Morning Coffee

Knockin' on Heaven's Door: Moving My Money to IFA

Morning Coffee

My portfolio is a mess. Despite years of covering markets as a funds writer for publications such as the Wall Street Journal and Barron's, I've come to realize that my discipline has slipped at key times in the past 20 years.

By my best estimate, simply holding a portfolio of globally diversified index funds and sticking to a regular schedule of rebalancing would've boosted our gains by almost 25%.

So, I've followed my professional move to Index Fund Advisors with a decision to work with an experienced money manager. Since my own philosophy is simpatico with Mark Hebner's passive investing and globally diversified investment discipline, I've decided to move all of our family's assets to IFA.

I want to stress that nobody at my new employer suggested such a change, let alone raised such a possibility. But that doesn't mean my wife and I are transferring our life's savings to IFA without a certain amount of trepidation.

Given such a backdrop, here's what I've learned. At IFA, diversification goes beyond what I as an individual investor could ever realistically expect to handle on my own. The firm has access and resources that make owning a portfolio with exposure to 40-plus countries and six major asset classes (including 16 different subclasses) out of my personal reach.

I also got a choice of holding my assets with the three major custodians -- Fidelity, Schwab and TD Ameritrade. After looking over each of their sites and discussing such a decision with our agnostic IFA rep, we picked our brokerage to work with on an independent basis.

Then my advisor called to explain how divvying up our assets might work in terms of asset location strategies. What he meant by that is determining what should go where to maximize tax savings and cut redundant portfolio holdings.

My advisor explained that Mark has invested heavily in making sure that his overriding portfolio construction strategies are backed by sound execution. But as a reformed journalist, I remained skeptical. So, I kept poking around, posing more detailed questions to various advisors and portfolio managers.

To be blunt, a major issue I've seen in wealth management is a proclivity to cobble together off-the-shelf software to manage portfolios. These are typically less expensive to develop and maintain. They also present more of a cookie-cutter approach to running and executing different client investment strategies.

IFA is decidedly taking a different path. Mark has spent big bucks to build an in-house computerized system tailored to IFA clients’ unique set of priorities. Trading and asset allocation functions are specially designed so that an advisor’s team can intuitively execute different strategies for each individual portfolio.

I've actually had an opportunity to watch as such a proprietary software system has been used to convert my jigsaw puzzle of a portfolio into a congruent and more globally diverse long-term investment plan.

But what really stands out to me is that humans are still left at the center of managing it all. With support from a dedicated team of portfolio managers and analysts, our advisor looked everything over after our money was transferred and offered his observations.

What followed was a thoughtful conversation about how to best structure our accounts. I got a "top-down" analysis of everything we owned, which made it much easier to get my head around.

For example, my advisor pointed out that we held a concentrated position in our taxable account with heavy capital gains exposure. We discussed our options and decided on a plan-of-attack. That single piece of human intervention saved us tens of thousands of dollars in potential tax liabilities.  

I've also come to realize that IFA's portfolio management process takes into account varying tax characteristics of Roth IRAs, traditional IRAs and different types of taxable accounts. This is done not only with tax ramifications in mind, but also with an idea of limiting trading costs and maximizing long-term growth opportunities.

For example, I like to dollar-cost-average on a monthly basis. My IFA team described a system where humans -- with computers doing the grunt work -- monitor markets to see which types of assets might be lagging at any given time. As a result, every periodic deposit is used as a sort of mini-opportunity by IFA's managers to keep our overall allocation targets in balance.

Tax-loss harvesting is also one of my chief concerns. I know that many firms tout their tax-loss harvesting abilities on a daily basis. But such a robotic application for a fairly straightforward process -- booking losses for tax purposes to minimize capital gains -- seems to me like better PR than actual sound management practices.

I am happy to report that an ongoing part of IFA's portfolio expertise includes monitoring of tax-loss harvesting opportunities. Instead of jumping at each market maturation, however, investment managers tell me they keep a close eye on transactional costs. In other words, they're not going to book a trade just to churn positions and look like they've done something on my behalf.

With a better perspective of how this whole transfer and asset location process works, I feel like a big burden has been lifted off my shoulders. Still, my wife isn't impressed. After trying to explain how everything is going with our investments at IFA the other day, she came to a different conclusion: "So you're basically telling me that after years of managing our money on your own, it was basically a big waste of time?"