We live in a time where market volatility seems to have become more of the norm than the spontaneous. With so much that seems out of control there have been advisors that have used asset allocations for their advantage. Diversification has become a well sought after style of trading and allocation. Trading and Rebalancing at the household level instead of trading at the individual account level can be extremely beneficial for the advisors that are more concerned with the location of specific assets for tax purposes. Attempting to trade at the household level can be challenging but isn’t impossible.
Diversification has been the name of the game for a lot of years and advisors have been utilizing a diversified asset allocation to help bring differentiation to their practices and firms. It has created beneficial returns for clients for many years. Mixing the idea of diversification and householding rebalancing helps advisors create many tax-advantaged trades and moves. The idea of utilizing each of the benefits from the different accounts types from IRA’s, ROTH’s, and Taxable accounts.
Being able to truly use a trading platform for household rebalancing can be tricky from the standpoint that if an advisor has not been taking advantage of these different tools or has not had the ability to use a rebalancing system, they have had no choice but to try to do this manually. Some side benefits of utilizing household rebalancing are to help reduce the total amount of transaction costs to the client. Many advisors are using free ETFs at each custodian to help reduce the overall cost of allocation and householding accounts can help reduce that even more.
Mentioned above one of the biggest benefits to householding is the tax-location-optimization components. This involves the idea of being able to place certain investments into certain types of accounts. For example, if you were trading at the household level and wanted to incorporate a municipal bond fund into your allocation, it would be less beneficial to own or purchase that type of security in a non-taxable account. This would have its largest benefit in a taxable account where the client can then take advantage of the tax benefit. Another example plays the other direction that it may make more sense to own securities that are large dividend payers and have room for a large increase in its position. This type of security would have a larger impact to be owned in a non-taxable account so to avoid paying large capital gains each year during tax season.
No matter the reasons for household rebalancing each advisor will create their own recipe for how to best handle their client’s asset allocation. The bigger question is do you actually have a trading system that can incorporate true householding characteristics.