Metamorphosis Money Management expands distribution with turnkey provider. With an eye to the benefits of frequent tax-loss harvesting in times of market volatility, third-party investment-platform provider Envestnet has tapped Metamorphosis Money Management (M3) to help advisors maximize portfolio performance for their high-net-worth clients.

"The addition of M3 to the Envestnet platform is an exciting development for advisors," says Bill Crager, president of Chicago-based Envestnet. "M3 enables advisors to offer important transition strategies to their clients; differentiating them in the high-net worth marketplace."

Perfect market

Though mainly positioned to manage transitions from low-basis, concentrated positions to more diverse, manager-models based portfolios, M3 also helps advisors cushion their clients from declining markets by allowing for timely loss harvesting.

"This is the perfect market for what we do," says John Phoenix, CEO of Denver-based M3. "There's just an enormous benefit to tax-loss harvesting in this kind of volatility."

But with the markets in retreat these days, it pays to monitor portfolios for rebalancing opportunities often -- not just quarterly or even yearly, as is the case with most separately managed account (SMA) platforms.

"With traditional SMAs, the [tax] losses are there, but they're useless unless you can realize them," says Phoenix.

The bar to more frequent portfolio review, especially on wirehouse-run platforms, is cost and complexity. "Most wirehouses want identical portfolios for block trading," says Phoenix. "It's a matter of scale, so advisors are discouraged" from providing more frequent rebalancing. "What [platform sponsors] hope is that advisors just don't do it."

Phoenix gets support for the view that scanning portfolios for rebalancing opportunities more frequently than called for by traditional methods makes sense from Gobind Daryanani, head of rebalancing research at TDAmeritrade's ThinkTech subsidiary.

"By looking frequently and rebalancing only when needed, the average rebalancing benefits are shown to be more than double that with the more traditional annual rebalancing," Daryanani writes in the January 2008 edition of the Journal of Financial Planning.

Buildout

Rebalancing can reduce risk by keeping asset classes from straying too far from their target allocations, and -- assuming that asset-class allocations eventually revert to their means -- it can increase returns by compelling investors to sell asset classes that have become overvalued and buy more asset classes that have become undervalued, Daryanani writes in "Opportunistic Rebalancing: A New Paradigm for Wealth Managers."

M3 takes responsibility for tax-efficient portfolio transitions and rebalancing off the shoulders of the advisor.

As an example of the benefits of harvesting losses against a backdrop of market erosion, Phoenix mentions an $8.5 million account it started overseeing on 6 October. Within a few days, by which time the market had dipped 11%, the owner of that portfolio had realized a 3.54% absolute return as a result of M3's work.

"That's nine times our fee of 40 basis points," says Phoenix.

In addition to getting a crack at providing tax-transition services to Envestnet's 15,000-strong advisor base, M3 was recently chosen by the Los Angeles office of EFG Capital Asset Management.

"Taxes are the high-net-worth investor's single largest expense," says Clinton Hodges, director of EFG Capital Management in Los Angeles and a former IRS staff attorney. "Combining M3's style of tax transition and managing tax efficiently year round, a portfolio's absolute return can be improved substantially."

Adds Hodges: "This is especially important in today's volatile market environment."

EFG Capital Asset Management, which manages about is the U.S. investment advisory of the Zurich-based private bank EFG International -- in turn part of Geneva-based EFG Group.

M3 also provides tax-transition services to Boca Raton, Fla.-based Independent Portfolio Consultants, a firm that provides custom investment services to insurance-channel advisors including ones supported by MetLife, Lincoln Financial and New York Life.

Two-year-old M3 manages about $100 million, but Phoenix says it's in for "hockey-stick growth" in the short term. "What we've seen so far is a distribution buildout; now we really start to deliver." -FWR

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