How to use a TAMP

(Mods - please don’t relegate this to the “Investments” thread where it will get neglected and ultimately die.)

Anybody have an opinion on how to use a TAMP? The pros and cons? Is there a point where it really starts to fail, and the client needs a “real” investment account? Is that magic number $100k? $1m? $10m?

Here’s kinda what I’ve uncovered, at a glance:

Pros - They’re really easy. You just “set it and forget it”. The TAMP manager automatically rebalances, invests excess cash, and creates cash, which takes all the heavy lifting off my shoulders. And it works pretty well for most people. And if it’s a nontaxable or tax deferred account, it doesn’t matter how much trading goes on, as long as there’s commensurate risk/return.

Cons -

  1. In a taxable account, it’s incumbent upon me to “uninvest” the original account. In other words, if a client comes to me with 8 different garbage funds and 10 different stocks, I have to systematically divest these one at a time, and place them with the TAMP manager. Otherwise, the TAMP will immediately sell the original holdings, creating unwanted & unnecessary capital gains.
  2. They can’t be individualized. So if a client has 10,000 shares of low basis stock, you can’t hold onto it inside the TAMP.
  3. It’s difficult (if not impossible) to do tax loss harvesting or gifting of shares, because the manager will see that you’re out of balance, and immediately start trading to put you back into balance, thereby creating unnecessary and unwanted capital gains. (I’d rather they just directed all cash flows to rebalancing the portfolio rather than doing a hard rebalance.)

For the record, the two TAMP’s that I’ve singled out are Morningstar Managed Portfolios (for nontaxable accounts) and Vanguard for taxable ones. I’m not necessarily married to either, but once I hit 40 accounts, I get a free Morningstar Advisor Workstation subscription (worth $300/month). And Vanguard’s investment philosophy almost exactly mirrors mine.

No idea in general, but if I was a client, I’d be extremely and irrationally p*ssed if you suddenly generated a huge realized capital gains tax in my portfolio. Surely, there must be some variation or other service that doesn’t have this characteristic. You seem to be very concerned about this as well.

Well, as a tax preparin’ CPA, Tax minimization is part of my job. And tax efficiency is what I’m proud of. So if I’m going to preach it, I’ve got to show it to my customers.

That’s why I like Vanguard’s TAMP. They use index ETF’s. They don’t make strategic or tactical shifts. They only do a hard rebalance once per year, and they only do it when it’s more than 5% out of balance. In the interim, they rebalance with cash flows. This is about the most tax-efficient portfolio you can ever ask for.

Morningstar does a little more trading, which generates turnover, which generates taxable income. But if it’s in an IRA (or other kind of tax-sheltered account), that’s fine. And I get some benefit out of it in the form of some of M*'s other products. (I use these soft dollars exclusively for the client’s benefit, in case there are any CFAI watchdogs monitoring this.)

This is right in my wheelhouse as I have both TAMPs and large RIAs as my clients so I can provide perspective from both sides. Might be easier to discuss specifics via PM but I can address a couple high-level things here.

Firms holding themselves out as TAMPs can range from a full service provider like Envestnet to a small FinTech firm that offers portfolio rebalancing and some other small thrills.

Assuming you want to work with one of the full service TAMPs, it’s really up to you to define your experience with them. If you want to use them as an outsourced CIO, they can build model portfolios for your non-ERISA accounts or maybe you’d like them to provide you with a 3(38) line-up for a 401k you manage. Want them to only rebalance non-taxable accounts? They’ll do it. Or, if you want to maintain control over the investment solutions you provide to your clients but need back office support, they offer technological solutions to make your life easier. Things like really cool client reporting, trading, portfolio monitoring, and so on.

The bottom line is if you feel you need additional support that you can’t get through your home office (or clearing firm if you’re an RIA), looking into using a TAMP is worthwhile. There’s obviously a cost though, so you’ll have to weigh the benefits to see if it’s worth it for your practice.

What I want is very simple:

  1. Use ETFs, because they are more tax efficient than mutual funds. (The fewer the better. Three or four is plenty, if they’re properly diversified in aggregate.).
  2. Recognize as little taxable income as humanly possible.
  3. No strategic or tactical changes. (I don’t believe it works.)
  4. Allow me to use tax loss harvesting and charitable gifting of selected tax lots. But rebalance with cash flows instead of selling and generating taxable income.
  5. Allow clients to hold “legacy” holdings. Divest then slowly, over time, in a tax-efficient manner, rather than selling them all outright and then buying your pre-selected holdings.
  6. Make sure there’s enough cash to meet distribution requests and pay the investment fees.
  1. I would have to imagine that Morningstar or Vanguard have a tax service (that you’d have to pay for?) that over time would seek to realize losses in the portfolio to offset any realized gains that would occur as a result of liquidating the positions your client holds before reinvesting.

  2. Morningstar/Vanguard won’t unsupervise those assets and retain them in the clients account while simultaneously suppressing them from all billing/trading?

  3. There are only a few scenarios in which the TAMP should automatically trade an account (assuming a third party model manager hasn’t updated the model, or you haven’t introduced cash flows into the account), but just because the portfolios 3.5% allocation to Goldman is sitting at 5%, doesn’t mean it’ll trigger a sell. Obviously there are 10 million different reasons why an account would trade which then implies positions furthest away from the models target are the most relevant candidates for trading, but your home office more than likely can set drift thresholds, and comfort zones that instruct the tamp not to touch positions unless certain criteria are met. If you’ve invested into a third party money manager though who is actually responsible for the execution of the trades directly, then you’re right that it opens your client up to more tax risk, but, at the same time, you shouldn’t be investing a client account into a portfolio it’s not suitable for (turnover wise that is). I know for fact there are TAMP’s out there that can monitor tax alpha opportunities.

Why do you feel that TAMP’s discourage tax loss harvesting though?

Morningstar has basically come right out and said that they won’t do any of the above. But again–with Morningstar, I plan to use them almost exclusively for nontaxable portfolios, so most of this stuff doesn’t matter. It only matters if I decide to use the TAMP for taxable money.

Vanguard is a little different. Vanguard doesn’t actually manage the asset. Rather, they come up with a model, and it’s incumbent upon the CAAP team (Cambridge Asset Allocation Platform) at my B-D to implement the model. They can do some limited tax loss harvesting, and they will do share gifting. However, when it’s time to do the quarterly rebalance, they will see that I gave away 1,000 shares of large-cap equity, so they will immediately start selling other positions to rebalance the portfolio. This is contrary to my “no capital gains ever” mantra.

WRT #1 and 2 above - I talked to one person who said that they had very limited ability to do that. And in practice, I can set up two accounts–one is the “legacy” account with the junk funds and low basis stock, and the other account is the TAMP. I can slowly but surely liquidate #1 and move the funds into #2. But I’m seeing that this takes a lot of time, which is something I don’t have an excess of. (What with my four jobs, and all.)

Did this answer your question?

You could call Envestnet and they would do all this for you. But, unless you have a lot of AUM, it’s going to be cost prohibitive.

I know a dude at Envestnet, and they’re on our platform. But I don’t know much about them. I’ll give him a call and see what’s happening. Thanks for the tip.