounts-type cash. We do have an unlimited number of set-aside cash rules that can be set for an account. That is a great way for an advisor to say, this client is taking a systematic withdrawal of 5% every month and they’re a redeeming a particular account, so I need to have 5% on hand each time. That set aside at that account for 5% gives them the flexibility to have that, and it can be an in addition to any of the other cash preferences that I previously mentioned. In fact, they can actually hold more than one cash set aside.

Craig: That can get very complicated. How can the system help the advisor decide which way to do things? Is there a scenario optimizer that they can run?

Ryan: There’s no scenario optimizer, it’s really driven by how the advisor wants to handle cash. We have some best practices that we’ve seen as we’ve implemented over 100 advisors on the Eclipse system. As I mentioned, there’s debate whether holding cash in the model is more efficient or adding the cash preferences is. But in terms of flexibility, each RIA is unique and each one seems to have a little bit of a unique training philosophy. So we needed to have the system be flexible enough to handle cash the way that they want to.

Client Restrictions

Craig: True. I think your CEO Eric Clark said, “When you’ve met one RIA, you’ve met one RIA.” They’re all very different, so having that flexibility is very important. The use of restrictions to block out certain accounts from buying certain stocks, whether they’re social restrictions (they don’t want to buy tobacco stocks or nuclear energy stocks) or they may be other restrictions (they may have a low-cost basis holding, but they don’t want to buy any more of that). Can you talk about how those restrictions can be set and how they can deliver mass customization at scale?

Ryan: Sure. Starting with the one that we see more often than not, which is an advisor has a client, and that client has legacy positions that might not be a part of the model. It has a low-cost basis, and they want to restrict it from trading. Or a client has a security they deem to be an equivalent to a security within their model. We’ve built in a way to address those scenarios, where you can either restrict a security from trading, have it included in the allocation or not, or you’d also be able to set up an equivalence. So if I have a security in my model, I have a QQQ but the clients held SPY, I’d be able to set up a security equivalence and I’d be able to put a “preferred if held” on the legacy security when we go to buy, or a “preferred if sold,” or a “do not buy, but can sell.” So that’s how we’ve been able to handle some of those security level restrictions. You can restrict a security within a portfolio from being included in the allocation, prevent it from trading, you can exclude a security but not include it in the allocation; so you need to hold the full allocation in addition to that security, which might be in the same asset class. Those are just some of the things that we’ve built in, security level or group level equivalencies to handle those legacy situations that we see almost every advisor managing. To touch on the other restrictions you mentioned, we’ve rolled out a platform called ASTRO. ASTRO gives our clients the ability to use environmental, social, and governance restrictions to create a custom portfolio for their clients. That gives the flexibility to exclude tobacco as you mentioned, or partially exclude tobacco issuers that have revenue related to it. A great example is firearms; I can exclude securities that have a percentage of revenue generated from firearms greater than 50%. So I might be able to hold a Walmart in my portfolio, but I would be excluded from holding a firearms manufacturer. So that type of flexibility is available in a trading component of our platform called ASTRO.

Portfolio Optimization with ASTRO

Craig: Would you consider ASTRO to be a mean-variance optimizer?

Ryan: Looking at how ASTRO decides to rebalance a portfolio is really driven by either those ESG settings or a risk-based analysis. So you have a lot of advisors looking at trading from an allocation standpoint; how do we allocate across asset classes to achieve the investment objective? Whereas ASTRO is going to look at all secure investible securities, and build a portfolio with a consistent tracking error to a target strategy. So let’s say that we wanted to replicate the S&P 500; we’d be able to use ASTRO to select the S&P as our target strategy, we’d be able to add constraints and say I don’t want to hold 500 securities, I want to hold anywhere between 50 and 150. I want to target a tracking error or 2, and I’m able to use the ASTRO system to optimize a portfolio, and that will have similar risk and return parameters as the S&P 500, without buying a packaged or pooled investment product.portfolio rebalancing

Craig: Is that like a smart beta, or a self-made index file?

Ryan: Exactly. So when you’re creating a strategy utilizing individual securities that have similar return characteristics as an SPY for example, you’re creating more opportunities to realize tax loss harvesting events. You’re creating an opportunity to eliminate those low-cost basis positions, by generating more frequent losses in other portfolios and offsetting from an accounting standpoint, taxable gains in the low-cost basis position with the basket of securities that the optimizer has defined.

Craig: How tightly is ASTRO integrated with Eclipse?

Ryan: Actually, we have an integration that’ll send the trades from ASTRO. Today, ASTRO is a separate module within the Orion system. So you access ASTRO, you select your target strategies as I mentioned, you run your optimization, and that feeds your orders into the same grid, the same OMS that rebalancer or tax loss harvest would be feeding those orders to using Eclipse.

Craig: That sounds pretty efficient.

Ryan: Yes, it is. And then what we find is most advisors don’t want to do this for all portfolios. They’re looking for this to accommodate those situations where portfolio complexity warrants it, or the size of the portfolio warrants it. So one of our clients could potentially use Eclipse and rebalance portfolios against models for all but 10 or 1 account that’s going to be managed in the ASTRO portfolio optimization tool.

Craig: That’s pretty cool. Once you’ve got the portfolio created and sent over to the rebalancer, how quickly can it rebalance? Is there a limit to how fast it can rebalance or how many accounts it can rebalance per hour or per minute?

Ryan: That’s also something that we took into consideration: a lot of rebalancers aren’t ready to go at the start of day. That’s one of the biggest complaints that I hear from advisors that are using modern households rebalancers, even the ones that are web-based and have model to model capability. One of the fundamental things that they lack is scale. What we did with the trading platform is we built the Eclipse platform on Amazon web services. And as you know, with trading its intraday or cyclical. We’ll have advisors that will pretty much all start their day looking at their portfolios and their positioning, and generating orders. The analysis to do that across a thousand accounts requires a lot of processing capability, and with Amazon web services we’re able to essentially obtain that processing capacity from the cloud, and then relieve it when we’re done with this cycle. Essentially we get instant scale by using AWS, so the clients of Orion that are trading within Eclipse, once their reconciliation is completed, within about a minute we can load in a billion dollar RIA’s assets, all of their tax bot information, so that they’re ready to trade. So from one reconciliation has completed, almost instantaneously they’re able to run their trade analysis.

Sleeve-Level Rebalancing

Craig: That’s excellent. You mentioned before sleeve-level rebalancing, can you talk a little bit more about how Eclipse supports that?

Ryan: I’d love to. This is one of those things that a lot of RIA’s don’t realize is available, and it’s really important that we have a consultative conversation with them and make sure that they are aware they’re able to handle sub-accounting within the Orion system. So effectively what a sleeve is, you have a single custodial account. Joe Smith has an IRA, and it downloads from custodian every morning. We will take that IRA and reconcile those holdings, but if you’ve assigned sub-accounts or sleeved out that IRA in the Orion system, we will handle a sub-accounting and a system that pulls the positions, the income generated, and the cash associated with each of the securities in your model strategies, and essentially align them in a way that you can trade and rebalance at a sleeve or a sub-account level. With true cash ring-fencing, you are able to bill on them separately, you’re able to report performance on them separately, and those sleeves are gifts-eligible composite entities. So in order to accomplish what I just described, a lot of advisors open up multiple accounts under a single registration type, like an IRA for Joe Smith. If an advisor wanted to assign separate and distinct investment strategies and measure the performance of those separate and distinct investment strategies, they might open up 3 accounts for the IRA with the custodian, so that they can report them separately and have transactions separate, especially if 2 of those strategies are going to hold the same security. With Orion, the cash and securities are truly ring-fenced, so when income is paid it pays on a pro-rata basis. Essentially, a sleeve or sub-account within Orion enjoys all the same benefits as an account. If somebody had wanted to, they are able to trade and monitor the sleeves in Eclipse separately in isolation, they can set target allocations across the sleeves underneath the registration, and pull them back to that sleeve allocation target when they’d want. So essentially, Eclipse allows each sleeve to be a portfolio that enjoys all the same benefits as any other portfolio in the system.

Unified Managed Accounts

Craig: Interesting. So when I hear sleeves, I think UMAs. Can we talk about support for UMAs in Eclipse? UMAs being unified managed accounts.portfolio rebalancing

Ryan: We have always had the technological capability; six or seven years ago, we rolled sleeve level capability. And a lot of our TAMP clients implemented unified managed accounts approaches, because they were more efficient in the ways that I described. You are able to clearly ring fence securities and cash, assign benchmarks to those strategies, and report it in a way that you might have that conversation with a client. So in terms of a UMA, we certainly have the capability to support multiple sub-advisors managing a single custodial account within the Orion system.

Craig: Excellent. And can the sub-advisors log in and trade directly if they want to?

Ryan: Yes they can, a sub-advisor would be able to be given access to the system and only see those portfolios where they are listed as a sub-advisor. Another thing that we see a lot more often is model delivery, whereas I mentioned we have UMA platforms that are our clients who will take the models from their sub-advisors, and then they’ll implement those models within our system and use the alerts to see when portfolios assigned to those sub-advisors need to be rebalanced or when there’s a model change. So you can have a sub-advisor access your database directly, or you can use model delivery and trade and rebalance off of those buy sell indications.

Craig: How often do the sub-advisors deliver their model into the Orion ecosystem?

Ryan: Whenever they want. We have a platform called Communities, which gives certain sub-advisors access to update their models and have those model changes pushed down. And through the alerts, the advisor has the ability to take action or to decide to abstain from taking action today, for maybe tax reasons or cost of transactions. But it gives the advisor some flexibility in how they want to handle that.

Model Community

Craig: That’s another feature I like, the Community feature. That allows advisors to share models with other advisors, right?

Ryan: Yes. So, Communities has a couple of important features. One, we’re able to offer free model strategies from CLS investments or BlackRock or Russell to advisors who are already using those strategies, but they’re able to do the portfolio management in a more efficient way: they assign those models directly. And as you mentioned, if a sub-advisor or a strategist would like to update those models, they can do so whenever they’d like and the alerts would have given the advisor the ability to automatically see when a rebalance is required, or when a sub-advisor has swapped out one security for another.

Craig: Can any advisors share their models, or is it limited? How does that work? Can an advisor subscribe to another advisor’s model automatically? Are there any limitations?

Ryan: Today we haven’t seen a lot of growth in peer to peer sharing, one advisor making their models available to another advisor or another RIA. One of the reasons why that hasn’t been more prevalent is really brand. How does an RIA market their strategies and differentiate themselves against the brands that I just mentioned, BlackRock or Russell Investments? So ultimately, what we’ve seen is these model strategists or global asset managers making their strategies available for free (obviously they’re using proprietary ETFs or funds), or what we’ve seen is some of our advisors are putting together communities where there they may be multi-office RIA’s, or they might have multiple reps and they want to give their reps access to their models. So that’s another area where we’ve seen the peer to peer sharing work, but it’s in a closed environment where those strategies will only be available to affiliated representatives to use in the system.

Craig: So not a lot of uptick on the peer to peer sharing, but you mentioned Russell and BlackRock. Those strategies are free, are there other managers selling their models?

Ryan: Today we haven’t included any managers that offer their strategies for a fee.

Craig: So only free models?

Ryan: Today, yes.

Craig: Is that something you might think of adding in the future?

Ryan: Yes, ultimately bringing a platform to our advisors that offer as much breath as they need to develop their trading styles. We do plan to roll out additional strategists that will be able to charge the RIA a fee for access to those model strategies.

Craig: So that would be more of a model marketplace type of approach?

Ryan: Correct.

Rebalancing Best Practices

Craig: Excellent. Seeing your advisors start to use Eclipse, working with the robust functionality and adding more accounts, what are some common mistakes that you’ve seen advisors make when they’re implementing or managing rebalancing that you’d recommend for advisors listening to this and thinking about it? If they’re not rebalancing yet or they’re not using a tool like Eclipse, what are some mistakes that you’ve seen them make and how you think they can avoid those?

Ryan: Well, if they’re going from a process of using a trading system, that’s the first area I usually have a consultation with that advisor, talking about how adding additional levels into your model gives you greater flexibility. For example, if you have a model that just targets a basket of securities with an allocation target and drift collar for each security, you lose the ability to say, “I’d like to do a tactical rebalance on my equity, but leave fixed income alone.” So even adding that one level of asset category to a model gives you a lot more flexibility in how you can keep securities alive. Now if you add in additional levels, you have the ability to essentially do a tactical rebalance at a more refined level. And if you have volatility in one particular area of a model, you can rebalance that without impacting allocations in less volatile areas. And ultimately, what that results in is less trades that need to be edited or rejected in the OMS when you go to review your orders.

New TAMP Product Offerings

Craig: So it’s been a year since Orion acquired FTJ Fundchoice. Can you talk about how Orion has changed their product offerings since the acquisition?portfolio rebalancing

Ryan: Sure. We looked at the FTJ acquisition as being an extension of our business that can make investment products or investment solutions available to those advisors that are using the Orion platform. But if you’re familiar with our company, we already have CLS Investments, who is offered on the FTJ platform and other platforms as well. So for the last year, a lot of what we’ve been doing has been internal: realigning CLS to work seamlessly with FTJ Fundchoice, and allowing the technology to be further customized for FTJ so that we can offer FTJ strategies through the Orion platform. One of the offerings that we did roll out, you might recall, we rolled out Orion Enterprise. And what Orion Enterprise gives advisors the opportunity to do is to access the best of both; you get access to Orion’s technology platform for the reconciliation, billing, reporting, trading, compliance, and you also have access (when you need it) to the investment platform offered by FTJ. That allows for consultative customization on what would be best for your firm. If there are strategists that you’re currently using that are not on the FTJ platform, we’d be able to add those. We’d be able to create a bespoke investment solution for your firm leveraging the expertise that FTJ has, but giving you the ability to leverage the broader Orion technology solutions. So I think Enterprise is the first go to market iteration of the combined entity. There will be more to come, but ultimately you can expect us to continue delivering innovative tools that will offer both investment solutions and technology through the Orion trading platform.

Craig: I would expect nothing less from Orion, considering your rich history of putting out new products, features, and services at quite a quick pace. Would you say that because FTJ had already built their platform on Orion’s technology, it made the integration much easier?

Ryan: Yes, but there’s still a lot of work to do. Historically, FTJ had a very tight operating model. They worked with a single custodian, whereas CLS Investments worked with multiple custodians. So we’re in the process right now of changing FTJ’s model to make them more agnostic to the custodian selected by the advisor. That’s of course going to give us the opportunity to distribute this on a much broader scale, so that’s a critical requirement that we have to get in place. And once you do that, you really have to change your processes for new account administration and servicing those clients. So we haven’t been sitting still for a year, we’ve been working on all of those things that we need to do to make FTJ available to the broader market and integrated more tightly with the Orion platform. For example, one instance is FTJ has their own proprietary proposal tool, with a risk scoring logic built into it. Making that available as part of the overall offering for Enterprise is a critical requirement; more tightly, bringing that into the Orion platform, the trading platform, or reporting platform is one of the many technology initiatives we’ve been working on to more deeply integrate FTJ with Orion.

Proposal Tools

Craig: I know that FTJ’s proposal system was built on top of Advisory World, which has some great proposal tools. Does the acquisition of Advisory World by LPL have any impact on this?

Ryan: No, not at all. LPL is a partner of Orion and LPL has had Orion as an approved technology partner for many years. We’ve worked with many of the largest LPL hybrids and continue to do so, so that shouldn’t cause an issue. And as you may be aware of, Orion has a longstanding relationship with Advisory World; we have a lot of clients that are using their analytics. FTJ had worked with Advisory World to build a very custom instance of their proposal tool. So while Advisory World does offer a proposal tool, the level of customization and development that was done for FTJ was quite specific.

Craig: You mentioned the risk profiling and risk scoring as part of the proposal tool. Is this something you’re looking to do more of, offer this risk profiling as part of every proposal that you’ll offer to all of your broker-dealer and RIA clients?

Ryan: If you’re using FTJ, the proposal tool will be available to you, in order to build a suitable portfolio for clients using the FTJ strategies. Orion, as a technology vendor, still maintains an open architecture approach, with deep integrations across multiple tools that can provide proposals for risk scoring or analytics.

Craig: So you’ll still be integrating with Riskalyze or other risk profiling tools? So one of your clients could say, “We like your proposal system, but we want to use Riskalyze with this.” Is that possible?

Ryan: That’s a perfect example. People love the Riskalyze rescoring; the simplicity of being able to explain that logic to a client, and the ability to integrate the reporting from Orion with the Riskalyze risk score and probability of 6 months gain or loss, through the report design tool that we offer in the client portal. We have a lot of common clients that overlap, so we will still continue to work with firms Riskalyze and Advisory World, that offer that proposal tool to our mutual clients.

Orion’s API Strategy

Craig: Orion has always been a leader from what I’ve seen in my business as a consultant, we have to do a lot of this work with our clients of integrating best of breed technology solutions. And 10 years ago it was very difficult; very few firms had APIs, or invested in APIs or in moving data between their system and other systems. And Orion was one of the first ones, along with Money Guide Pro and eMoney, to really embrace APIs, embrace openness, and integration with third-party applications. How is that changing the way Orion approaches the business? Looking at your competition like Envestnet, where they’ve got one big platform with everything and they’re trying to be more open for integration, but you’ve had that mindset from the beginning. How has that changed the way you approach the industry?portfolio rebalancing

Ryan: There’s a fundamental difference in the culture. When you compare Orion’s open architecture approach, we’ve made a lot of really good decisions. And ultimately that’s what results in the success of an organization, how consistently you make good, small decisions. One of the biggest ones was making our platform open architecture, allowing us to integrate with CRM vendors like Salesforce, Juncture, or the financial planning tools that you mentioned, Money Guide, eMoney, and newer entrants like Right Capital or Advisor. We really do believe an open architecture platform is the strongest platform. It gives the advisors the ability to choose those tools that work great for their business, their philosophy, the conversations they have with clients, without us telling them, “This is our deepest integration partner because we own them, so make it work.” So with Orion, you’ll find that that open architecture approach is much more than marketing; it’s really ingrained in our culture. We have a dedicated integrations team, developers that work on integrations, a conference called FUSE, which allows for the 80 or so members of the conference to demonstrate on an annual or more frequent basis their integrations with our platform to the advisors and consultants and thought leaders in our industry. So what you’ll find with some of our competitors is the term integration is a marketing buzzword that’ll help get them more interest among advisors. But with Orion, we have a lot of depth in our integrations. Single sign-on is really easy, being able to consolidate reporting and consolidate that conversation with the client who wants to know if they’re on track to meet their financial plan, and then in next sentence wants to know how they are performing relative to the objective that the advisor set. I think you’ll find that that open architecture approach is a significant difference at Orion compared to Envestnet, who’s a serial acquirer; buying the technology that they want to integrate and then essentially focusing primarily on their selves and the platform and ecosystem that they’ve essentially built. Perfect example is a financial planning firm called Right Capital. I started seeing their name at trade shows a few years ago, and I didn’t really appreciate how many people were using it. Three years later in the last T3 survey, they have over a 4% market share in a highly concentrated industry, with two titans ruling that particular market. They’ve been able to come in with a differentiated offering for financial planning and capture a good chunk of that large market. So we want to be open, we want to be able to offer over a hundred clients that are working with Right Capital a really deep integration, that will provide them with scale, eliminate data error, and a consolidated reporting experience.

Craig: 100 of your current Orion clients are using Right Capital? Do you have a breakdown of how many other clients are using other financial planning tools, like eMoney or Money Guide Pro?

Ryan: eMoney and Money Guide Pro are going to be the two most popular financial planning tools used by Orion’s clients. And while I don’t have a breakdown of who’s using them exactly, I can certainly confirm that they are the two most popular financial planning tools; their market share is relatively consistent within the Orion client base.

Impact from the Portfolio Center Acquisition

Craig: Since we’re talking about acquisitions, how has Orion’s business been since Schwab sold Portfolio Center to Envestnet?

Ryan: Well I wasn’t very surprised, but I did get the news when I was traveling to the mountains for a ski trip with my family, and it pretty much derailed any conversation that I was having for the next month. It’s very visible, there’s still so many Portfolio Center firms out there that I think may have been somewhat surprised by this. So the phone’s really started ringing from Portfolio Center firms that wanted it to look at other options. Anytime something like this occurs, it creates a catalyst to reevaluate where you are, where you’re going. To Schwab’s credit, I think they made the decision that they needed to make, moving Portfolio Center to Envestnet, with Portfolio Center being the underlying accounting system for Tamarac. It was the right thing to do; they are going to be able to remain on Portfolio Center, and it’s highly unlikely that Envestnet or Tamarac are going to pull the plug immediately on those advisors using it. With that said, it is legacy technology with no web presence, and a lot of advisors see this as a catalyst to reevaluate Orion’s technology; whether there’s better integration and more efficient business processes that can provide them with scale. So while this might have been in some advisor’s minds a 2020 or end of year 2019 or after tax season or the CFA exam type of initiative, it really put this on the front burner. We’ve spoken with a lot of Portfolio Center firms, and I think about 3 out of 4 of the calls that I’ve been getting in my area have been Portfolio Center firms looking to explore alternatives. Another reason is the incentives that are being rolled out to Portfolio Center firms by Orion and other firms. Orion is providing Portfolio Center users with 9 months of free service, and since we bill quarterly in arrears, that gives an advisor the ability to transition to a superior portfolio management system with a client presence and deep integrations a full year almost before they get an actual cash, out of pocket expenditure for that platform. We’re also providing free attendance at our regional conference Ascent. We still have about 6 more of those going on around the United States, so those Portfolio Center firms that convert over to Orion would be able to attend that free of charge. So it’s been keeping me busy.

Craig: Why weren’t you surprised when you heard about the acquisition?

Ryan: When I think I first heard about Portfolio Connect going to the cloud, it must have been 2015. Portfolio Center was going to be reinvested in, and it was going to be a web-based platform with an API that would allow for integrations. And ultimately, at the last IMPACT conference, while I was presenting this new Schwab digital account opening tool, this woman from an advisory firm in Atlanta shared the stage with me. And she was talking about what Portfolio Connect actually is and how it’s designed for her business. And it just wasn’t the type of platform that I saw being made available to those larger RIA’s. So I think once Schwab had made the decision that they were going to invest in an alternative platform and make that available and they weren’t going to be investing in the Portfolio Center platform, they had some difficult options on how to handle those thousands of Schwab clients that were using Portfolio Center.

Orion Roadmap

Craig: We’ve gone over a lot of things, we’ve covered a lot of ground. What is on the roadmap for Eclipse? Can you talk about some things that are coming in the future, maybe the next 12 months?portfolio rebalancing

Ryan: Over the next year, we plan to implement quite a few features. One of the most exciting ones we’ve mentioned is ASTRO. As I mentioned earlier, ASTRO is a portfolio optimization tool which gives institutional scale to advisors that want to replicate an index, transition a client to a target strategy, use ESG rules, or continuously tax loss harvest to offset gains in a non-core or non-model position. The way that ASTRO works today is as its own separate module and it feeds orders to the Eclipse OMS. We will be embedding ASTRO as a component of Eclipse, so you would be able to assign ASTRO target strategies alongside Eclipse models, and through the same platform rebalance based on tracking error. ASTRO is really a powerful complex optimization tool, and a lot of advisors are looking for a more turn-key approach.

We’re creating (based on index strategies) a way for an advisor to select an index strategy that they would like to target, and our system will give them notifications when that client’s account is out of tolerance based on tracking error, when that client’s account has tax loss harvesting opportunities, or when cash requires a portfolio optimization for those. ASTRO being more closely aligned with Eclipse is a great thing. It will further improve the workflows around trading, especially where an advisor has bifurcated trading, where they’re looking at asset allocation, rebalancing, and risk based-trading.

Another feature on our roadmap is integration of the billing with the trading platform. Today we have tools within the billing module that will show an advisor their cash that needs to be raised to satisfy the advisory fee. Beginning a workflow of raising cash can start in the billing audit, initiate orders based on model assignment and tolerances, and raise cash within Eclipse, so those orders would be automatically populated. Another important step is making sure we set aside cash until the fees are deducted from the account. With one step an advisor would be able to raise cash in the billing module, initiate the orders required, and set aside cash. We have a set-aside cash expiration, where once the management fee comes through on the custodian file, it would remove that cash set aside. It essentially handles a multi-function workflow with a single billing process.

Craig: Will that be automated, or is that still a manual thing for the advisors to click a button to do?

Ryan: Advisors would see the cash funding report. Where they’re insufficient for taking their advisory fee, they click a button and it would initiate this workflow and those components that I mentioned: initiating the sale orders, setting aside cash, and then when cash is taken for the management fee, it’ll automatically remove that cash set aside. So portfolio grouping, syncing the portfolio grouping between the two systems is handled today. Ultimately the Eclipse platforms syncs to the reporting. We’ve had an ask from our client base to be able to have a bi-directional sync. A portfolio group can be set in the Orion Connect new account administration workflow for example, or it can be updated by the portfolio manager. But being able to sync the portfolio data between two systems is an important roadmap item for some of our clients, and also being able to sync the reporting associated with that between systems without having to update two systems. Portfolio grouping will eliminate some of the manual steps that clients have today.

Another tool that we’re going to be bringing into Eclipse is an options trading tool. We have the ability to generate a covered call strategy, and that Orion system would look at the client’s holdings of the underlying selected across multiple clients at once, run the calculation, and propose how many options are needed in order to properly hedge that security. And ultimately, the calculation engine would handle any subsequent buys and sales, and update the associated amount of options and contracts that need to be essentially..

Craig: That’s interesting, I just recently wrote about that. Would the system also block any sales? Say I’m running a covered call and the call is still active, I can’t sell the underlying out?

Ryan: That’s right, without essentially selling a contract. The system would automatically handle both the acquisition of an underlying security and the divestiture, and the impact that it has on the calls. It would do it at a block level, and it would also do that for the allocations. And we do have the capability to execute this via Fix; that’s one of the things that we’re going to be working on, is sending those orders through Fix to custodians that we currently participate with. Today, the options would generate to a trade file, the equities or ETFs would be routed via the Fix system.

Craig: Nice. Is it limited in what strategies it supports? Is it only covered calls at the moment, or do you have plans for others?

Ryan: We have for plans for protective puts; at this time it would be limited to covered calls and protective puts.

Craig: That makes a lot of sense. Well, I think we’ve covered everything.

Ryan: Yes, thanks for having me on today. It’s been a lot of fun.

Craig: We got to everything, I appreciate it. I think this has been really helpful, I’m really into portfolio rebalancing and I thought it’d be interesting for listeners to hear some. You were very open and I really appreciate your feedback and you sharing some of the lessons you’ve learned, giving everyone a little bit more understanding of Eclipse, what has been and what’s coming down the line.



The Wealth Tech Today blog is published by Craig Iskowitz, founder and CEO of Ezra Group, a boutique consulting firm that caters to banks, broker-dealers, RIA’s, asset managers and the leading vendors in the surrounding #fintech space. He can be reached at craig@ezragroupllc.com