Denver RIA works with investment platforms to ease move to model portfolios. Portfolios based on manager-provided models, like unified managed accounts and multiple-discipline accounts, are supposed to provide reasonably broad asset allocation, streamlined reporting and tax efficiency in a fee-based environment. But the process of transitioning an existing non-model portfolio -- especially when a concentrated holding of a low-cost-basis stock comes into play -- can have serious tax implications for the private investor.

That's where Metamorphosis Money Management (M3) comes in. The Denver-based RIA works with outsourced and internal investment-platform providers to make the move to model-based accounts less expensive to the investor.

"We help diversify portfolios tax efficiently," says M3's president and CEO John Phoenix.

CalPERS

M3's approach to managing portfolio transitions in a tax-effective manner comes from methodologies developed for the Public Employees' Retirement System about three decades ago, when the retirement and benefits provider sought to cut costs associated with hiring and firing managers.

"And those are non-taxable investments," says Pheonix. "With high-net-worth investors you've got smaller dollar amounts but really huge transaction costs."

Using a fundamental-risk model created by Boston-based portfolio optimizer Northfield Information Services, M3 examines each holding in a client's entire portfolio across 67 criteria and, working within the client's capital-gains and transaction-cost budget, starts whittling away at the concentrated position, aided by a proprietary trading system called GTS.

Buzz Tabatchnick, national sales manager for Independent Portfolio Consultants (IPC), a Boca Raton, Fla.-based firm that provides bespoke investment services to insurance-channel advisors and their high-net-worth clients, doesn't know how many affluent clients are unhappily ensconced in concentrated positions, but he knows that being able to put them in portfolios they're happier with at minimal cost is a boon to financial advisors.

Dread name

"In the high-net-worth marketplace, you have families of three generations with highly concentrated positions; it's how they got wealthy in many cases," says Tabatchnick. "But now they're looking to diversify -- and if the name 'Bear Stearns' means anything to you, you know why."

To demonstrate the kind of pain some concentrated-position holders are enduring, Phoenix mentions a $37-million portfolio M3 is in the process of transitioning. About $24 million of the client's holdings are concentrated in the stock of a U.S. carmaker -- a position that was much closer to $50 million just months ago.

In addition to the bear market in securities, the very real possibility of an increase in the U.S. long-term capital-gains tax for individuals in 2010 could be an incentive for investors to move out of concentrated positions now rather than later.

M3, which got up and running about two years ago after several years in planning and development, has two institutional clients: Envestnet, a Chicago-based investment-platform outsourcer, and IPC. It also provides tax-transition services to a single-family office it won't identify.

IPC chose M3 to provide tax-efficient transition services as an addition to its service menu because, in its view at least, there's no one else in the game.

Cutting edge

"We found no one," says Tabatchnick. "People say they can do it manually, and I guess they can, but I'm not aware of anyone who has the ability to do it as efficiently as [M3] does."

But Phoenix sees M3's role in high-net-worth advisory merely as a chance for advisors to make good on the promise, supposedly inherent in the retail separately managed account (SMA), of an approach to portfolio construction that takes the investor's unique criteria into consideration.

"The SMA business is 40 years old, [so] it amazes me every day that we're considered cutting edge," says Phoenix.

Right now M3 manages less than $100 million (with an average account size of about $4.2 million), but it hopes to see its assets under management grow to $1.5 billion in three years. To that end it's out making pitches to most of the big third-party investment platform providers and their wirehouse counterparts, according Phoenix.

And to help its business-development efforts along, M3 is about to hire an U.S. East Coast representative. It expects to name a West Coast representative before the year is out.

IPC manages about $1.8 billion. Its institutional clients include MetLife, Lincoln Financial and New York Life. -FWR

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