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(By Joel Bruckenstein)

Whether you call yourself a financial planner, a financial advisor, or a wealth manager, the odds are that the management of investment portfolios is one of the core services offered by your firm. In fact, not only do many firms offer investment management services, they also base their fees, at least in part, on assets under management.

As most firms have discovered, managing portfolios professionally can be a time consuming and labor intensive task. It can also present a compliance risk. For example, if you create investment policy statements for your clients, and those investment policy statements state that you will maintain a portfolio within certain parameters, you are then obliged to monitor portfolios on an ongoing basis to ensure that the agreed upon restrictions are not violated. As the number of clients and the number of portfolios grow over time, the task of maintaining the proper portfolio allocations becomes increasingly time consuming and expensive. Annually rebalancing these portfolios and  executing the trade can be a chore. In addition, as a firm grows, the cost of compliance or trade errors expands significantly.

To combat the costs and inefficiencies inherent in the manual rebalancing process, a growing number of advisors are turning to rebalancing software. Good rebalancing software can significantly reduce the cost of monitoring portfolios, calculating the trades required to rebalance a portfolio, and producing the trade orders to bring portfolios back into balance.

Rebalancing means different things to different advisors. One area where advisors differ is on the timing and the frequency of rebalancing. In the past, many advisors performed rebalancing on a calendar basis, either quarterly, semi-annually, or annually. This is not a particularly efficient approach to rebalancing, but before commercial software offered better options, many advisors, particularly smaller ones, rebalanced on a calendar basis. Today, best practices dictate that advisors set a target allocation for each security or asset class, and then set a tolerance band around the target. For example, if you allocated 20% to developed market international, and you set a 10% tolerance band, you would only rebalance to the target when the allocation fell below 18% of the portfolio or if it exceeded 22%.

Another differentiator is a program’s flexibility as to what can be rebalanced. Some applications only rebalance at the account level. This is inefficient for a number of reasons. One is trading costs. If a client owns an asset in two portfolios, and one portfolio is overweight while the other is underweighted, account level rebalancing will generate two trades, even though the overall entity, the client in this case, is in balance. Another problem with account level rebalancing, and client level rebalancing for that matter, is that you cannot take maximum advantage of asset location. Household level rebalancing allows you to minimize trades, locate each asset in the proper tax bucket (taxable, tax-deferred, tax-free). It also allows you to manage realized gains and losses across the household entity.

When intelligent, tax sensitive, location optimized rebalancing software first hit the market, it was priced beyond the reach of all but the large RIA firms. Over the last several years, a number of more affordable intelligent rebalancing solutions have become available to advisors. One that has seemingly flown under the radar of many advisors is Trade Warrior.

Some Background

The origins of Trade Warrior date back to 2004, when Damon Deru, the founder and CEO of Trade Warrior was associated with an advisory firm. Since he judged the intelligent rebalancing solutions that were commercially available at the time to be too complex and expensive, Deru began designing a rebalancing solution for the advisory firm using MS Access. About a year later, the advisory firm began successfully using the initial product. Over time, other advisory firms heard of the program that Deru had designed, and they offered to pay a fee in order to use it in their firms. As a result of these offers, Deru hired some developers in 2008 to start working on a commercial version of the product. By early 2009, Nine Mile Software had been founded to market an updated, SQL based, enterprise version of the rebalancing software to RIAs.

Around that time, Nine Mile Software announced a joint venture agreement with FinFolio, a portfolio management program whereby a free, lite version of Trade Warrior, Trade Warrior Express, would ship with every edition of FinFolio. FinFolio was a new product as well, but the CEO of FinFolio was (and is) Matt Abar, an industry veteran who achieved a measure of success with his previous firm, TechFi, which he subsequently sold to Advent. Deru’s hope was that FinFolio would attract customers rapidly, and that he would make money by selling an enhanced, full version of Trade Warrior to FinFolio customers. Unfortunately, FinFolio sales did not take off, and Trade Warrior’s fate, at the time, was largely tied to FinFolio’s.

Since the initial marketing debacle, Trade Warrior has been making progress. They launched the full, enhanced version in August of 2010 after a year of beta testing. They now offer some degree of integration with most major custodians. In addition, they integrate with a number of portfolio management software products including AssetBook, Advisors Assistant, and Schwab’sPortfolioCenter. They are currently beta testing integrations with Morningstar Office and Principia CAMS.

Trade Warrior Software

Trade Warrior was originally designed as desktop server software, but since the beginning of 2012 it has also been available in a hosted, Web based environment. I ran my brief tests on the hosted Web version, since it was the most expedient route for me. When you first log on, you arrive at a page that looks very much like a Microsoft Office app. This is by design, so that advisors are greeted with a familiar work environment. At the top of the page is the ribbon. The ribbon consists of tabs with familiar headings such as File and Home, plus some Trade Warrior specific ones such as Create, Operations, Import/Export and Rebalance. Each ribbon has various icons and functions attached to it. For example, the Home ribbon is divided into five sections: Edit, Views, Tools, Groups, and Select. Edit includes functionality to create, edit, delete, etc. Views allows you to access a list of the four levels of account views Households, Portfolios, Clients and Accounts). Households, Clients and Accounts are self-explanatory. Portfolios can be used to group multiple portfolios together for trading purposes. For example, if a household included three children, each with a UTMA account, and you wanted to trade those three accounts independently of the rest of the their accounts, you could set up a portfolio for that purpose. Tools includes things like charts, error alerts and notes.

Groups allow you to group folios, which are a generic name for households, portfolios, clients or accounts, any way a firm desires. Examples of groups you might want to create are groups by asset size, accounts subject to RMD, or those that you regularly need to generate cash from.

As with any rebalancing program, there is some up front work required in order to use the application, but Trade Warrior feels more intuitive than some competitors with regard to setup. First, you set up your list of securities, accounts, clients, portfolios, and households. Much of this process will be automated, or accomplished with the help of Trade Warrior support, but ultimately the advisor will have some  responsibilities such as the classification of the security and perhaps the setting up of the households and other groupings. Much of the subsequent work takes place under the Rebalancing tab. Here, you create your models. You can create asset class models, asset class models of models, security models, or security model of models.

Models are built from the bottom up. You add a security, assign it an asset class, and then assign the security to the model. Within each asset class, you assign a low tolerance and a high tolerance for the class. If you have multiple assets in an asset class, you can assign a target  mount for each security. This allows you to more heavily weight your favorite security. You can also set a minimum target for a security so that you can make sure you get some diversification across a given asset class if desired.

If you maintain a number of models, using model of models is easier than using individual models. For example, if you use one equity model and one fixed income model, you can generate multiple models at various risk levels from those (80/20, 70/30, 60/40). If you later decide that you want to reduce your clients’ equity exposure, all you would have to do is dial down the equity exposure in each portfolio, as opposed to changing each component of the equity portfolio in each model. Trade Warrior also allows you to allocate a percentage to cash, or a fixed dollar amount, either at the model level, or in the case of model of models, at the sub model level, should you desire to do so. In Trade Warrior, cash comes in two flavors: tradable cash and non-tradable cash. The former can be used to buy securities and pay commissions. Non-tradable cash will not be used to generate trades or pay commissions. You can also control some cash settings globally. So, for example, if you always want to maintain 1% of cash in all portfolios, you can do so. If you are allocating money for withdrawals, such as RMD, you can specify both an amount and a frequency of the expected withdrawal.

You then assign models to each account or group of accounts. To see which folios have not been assigned a model, you can view the Folio list, accessible from the Rebalancing ribbon. As illustrated below, the Folio list shows which Folios have not been assigned a model. It also shows the last rebalance date, which would be “none” for a Folio that had never been assigned a model. If you sort the list by the model column, you can immediately see which Folios are lacking a model, so you can assign them one. The folio list filtering can be useful in other ways. For example, it can be easily used to identify all Folios managed under the conservative model, Folio values, or which Folios have drifted the most from their target allocation. You can even add additional filtering columns to the list, including one to sort by custodian, group, account type, etc.

Folios that Require a Model

To perform a full rebalance, based upon your default parameters, you’d select all Folios and click the Rebalance button on the Rebalancing ribbon. Depending upon the number of accounts you ware working with, the program will take anywhere from a few seconds to some minutes to compute the recommended trades. When the results are available you can view them by clicking “View Results.” The results of one sample rebalance are displayed below.

Rebalance Results

As you can see, icons appear in the first column to the left. The red X in the first line identifies a  rebalancing error. I can click on the line for further details, and I confirm that the account has no value. A warning sign is just that: a warning. In one case the recommended trade might be to sell out of more than 95% of a position, so the warning tells me that I might want to sell the whole position instead. In another case, a warning might result if the trade would exceed a pre-set limit on short term capital gains. An informational alert might tell me that a trade had been dynamically removed due to a restriction, or that an equivalent security exists for one being purchased.

After I review all the results, I can go to the trade blotter and make any changes to the recommended trades. The trade blotter includes all the information required, including the account name, number, type, custodian, security type, symbol, trade type, units, dollar amount and realized gains/losses. Once the trades have been finalized, Trade Warrior creates a trade file in the proper format for each custodian, as required.

Pricing

The pricing on Trade Warrior is competitive for the functionality offered. It is especially attractive for smaller firms that find the minimums of some Trade Warrior competitors prohibitively high. There is a base fee of $4,000 that applies to all firms, regardless of size. In addition, firms pay a sliding scale asset based fee. For the first $200 million, that asset based fee is . 003%. For $201 million to $1 billion, it is .002%. Above that, it is .001%. So, if you are a $100 million RIA firm, your cost would be $7,000 per year

($4,000 base fee plus $3,000 asset based fee).

Our Impressions

Overall, I think Trade Warrior is a reasonable option given the functionality and the price. Currently, from what we can gather, the data feeds that Trade Warrior gets from Fidelity and Pershing are on their second generation, which means they contain more information than the ones from Schwab and TD Ameritrade. Trade Warrior is currently working on updating the Schwab integration, and they will tackle the TD Ameritrade interface when the Schwab one is completed.

Ideally, we’d like to see Trade Warrior offered a deeper level of integration with custodians and third parties so that trades can be sent dynamically from Trade Warrior without having to export and import trade files, but that day seems a way off.

As a matter of principle, we here at Technology Tools for Today strongly believe that an intelligent rebalancing application can add real value and significant ROI to many advisory practices. Historically, price has been a major impediment to the wide adoption of such software. Trade Warrior is one of a handful of affordable intelligent rebalancing solutions. We believe that price conscious firms should give it consideration when looking for an intelligent rebalancing solution.