“Am I holding the right kind of investments in my portfolio?”

“Am I taking on too much risk by staying invested in stocks?”

“Am I being too conservative by holding bonds?”

These are questions that are often on the top of a client’s mind. And rightly so, especially when a major life goal, like retirement, starts to feel closer than it used to.

As you well know, taking on too much market risk could lead to losses for investors who plan to use their money soon. But taking on too little risk may mean leaving returns on the table. It’s during the countdown of an investment’s time horizon when many investors begin to feel less certain of what their allocation should be. This is when having a financial advisor can help you reach your desired outcome. We’ve now made it easier for you to provide this professionally managed allocation advice.

automatic glide path

In this article, we will:

  • Describe how portfolio allocation advice works
  • Demonstrate how automation enables advisors—like you—to implement more precise allocation advice
  • Illustrate how you can help your clients stay on track by enabling technology to auto-adjust their allocation as their investment approaches their goal date.

One of the most important roles you can play as an investment advisor is helping tailor your clients’ allocation based on their investment goals. Depending on your practice, you may make changes to your clients’ allocation periodically—perhaps once or twice per year—leading to a stairstep-like fall of your clients’ allocation risk (i.e., more bonds and less stock over time).

Adjusting an allocation is one area of advice where automation can play a particularly important role for you and your clients. As long as you and your clients choose to follow Betterment’s advice, we will automatically adjust your clients’ allocation through time to control risk as they near the end of their goal’s investing timeline. Rather than downshifting risk every so often, leading to a series of stairsteps, Betterment’s automation makes incremental changes to your clients’ risk level, rendering a smoother path from a higher risk level to a lower one. The smoother the path, the closer your clients stay to their optimal allocation.

The below chart is an example that shows the target allocation for a Major Purchase goal that an investor would have if she updated her target allocation annually compared to more frequent monthly updates. As you can see, the size of any individual portfolio change is smaller when allocation is updated monthly.

Major Purchase Target Allocation through Time

automatica allocation adjustment

The quality of the allocation advice you, as an advisor, offer depends heavily on how effectively you help your clients to execute on your advice. We provide full transparency on how we’ve designed our allocation advice to work here, but more importantly, we help you execute the advice through automation – saving you time and helping your clients stay on track efficiently

Automation enables more precise allocations.

For most accounts, the ideal allocation is one that changes to reduce risk as an investor nears her goal. Automation can help adjust an allocation with as much efficiency as possible. Think of it like a plane’s automatic landing system; in weather conditions that can be hard for a pilot to navigate, the automatic landing system helps put a plane in position to land safely. Similarly, automatic adjustment of your clients’ allocations helps keep them on track to meet their goals.

Allocation advice should be personal.

The key with allocation advice is to base the advice on well-researched evidence for appropriate risk levels. At Betterment, for every account you open with your clients, we automatically provide allocation advice based on the type of goal assigned to an account and the investment horizon.

Different investment goals are used in very different ways. A retirement goal generally has a long time horizon, and, once your clients reach retirement, they will potentially spend that money for the next 30 years or more. This requires a very different portfolio allocation than if they are saving for a major purchase, like a house, where the investment horizon is generally shorter and they will spend the full amount at once on their down payment.

Appropriate allocation advice will consider these factors for each goal and frequently reassess them to ensure risk remains in control.

Allocation advice should be executed tax-efficiently.

The problem with some forms of allocation advice is that they are not executed as tax-efficiently as they could be. Any change to an allocation can involve selling investments, which may cause taxes. The ideal allocation advice adjusts the allocation in a manner that causes an investor to realize the fewest possible capital gains taxes.

Our technology uses the cash coming in and out of your clients’ accounts, as well as market changes, to help avoid sales that might cause taxes. Deposits, withdrawals, and dividends help us guide your clients’ portfolios toward the target allocation without having to sell assets—which may result in taxes—to reach the right balance. Similarly, because our allocation advice allows a degree of drift from your clients’ target allocation, we can use changes in the market to help them balance their portfolio tax-efficiently and without unnecessary trading.

If adjusting your clients’ allocation causes us to sell their investments, we use our TaxMin algorithm to minimize any potential tax impact. When we sell an investment, we first look for shares that have losses, which may be used to offset other taxes, then we sell shares with the smallest embedded gains (and smallest potential taxes).

By auto-adjusting allocations, we help save you time and keep your clients on track.

As explained before, your allocation advice is only as good its capacity for implementation. If you plan to adjust your clients’ allocations yourself, it can be time-consuming and a challenge to make the necessary changes as tax-efficiently as you might want to. By allowing Betterment to auto-adjust your clients’ allocations based on our advice, you not only save time but your clients also gain the tax-efficiency of a smoother path from higher risk to lower risk.

Near the end of an investment’s term, when account balances are often at their highest, most investors want to feel certain about what their final balance will be. A market downturn at the end of an investment period will cause a worse dollar loss than a similar-sized downturn earlier on, when a client’s’ balance was likely smaller. Auto-adjusting an allocation helps you and your clients gain greater certainty without having to worry about making major changes. It saves time and adds efficiency, but more importantly helps you and your clients gain peace of mind.

And even with automation, you and your clients can always know exactly how the allocation will change because we provide full transparency on how our allocation advice varies by goal, and your client’s account will always detail what the current allocation is.

You can turn on Auto-adjust for your clients through impersonation from the Advice or Portfolio tabs. You can read our FAQs to learn more about this new feature.

This article was published on December 14, 2017

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