Ep. 214: Implementing Tax-Smart Portfolios at Scale with Sachin Shah, 55IP

Come on in and sit back and relax. You’re listening to Episode 213 of the WealthTech Today podcast. I’m your host, Craig Iskowitz, founder of Ezra Group Consulting. This podcast features interviews, news and analysis on the trends and best practices, all about wealth management technology.

My guest for this episode is Sachin Shah, COO of 55ip. Sachin has been in the industry quite some time. He started out back in 1988 at Bank of America as a merger arbitrage research analyst. He then co founded a trading algorithm company which he sold, then became a head of prime services for that financial group that acquired his company. Then moved on to RBC as Head of Emerging Manager Allocator Platform, then became COO of Ada Investments, which was eventually acquired by 55ip, where he has been for over seven years first as Chief Revenue Officer then as Chief Operating Officer and now part of JP Morgan Asset Management, which acquired 55ip back in 2018.

We had a really good conversation about all kinds of stuff, it’s an interesting company. They’re doing a lot of things that we find to be well suited to a lot of advisors and how they operate when they’re outsourcing different parts of their business 55ip has some solutions that advisors are taking advantage of and we go in depth into some of the underlying technology and some of their tax methodologies, how RIAs can use this system, some of their tax savings, direct indexing, we cover a lot of ground.

But before we get started, let’s talk about tech stacks. At Ezra Group, we’ve seen tech stacks of hundreds of RIAs and let me tell you, most of them are loaded down with tech debt. So you shouldn’t feel too bad about yours. But let’s face it tech debt is like a giant anchor, holding back your business growth. If you want to free your firm for exponential growth, you should run, not walk to our website EzraGroup.com and fill out the Contact Us form. Our experienced team can evaluate your current tech ecosystem, deliver targeted recommendations, optimize your existing systems and operations or run an RFP and help you implement new software to take your firm to the next level. You can take advantage of our free consultation offer by going to EzraGroup.com.

Topics Mentioned

  • Differentiation from TAMPs
  • Technology and Integrations
  • Evolution of Services
  • Future Developments

Episode Transcript

Craig: Our next guest is Sachin Shah, Chief Operating Officer of 55IP. Hey Sachin, thanks for coming, man.

Sachin: Hi, Craig. Thanks for having me.

Craig: I’m glad you could be here. We were just talking about when we saw each other last was back in May at Tiburon.

Sachin: That’s always a great event that Chip puts on. Good to see you there.

Craig: It was in your new hometown of Boston.

Sachin: We moved up here about five years ago as we kept developed as we developed, 55ip further. I made the move from New York City where I spent 22 years to move up here and build out 55ip. I moved my family up here. We live outside of Boston in a town called Needham.

Craig: I know Needham, I’ve been there. How do you like Boston compared to New York?

Sachin: People ask me that all the time. I don’t look backwards. New York City was all about me and my life there, and Needham is all about me and my family, which is the phase I’m in, so It’s been a great change.

Craig: That is awesome. Can you tell us a bit about, for people who aren’t familiar about 55ip?

Sachin: 55ip is a fintech company based here in Boston. As we discussed, we are an investment strategy engine, that empowers financial advisors with their tax smart implementation of model portfolios, SMAs, UMAs across their book of business.

Craig: That’s a new firm, an investment strategy engine.

Sachin: When we think about advisors, when they think about what’s core, their workflow, implementing their portfolios is a piece of their workflow that they need to focus on. And we allow them to do that in a seamless way. More so than not these days, we empower them with the ability to customize their investments for their clients. We believe that when you think about customization or personalization at scale, these are common words in the industry these days. Taxes sits at the middle of that. Because I can’t think of anything more personalized than your tax consequences or your tax picture, if you will, as an investor. That’s obviously catered to your nuances and your choices and your portfolio. We’ve found over the years that, that has and was, and probably will continue to be a pretty big pain point for financial advisors as they think about growing their practices. And we set out to solve that problem for them.

Differentiation from TAMPs

Craig: I think there’s some in the industry. I’ve talked to some people; they might be a little confused. Would you guys consider yourselves a TAMP? Or what category would you put your company in?

Sachin: We’re definitely not a TAMP. When I think about TAMP, I think about a broad based service model, primarily in operational services that range from billing to CRM, to some asset management services, to reporting. We have been singularly focused and we’ll continue to be singular focused on using Fintech. And specifically rooted in the fin part of tech and come back to that in a second and software to allow advisors to implement model portfolios, SMAs, UMAs, as I’ve mentioned, in a customized way. Our software sits at the middle of model providers; these can include the home office models or models built by the advisor themselves or in conjunction with the asset managers. And on the other side of that equation are the advisors in their books of business. Advisors work with our platform as an add-on to their existing tech stack. We’re not looking to rip and replace anything that they currently do. We fit like a glove in almost everything all of their existing tech stacks and provide our service specifically around this tax market implementation.

Craig: The broad based service model. We define the TAMP market differently. That’s what we would call the old school TAMP or the broad based service models where you provide everything like in Envestnet or an AssetMark that provides end to end. But the TAMP market has grown or divided up in the recent years where firms are launching TAMP like platforms of different subsections of that model. When a firm like yours has an RIA, you can make fiduciary decisions and firms are outsourcing that to you, you’re a form of a TAMP. It’s not the same kind of TAMP that an investment or an AssetMark would be, but you can still singularly focus on helping advisors implement portfolios that’s part of the TAMP like function. Because you do all of the technology, you do outsource that piece of it, you can still fit hand in glove into their tech stack but it’s still very different types of TAMPs that we divide the market up into.

Sachin: I hear what you’re saying makes sense. Maybe we could take a step back for a second when we think about the industry and our capabilities in how we want to implement them, a couple things come to mind. First we’ll talk more about integrations. We focused on integrating on where the advisors do business. In the RIA channel, it’s obviously the custodians, and so when we built the company, we focused on building deep integrations with the custodians so we can get the client data. Then we want to be able to deliver our capabilities into the workflow of the advisor but then we want to focus on developing Algorithms that the advisor can then leverage and use and be the driver and decision maker to the extent that the regulators allow us to determine what they want to use or not use.

Sachin: When you talk about fiduciary duty, yes, we do have an RIA, but that’s only serves one delivery method, if you will, of how we think about delivering our capabilities. When we as our business has been developing over the years, our full form service model is a sub advisory offering that some advisors take advantage of where we allow us to use our algorithms, our service model implement the portfolios or the model portfolios or estimate on the client’s behalf, and we do the full service model. As we continue to deliver our capabilities to more and more advisors, obviously 300,000 advisors in the industry, we want to continue delivering across different platforms and programs.

Sachin: We’re seeing more and more use of our capabilities through either a trade list delivery mechanism, or even all the way through to a SaaS life service, which we offer today as well through API. I think the industry is evolving. I think the names of what we offer is evolving to your point. When we think about the direction of the business, we have a core capability that we know is useful to advisors at and saves them a ton of time. And we want to continue to figure out how we can deliver that in the most seamless economical way to the advisor practice.

Craig: Let’s talk about the underlying technology behind the tax transition system. Was it all built in-house? Do you have any third party software that you’re relying on? Can you go into a little bit more detail?

Sachin: Yes, absolutely. We have built all of our tax technology. We call it our active tax technology. We have built it primarily in-house and over the years, I mentioned, when we say Fintech, we have a heavy bent to Fin. Our algorithms are rooted in finance. Early days, I’ve been here since the beginning. Early days we had many academics and leading financiers. Our founder was a longstanding investment professional, and we developed our capabilities to hone in using finance and then figure out ways to then deliver that through technology in that works in the advisor’s workflow. I think that’s the right way about going about providing technology in today’s wealthtech market.

Sachin: Technology in itself makes things sometimes faster, but when it’s finance and technology, it is smarter and faster, and that’s what we’ve been focused on. Specifically, in our tax technology, we honed in on three areas, and even specifically one area which we figured out is the pain point for the advisors. And that’s around the tax smart transition capability. What we found taking a step back in the industry as all the trends happening in the industry where there’s all this money in motion as we call it when commission-based is moving to fee-based advisory savings, moving to spending. All these trends that are happening in industry where money is constantly in motion. The one thing particularly coming after out of a decade long bull market is that the friction that’s getting in the way are taxes.

Sachin: That tax transition problem if you will, we found advisors were spending a lot of time trying to figure out how to move their clients from one model to another model using spreadsheets. It would take weeks if not longer to figure out how to make that transition. We honed in specifically on that problem and built the technology and finance around solving that. Then once the transition happens, then it’s this ongoing tax loss harvesting capability that we implement for our clients and advisors. Then of course when we want to redeem money out of an account, we want to do that in a tax smart way, and we have a tax smart withdrawals. And so that rounds out this tax smart capability that allows advisors to effectively outsource that.

Sachin: As an example, the tax transition capability comes, it came in handy, in March of 2020 when we saw advisors are dealing with the onset of COVID and I’m sure client inbound inquiries on what’s happening in the world or in their portfolios. While that was happening we were transitioning client and there was a big pullback in the market that gave us an opportunity to transition clients in the right portfolios that they want to get into. I think during that time, like 70% of the intended transition to the target models happened just over that period of time, while the advisors didn’t have to do anything. So that automation is, we found helpful.

Technology and Integrations

Craig: I’m an advisor. I’m using Orion or Tamarac, or something, and I want to use, so I’ve got a bunch of accounts that are in the model, and I want to change them all over to another model. How would I go about accessing your tax transition service outsource service to move all those, and how would it be managed? How would I monitor it? How would I connect with it? How would it integrate into my existing platform?

Sachin: Great question. We work with a lot of advisors that use Orion. In fact, were an Orion client early days as our order management system on a sub-advisory basis when we were executing trades out. Advisors can continue using an Orion platform and we plug into the custodians directly. They give us access to all their client data that goes into our systems. Then very easily in our software, an advisor can see the accounts that can have their models, either their home office models or in models that they’ve built with some of the asset managers we work with. We work with BlackRock, JP Morgan, Fidelity, many others and then assign their client accounts to specific models that makes sense for their client.

Sachin: Then they can use our tax configurations. For example, set the tax budget that they’re willing to pay to transition typically advisors use zero because the client doesn’t want to pay any tax bill and then press “Submit”. We basically at that point, we take over and so generate tax for smart trade lists to slowly transition that account to the target model portfolio. If the advisor has chosen a sub-advisory relationship with 55ip, then we would go in and trade the account at the custodian. And those trades would flow back into their order management system at Orion. Or the advisor can select the trade list delivery capability, and we would deliver those fully formed trade lists to the advisor in their order management system, Orion or otherwise. Then they’d be able to press “Send” and execute it at the custodian themselves. The onboarding process is pretty straightforward, particularly in the RIA channel because of these deep integrations we have with the custodians. In places like Fidelity, many of the firms we have single sign on integrations, and so they can see all the data pretty seamlessly.

Craig: I’ve understood in the ongoing tax loss harvesting. If I’m on Orion or Tamarac or Black Diamond, that’s where I’m managing my portfolios. Do I have to hand over those accounts to you and that can lead you managed on your platform for ongoing tax loss servicing? Or is there some integrated capabilities where I can keep managing them in my existing portfolio management system and you make these ongoing tax loss harvesting trades for me?

Sachin: To be clear, the advisor is always the manager of the account. The advisor always is the advisor. In the cases where they’re using model portfolios or SMAs that we have on our platform, the advisor is just outsourcing the capability to manage that portfolio or implement that portfolio in the updates and the target updates, target model updates in a tax smart way. They leverage our platform in a way that allows them to leverage our Algorithms and our capabilities for that particular piece. We can act as sub-advisors, again, if they want us to execute on their behalf. Or in many, many cases, the advisors don’t want us to execute and they want to use our Algo, and so we deliver that tax smart trade list to their platform and then they execute it. But in no case do we become the manager of the advisor of the account.

Craig: Good to know.

Sachin: Yeah.

Craig: On the decumulation part, which would be when a client is going into retirement and now they’re selling down their portfolio, do you require more information about other expenses or other accounts, held away assets, just order to generate your tax month withdrawals? Or can you just use the data that that client has at a single custodian?

Evolution of Services

Sachin: As of today, we do it very similarly that it’s basically the opposite of what we do on transition into the account. The advisor on behalf of the client will give us the tax budget that they’re willing to adhere to that. That’s a singular not data point that we then use as the benchmark in order to harvest losses and raise the cash to meet the withdrawal. We don’t currently take in data from other sources but it is on our roadmap. I know some of my colleagues and partners it’s of high interest to build over the next period of time.

Craig: That would be cool. The larger client or client might have assets of multiple advisors as many individuals do break up their assets across multiple advisors, it might help to have that data.

Sachin: Yeah, for sure.

Craig: But it works both ways. According to your website, your platform has generated 2.16% annualized average tax savings over the past three years. How does this work? Is it just tax loss harvesting is it other capabilities? Are there specific types of portfolios that delivered better Tax Alpha? Can you provide some insight there?

Sachin: Absolutely. First, what is tax savings? I mean, there’s a lot of different ways to show tax benefits. We focused on an RIA channel. We focused on tax savings today and so what is that? Tax savings is the difference between the tax bill of an account that has tax management on it, versus an account that doesn’t have tax management on it. We run shadow accounts to allow us to show the difference or the value, if you will, of running our capability on an account. We run for the RIA channel and the models, the SMAs. There are different depending on the product, we have different tax management methodologies for many of the model portfolios that we run that are ETF and fund model portfolios, it’s a monthly harvesting.

Sachin: Every month we have a methodology we can dig into in a second that takes a look at it, what we should harvest, if at all, and then what we should replace it with. And then in doing that, obviously not in just a vacuum but being sure that we’re maintaining the tracking error to the target portfolio and making sure that we don’t veer too far off of that. We do that monthly. It generates good tax alpha, that tax savings number represents that methodology across the 40,000 or so model portfolio accounts that we run on our platform today and about $15 or $16 billion.

Sachin: Then with JP Morgan, I haven’t talked about yet, but about two and a half years ago, we were acquired by JP Morgan Asset Management. We still run as an independent subsidiary and cater to the industry and work with many other asset managers and model providers. But part of our partnership with JP Morgan is that we power up their direct indexing business as well as their active SMAs and so there we generate tax alpha reporting and in a year we launched it. Last year was a very good year for tax alpha. Again, there we do daily harvesting, daily optimization, identify opportunities to harvest losses on a daily basis and so given the year, given the products, it depends on different markets and different benchmarks. But I think that both methodologies provide significant tax value and I would recommend that advisors use some tax methodology that’s automated because it’s a very time consuming process. And in using platforms like 55ip would certainly help in that may make sense.

Craig: How much of your business is powering direct indexing?

Sachin: It’s a great question. Today, it’s about 25 to 30% of our business. That’s going to continue to grow. It’s a big reason why JP Morgan purchased our technology as to power up their direct indexing business as well as our active SMAs to be fulsome about it. People always talk about models, direct indexing in the industry. I think about it as all one model eventually. And these are all just sub components, ETFs funds, direct indexing, Alts, One day. It’s all going to be delivered eventually in a UMA structure or blended portfolio, if you will, that has going to have tax management across all of it and we’re as applicable. I think we’re all on that journey, and I don’t think one product is way too early to say one product is going to destroy the other. We’ve heard that for decades on ETFs and mutual funds. Now we’re hearing on directing, investing and ETFs. I think there’s a place for all of it, depending on client size, client type and direction, and so ultimately to me, it’s all one big model.

Craig: On the Ezra Group side, we see direct indexing as a operational tool similar to UMAs, where they will grow and grow significantly as firms see them helping them build scale. But clients don’t know the difference. No client comes into their advisor and says, I need a UMA or I need a direct indexing. They just say, I’ve got these problems and I want to retire, or I’ve got things I need to save for, and the advisor’s job is to put them in the right product. Or the advisory firm’s job is to use the right operational framework to deliver efficient advice. Do you see it that way, or do you think it’ll change and it’ll become a product that an end investor will understand and ask for?

Sachin: I agree with you. I think that asset allocation and storytelling and narrative is the way that money is managed well, and as we know from various value pyramids that we see, the top of the pyramid is always client service, financial planning. Am I going to have enough money from my life events? And Envestnet is third or fourth or fifth on the list in terms of what the clients want. Clicking into the actual portfolios, I just think that that’s not as important. There are optics and there is issues like when a client gets a statement of 500 names in their statement, that shows up and has maybe different issues. But ultimately, I think directionally what’s in the portfolio, at the ingredient level doesn’t necessarily make too much of a difference. I think meeting the financial plan is the primary thing that advisors need to need to think through. And the narrative around that over the years, the so that the clients don’t enforce advisors to make rash decisions.

Craig: We definitely don’t want that.

Sachin: Definitely don’t. Totally don’t.

Craig: You mentioned the acquisition by JP Morgan, and since then, I believe according to the press release, you reported $4 billion as 55ip powered assets, but then you said now you’re up to 15 billion. Was this primarily for JP Morgan clients that they moved over, or is this external, and what’s the trend that’s driving this growth?

Sachin: In aggregate we just crossed $20 billion and so that’s across models —

Craig: $15 billion, five minutes ago. You added $5 billion just while we’re talking.

Sachin: Well, that was in our models business, and so our direct index of business is another $5 billion. That’s what we talked about. In aggregate, it’s $20 billion today on its way to be multiples of that in the coming years. The big drivers, trends wise, I’m not going to get into the makeup of the allocation across different products, but I would say in the RIA channel specifically, I would say the biggest driver that we see is this push to custom model portfolios. Half of the assets on our platform today are in custom models, either built by entirely by the CIO office of a aggregator or integrator, if you will these days. RIA platform or a more standalone traditional wealth management firm or custom models built in conjunction with the BlackRocks of the world or Fidelitys of the world.

Sachin: The industry is certainly shifting to that. It’s for a number of reasons. Obviously, I think that there are obvious ones, but I think one of the ones that I’ve seen that is more like economic driven is as we see all this aggregation that’s happening funded by private equity and I think the pressure is on to homogenize businesses but still have a fingerprint on the portfolio. It still has this custom feel that advisors can talk about and have a narrative around, but also move this broader shift to model portfolios, which or others would say, goes from 4 trillion to 11 trillion in the coming years. Those trends are the biggest driver, and I feel like 55ip is well positioned to capture that.

Sachin: We work with all the asset managers on custom model portfolio builds. We have the ability as well as the advisors directly in their home offices and we have the ability to build their model portfolios on our platform and then use the very quickly and then use the software to allocate it to client accounts pretty seamlessly. Then use obviously our active tax technology and deliver these better after tax benefits for their clients. The tax transition problem also shows up a lot in this aggregation movement that we see. All these firms are becoming household names and national RIA platforms are buying of firms, and then they’re stuck with these books of business that don’t look like the home office models, and so how do they get them there. They’re getting pressure to make the operations more seamless as of the bottom line, but how do they get them to the portfolio that they already use in house, where our capabilities can facilitate that pretty quickly. That’s the major trend I see, Craig.

Craig: That’s good. I appreciate that. When it comes to automated portfolio implementation, not transition, you’ll offer that as a service, what exactly does it mean and how does it work? Again, how would I work with that? How would I take advantage of that with my existing wealth management platform?

Sachin: Totally. When we think about our like core offering, if I had to distill it into to the three things. Is this intuitive, intelligence that we have inside, the intel inside, if you will, which is another word for our Algorithms on the tax side, on the app text technology. It’s our digital experience, which we feel pretty intuitive and easy to use within a few clicks. You can get through the workflow. Then thirdly, it’s this automated implementation, and so behind the hood, under our UI, we have something we’ve built over many in years called Trade Gen, and it’s our trade generation module that at massive scale allows us to generate tax smart trade lists for clients and for advisors at the account level.

Sachin: That’s the power of the implementation and combining those, and while there’s other firms that I think do parts of that, combining those three things together in an experience as well, I think makes us stand out. Advisors love that capability because they can basically, they like outsource that full workflow with a few clicks and configurations on their end to a 55ip. And we can go through those same delivery services as we talked about earlier, which start from sub advisory, the trade list delivery, and now as we move into pure software as a service, through APIs. Under the hood is this implementation engine that we expose in various ways.

Future Developments

Craig: Indeed. Final question, what’s coming down the pike for 55ip? What can we expect exciting new features, functionality in the next 6-12 months?

Sachin: It’s little bit of where we think the industry is going, so that the fastest growing channel is UMA. That’s the natural extension of our practice and so we’re being able to become the tax overlay on UMA platforms that have the sleeves infrastructure, and we deliver the tax management across all the sleeves. We’re going to be doing that within the walls of JP Morgan. We have some other large enterprise partners that are being lined up and so we’re going to be able to deliver that through the industry and continue to provide our service. In the advisor experience, we’re going to be focused on developing our custom model solution even further. And so advisors can take advantage of our capabilities on the tax transition piece, specifically around our bulk upload process. Advisors who want to move books of business, big chunks of business over and into the implementation engine, they’ll be able to do that pretty seamlessly over the coming months and quarters.

Craig: That is excellent. I mean, the time has just flown by Sachin, can you tell everyone where they can find out more information about 55ip?

Sachin: Absolutely. You can please come into our newly launched website. We just launched it last week, www.55-ip.com. Our advisor success team would love to engage and discuss our capabilities.

Craig: So glad you’re here Sachin, I appreciate your time and openness about your product and explains to everyone. Thanks so much.

Sachin: Thank you so much, Craig, for having me.

55ip is the marketing name used by 55 Institutional Partners, LLC, an investment technology developer, and for investment advisory services provided by 55I, LLC, an SEC-registered investment adviser. 55ip is part of J.P. Morgan Asset Management, the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. 
Telephone calls and electronic communications may be monitored and/or recorded. Personal data will be collected, stored and processed by 55ip in accordance with our privacy policies at https://www.55-ip.com/email-disclaimer/. 
If you are a person with a disability and need additional support in viewing the material, please call us at 1-800-343-1113 for assistance. 
The impact of a tax-loss harvesting strategy depends upon a variety of conditions, including the actual gains and losses incurred on holdings and future tax rates. The results shown in these materials are for illustrative purposes only and do not represent actual investment decisions. 
The tax-loss harvesting service is available for an additional advisory fee and the results shown represent the net effect of the advisory fees but may not consider the impact of fees charged by others, including transaction costs or other brokerage fees. The information contained herein is subject to change without notice, is not complete and does not contain certain material information about the investment strategy, including additional important disclosures and risk factors associated with such investment and information about fees, trading costs and taxes. 

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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

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