Smartleaf: Automating Rebalancing to Empower Financial Advisors

Site: www.smartleaf.com
Established: 1999
Value proposition: Provider of automated portfolio-rebalancing and tax-optimization solutions.
Clients: Wealth managers, registered investment advisors (RIAs), turnkey asset management programs (TAMPs), broker-dealers, and banks
The executive team: Gerard Michael, Cofounder and President
Robert McKinley, VP Client Services
Stefan Mitropolitsky, SVP Engineering


Smartleaf leverages advanced, institutional-grade analytics to enable wealth-management firms and advisors to deliver highly customized, expertly tax-managed portfolios, at scale. And show end investors a personalized record of taxes saved and daily oversight.

To meet Jerry Michael, I went to Smartleaf’s office.

Jerry Michael and Vasyl Soloshchuk

Jerry told me how Smartleaf was started. Mark Nitzberg, John de Souza, and Jerry had previously launched successful companies and were thinking about how to invest their money.

“We concluded that diversification is good [and] mutual funds are good. But you could do better by owning the individual securities,[a] so-called SMA [separately managed account]. But, you had to actively manage risk and taxes to make this work. And, at the time, this had to be done manually by a professional, which was expensive.”

After some back-of-the-envelope calculations, they concluded that the advantages of SMAs only outweighed the costs if you had more than 25 million USD in investable assets.  With anything less, you were likely getting a mutual fund in disguise.  So, they decided to create a platform where all actions regarding risk management, tax management, and constraint management would be automated. Thus, all four became cofounders of Smartleaf.

“We set out to lower the threshold where SMAs really made sense from $25mm to $25K.  We’ve done it. In fact, with fractional shares and BPS-based commissions, it’s probably now closer to $25.00.”

An alternative to mutual funds

“The core of what we’re trying to do is the separately managed account at scale; such scale that it is both cheaper and better than a mutual fund.”

Jerry points out that ETFs and index funds outperform approximately 80–90% of all investments. Which is impressive, but a well-managed “direct index” will outperform index funds and ETFs on an after-tax expected basis.

Although Smartleaf considers itself to be a software company and not a robo-advisor, their platform has a number of robo-like attributes (e.g., robo-rebalancing capabilities).

Experience Engine

“A customized solution for us is based on a set of parameters. What does this client want? Do they want tax-loss harvesting? If they want tax-loss harvesting, do they view short-term losses as more valuable than long-term losses? Do they want social traits?”

These parameters should come from client profiling, client acquisition, and/or the IPS generation system. For this purpose, the company has created a set of APIs so that advisors can provide these parameters directly into the system. Smartleaf then analyzes the information and generates trades.

“But we […] have done something more interesting. We call it the Experience Engine.”

The system analyzes each portfolio every day to help advisors show the work and value they provide. Smartleaf provides the following reports:

  • Taxes Saved Report: A specific dollar amount saved through active and optimal tax management.
  • Health Checks Report: A record of daily review of each portfolio, showing whether the portfolio was within parameters–and also showing a record of advisor action when required (in alpha development).

“We’re not trying to make these reports the primary reports that an advisor shows a client. It’s shifting the conversation away from, ‘I can beat the market’ to ‘I am a professional delivering professional services in a workmanlike fashion.’ And we provide support for that.”

Automated rebalancing

Smartleaf has a large presence in banks, and the company also works with broker-dealers, RIAs, and TAMPs. According to Jerry, they are working with organizations that want to automate rebalancing services.

There are other rebalancing systems on the market, but Jerry believes that they are primarily designed “to assist in executing specific trades. Most customization and tax management require manual intervention”. In contrast, Smartleaf was uniquely conceived from the ground up to support customization and tax management at scale.

“You can view us as Parametric or Aperio in a box, in a somewhat literal sense. Our technology is an automated version of what a TAMP does, in terms of rebalancing. There aren’t a lot of firms that are trying to do what we’re doing. Most rebalancing systems are a powered screwdriver and we’re a robot. And those are very different things.”

Smartleaf Taxes Saved

The company’s structure and services

Smartleaf Inc. has a subsidiary—Smartleaf Asset Management LLC—that is a registered entity and generates direct indexes. Smartleaf Inc. is a software development company. The core of its team comprises financial engineers, mostly with PhDs in math and physics; they provide the research into automated rebalancing.

On the software-development side, Smartleaf runs the application and is a hosted service. Beyond that, the company provides client services; i.e., helps clients to run the system. There is also a sales and marketing team.

To define a product-development roadmap, the company uses feedback from clients. However, not all wishes come true:

“It is filtered, not only by how important it [the feature] is to clients and how it affects their growth, but is it compatible with scale?”

SmartLeaf Architecture

Future plans and challenges

Talking about the industry’s future, Jerry expects that product-oriented value propositions will decline and that financial planning will become the center of the advisor experience.

Smartleaf aims to be the best at highly scalable automated rebalancing that can concurrently support higher levels of customization of tax.

“That’s our goal. That’s who we want to be. That specific functionality, and to do it better than everybody else.”

Jerry is confident that they help advisors to increase the level of customization. But this is only part of the whole client experience. There are a number of digital solutions that can add up to a coherent client experience infrastructure.

“The robos are good examples of an entire ecosystem where every touch point is consistent. I think most advisors are a long way away from creating that total consistency of client experience. I think that’s one of their biggest challenge.”

Final thoughts

Smartleaf is a very interesting company created by industry experts. The company focuses on rebalancing and tax management and aims to be the best among the companies who provide these services. Their services are built around data processing and reporting. Thus, they see their goal as freeing financial advisors from the routine work that can be done automatically, and then empowering these advisors to devote more time to designing customized solutions and coaching, which cannot be automated, and adding value to their conversations with clients.

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