Integrate, v. \ˈin-tə-ˌgrāt\ To form, coordinate, or blend into a functioning or unified whole
A frequent complaint we hear from Intel employees surrounds the investment restrictions in their retirement accounts. While the investment options in the accounts are increasing, you are still limited to a preset menu in each account. Those wishing to expand their allocation beyond this list of funds cannot do so within their retirement accounts.
A process we call Investment Integration can solve this issue in addition to minimizing your taxes and expenses.
One of the most common things we see when doing a portfolio review is the lack of a cohesive strategy uniting different investment accounts. Typically, each account is treated individually and perhaps considered a separate bucket with a unique goal—in other words, the different investment accounts are not integrated.
Investment Integration is a process by which all accounts are viewed as part of one combined portfolio, and then each account is simply used for it’s highest and best use.
The Benefits of Integration
There are at least five benefits to the “Integration” process:
- Expanded investment opportunities – Viewing the accounts as one holistic portfolio allows you to take advantage of additional investment opportunities. For example, let’s say you want to place an allocation to a managed futures strategy. Because a managed futures fund isn’t available in the Intel retirement accounts if you manage each account separately you will be underweight your target allocation to this strategy. However, if you look at things holistically, you could put the managed futures allocation in an account outside of Intel and hold something in its place (like a bond fund for example) in your Intel account.
- Proper risk positioning – When managing accounts as separate entities it’s going to be difficult to know how much risk you are taking on all your investments. Given your specific goals, objectives and risk tolerance you may be taking on too much, or too little risk. Positioning your assets as one combined portfolio allows you to both set the overall risk level of the portfolio and monitor it on an ongoing basis.
- Reduced taxes – By taking advantage of a process call asset location (placing the least efficient assets from a tax perspective in the tax-deferred accounts), you can reduce taxes. For example, due to their interest income, bond funds are less tax-efficient than equity funds. Also most alternative investments, by the nature of the strategies they pursue, are less tax-efficient than other allocations. (see chart below) You can only do this asset location process when looking at and managing your portfolio as a whole and not as a collection of separate accounts. Asset location means your allocation in your taxable accounts will look very different than the allocation in your tax-deferred accounts—something that’s only possible when all accounts are integrated.
Source: Hypothetical example based on Cordant’s calculations using the Asset Location framework from “Asset Location: A Generic Framework for Maximizing After-Tax Wealth” Journal of Financial Planning 2005.
- Trading efficiency – Imagine you’re making an investment change or portfolio rebalance. By managing your accounts as one portfolio, often individual positions are consolidated. For example, if you need to rebalance and sell US-stocks because they’ve risen above your target allocation when your portfolio in integrated you may only need to do this in one account compared to every account if they are managed separately.
- Monitoring Performance – With a “portfolio” of separate accounts you are forced to to look at the performance of each one individually. This makes it difficult to know how your total assets are doing in aggregate. By switching to a one portfolio mindset (Investment Integration), you can monitor the overall performance of all your assets.
Intel employees, to find out what benefits you are missing out on by not integrating your assets, attend our upcoming event in Portland, OR. Click below for more.
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Cordant, Inc. is not affiliated or associated with, or endorsed by, Intel.
Published on February 29, 2016
Isaac Presley, CFA
Isaac Presley is the President and Director of Investments for Cordant, a wealth management firm serving current and former Intel employees. To learn more, you can read Isaac’s full bio.