A Tax-Smart and Risk-Smart Way of Managing Portfolios with Damon Deru
Rebalancing is one of the most important tasks performed by financial advisors. But in an increasingly complex world where markets are moving faster, clients are not the only ones who need guidance. Advisors need solutions to overcome roadblocks that impede their ability to provide the best service to their clients. With the right technology, advisory firms are able to reduce the time needed to rebalance portfolios, as well as manage tax and risk more effectively.
In today’s episode, Jack talks with Damon Deru, CEO and Founder at AdvisorPeak and Senior Product Director at Addepar.
Damon started his career as a registered investment advisor where he manually rebalanced and traded hundreds of clients’ portfolios using Excel spreadsheets. Frustrated by the lack of affordable and intuitive options in the market, it was in this role where the idea of a customizable robust portfolio rebalancing system was born. Damon relinquished his role as an investment advisor to focus his efforts on building the most innovative rebalancing software for the financial services industry.
Damon talks with Jack about the evolution of AdvisorPeak, how rebalancing software can be a powerful tool for managing client portfolios, and why it is highly beneficial to the firm, their advisors, and their clients.
What Damon has to say
“If you are not currently using rebalancing software, I would highly encourage you to take a look at that. I feel like this is one of those areas that advisors can see more of the biggest back-office efficiency gains.”
Read the full transcript
Jack Sharry: Hello, WealthTech on Deck listeners, thank you for joining us for this week’s podcast. Glad to have you back to hear from people on the cutting edge of creating strategies, capabilities and platforms around the confluence of digital and human advice. Today we will talk with someone who’s a friend of ours Damon Deru. Damon builds platforms for RIAS to manage the full household portfolio and risk smart tech smart way. Damon was the CEO and Founder of AdvisorPeak because of what he is, he and his colleagues have built. He was recently purchased by Addepar. We’ll talk some more about that in a moment. So Damon, welcome. Thanks for joining us on WealthTech on Deck.
Damon Deru: Thanks, Jack, happy to be here.
Jack Sharry: Good to have you on board. So Damon, tell us about your background and what you built at AdvisorPeak. And then we’ll talk about the transition data part next. So talking about how you got started on all this. All right, what led to advisor picking your success there?
Damon Deru: Yeah, sounds good. So and then appreciate everyone taking the time to join us here today, trying to make it as worthwhile as possible and talk about some interesting ideas happening around the industry trading rebalancing. And let’s try and make this worth your time today. So getting into our history a little bit. So I was actually a former registered investment advisor, which is where the idea for the trading rebalancing system first came about so and I think that’s also what really appeals to advisors as well to use our software as we’ve sat in their shoes, I’ve, you know, manually rebalanced and traded, you know, 1000s of client portfolios using Excel spreadsheets before we started our software company. And so, so we felt the real-world pain, which is ultimately what led us to build the system. And so starting back in the early 2000s, is where our story starts, I was brand new in the industry is the new guy that a registered advisory firm. They put me in charge of the trading Little did I know at the time, why they put the new guy in charge of that because we were using Excel spreadsheets that said the firm wanted to be tax efficient. We were trading on a household basis, we wanted to analyze the client’s entire tax picture. And for anyone that’s done that manually, they know just how much time that takes. And so we did that for several years. And that’s really where the idea came about where you know, I started asking myself, there’s gotta be a better way to do this. Back then there were a couple of commercial options. iRiba was out in the marketplace. This was prior to TD Ameritrade purchasing them, they were still a desktop-based software back then. And Tamarac had just come on the scene that said, they were still both relatively new systems are really expensive, took a long time to learn. And so we just didn’t feel like they were, you know, really meeting our needs. And so we went to work on building our own solution. The initial intent of it was not actually to go on commercialize it, we were really just building a solution for our own firm that said, we were at TD Ameritrade at the time, and our TD Ameritrade rep actually invited me to speak on a panel at their conference, their national conference, just about you know, here’s an advisor who built his own homegrown solution. And so I was up on the panel with, you know, folks from I rebound, Tamarack, and then I was up there as the guy with the homegrown solution. And after that panel, several advisors came up to me, offered to buy a copy of this program we had built. And so that’s really kind of what spurred us the idea there was a need in the marketplace. advisors were looking for other solutions. And so we took this initial kind of prototype program we had built and built our first software around that. And the first company I founded was a company by the name of trade warrior that was acquired in 2017. And then three years ago, myself and several others from the industry, you know, Pete Giza, who is the co founder and CTO of RedBlack Software joined us, but really kind of the idea on why we came back together. And why we founded advisor peak was because we felt that innovation, particularly around trading and rebalancing basically stalled in the industry. And so that’s why we got back together and started AdvisorPeak.
Jack Sharry: Then along comes Addepar. They have become I think I saw on the news recently, they’re worth about $2 billion now. So they’ve grown rather rapidly. So talk about why you guys hooked up with Addepar. What do you see what’s in it for you and your team? And what’s in it for at apart?
Damon Deru: Yeah, really good question. And so, it since we found an AdvisorPeak three years ago, we have actually been approached multiple times to be acquired. However, you know, we weren’t necessarily looking for an acquisition. That said, when our partner approached us, it was an acquisition that we we certainly looked at and as we got to know them, and got into the conversation and learn more about what their vision was it aligned very well with the vision that we had and why we started AdvisorPeak again to continue to drive innovation in the space. Over the last year, our out of party integration was our fastest growing integration partner. And our departure was seeing the same thing on their side. We are their fastest growing rebalancing vendor partnership. And so when they approached us again, it was just a natural fit. It was a natural cultural fit. And ultimately, what led us to decide to move forward with the acquisition was again, we felt like you know, with the resources With the region, it was going to help us expand on our vision of really bringing, you know, the innovation to trading and rebalancing that we wanted to, you know, that’s definitely one of the downsides of being a smaller company is just, you know, our limit on resources. We always said internally, we have more ideas, and we had developers to go build them. And so now we are in a spot with without Addepar’s resources to really go out and execute on that vision that we have.
Jack Sharry: So what do you explain what you guys do? What is it? I’m quite familiar, obviously, but our audience may not be. So what’s your differentiating point of view rebalancing, there are a bunch of good ones out there, and I’m sure you’re gonna say there are, but I know yours is different.
Damon Deru: Yeah, and there definitely are a lot of good solutions in the marketplace. But yeah, at the core of it, advisor peak is a household-based tax efficient trading and rebalancing software, you know, and again, that’s where our partnership with LifeYield really came about, as well. And we’ll, we’ll dig a little bit deeper into that here in a minute. But, you know, at the end of it, you know, again, a lot of it goes back to kind of our founding story of just, you know, the system was built to handle those real world needs that advisors face. So really be able to handle, you know, the day to day scenarios, such as, you know, cash coming in, or cash distributions needed, all the different client restrictions being multi custodial. And then, you know, to top it all off, just making a system like that, you know, user friendly, so that, as advisors, or traders get into the system, that it’s user friendly, they know how to jump in and quickly get their trades done. You know, just for comparison, the firm I was at, originally, when I was an RIA, you know, it would take us days or weeks to get through our trading process. And that same firm now, you know, they’ve grown from roughly 150 million to over a billion, and they can do their entire trading in a few hours. And so again, at the end of the day, that’s really what it’s all about, it’s just that back office efficiency, but also bringing, you know, the tax efficiency to the end client, and making sure that they’re getting that advantage.
Jack Sharry: So as you know, I talked about UMH, and household level management. So I’m blue in the face, and apparently the world is catching on. It’s one thing to talk about it and you will know better than anyone, or at least as well as everybody here at LifeYield and a few of our other clients. This stuff’s hard. So explain one why it’s so hard not to go into too much technical detail, but just that high level, what why is it so hard? Why do advisors like it? And then talking about why are advisors attracted to it beyond? That? It’s easier that part I know, but obviously, it improves outcomes. So why don’t you just sort of explore that, if you would, is this talk about the future, which is the UMH as far as I’m concerned? You probably agree.
Damon Deru: Yeah, absolutely. And this is why we started working with LifeYield. I mean, just for the listeners benefit. You know, we announced a partnership with LifeYield, what was it? Jackson, I want to say 18 months ago, approximately, it was at the T3 conference. I remember that. So yeah, so we do have an existing partnership and relationship. But to go back to your original question here, you know, why is this so complex? And, and again, if you really sit down to think about it, again, just doing this manually, it’s really interesting. So we work with the Utah Valley University here locally, and they have a financial planning course. And so we go down and teach this course a couple of times a year, and one of the exercises we put the students through, is we actually give them a very, very simple household, I think there’s like two accounts and a one’s a taxable account, once a tax deferred, we give them a model and we say rebalance this, this one household. And so And at first, you know, they start getting into it, and it takes the students sometimes 2030 minutes to work through this one household. And typically, there’s mistakes in it, and it’s not the most efficient and, and so again, any advisor that’s actually sat down and you know, worked on trading and rebalancing a client household, particularly when you start taking into account, you know, taxable tax deferred tax free accounts, and the different statuses, they’re all the different underlying tax lots trade restrictions, you know, then you start throwing in the complexities of, you know, multi custodial. And then further, you start throwing all the complexities of the client’s cash management needs, and trade restrictions, and ESG requirements, and all these sorts of things. So, once you start, like putting this all together, you quickly realize how complex it becomes. And so that’s really, you know, again, at the end of the day, you know, coming back to why we built this system is that’s the way we wanted to trade as an advisory firm. And this is something the software does very well, once you build in all the rules and the analysis, it can calculate all this information very quickly, you can, again, click of a button, rebalance hundreds or 1000s of accounts, in a matter of a few minutes. Versus if you sit down and try and manually do this, just you know, the hours and hours, it takes not to mention the component of the human error factor of just, you know, factoring fingering a piece of data into that, in that process. And so, anyway, so that’s, I mean, hopefully, that kind of paints the picture of just really how complex this problem becomes. And I also think while you know, you also look at, you know, just the space as a whole, you know, and even coming back to you know, I think one of the reasons why our part decided to acquire us versus go out and build it is because of this this kind of complexity that has taken us you know, we’ve been working on this problem for over decade as I know, you know why LifeYield has as well.
Jack Sharry: And for our audience to understand LifeYield, we’re kind of the Intel inside on the tax optimization, multi account, if we can deal with models all the way and different ways that you that advisors deals with accounts. But you guys take it further when I talk a little bit about sort of what we’re arguably a cornerstone of what you do, but you do a lot more than that. And a lot of it, I assume, and know actually, that you just have that good sense for what advisors want and need that they’re, you know, the practical reality of doing this. So what do you describe what differentiates? What advisor peek now at apart? Is your name change? How do How does that work? By the way? Just quickly on that?
Damon Deru: Good question. So we’re still known as AdvisorPeak for reference, I mean, we’re currently in the process of rebranding the program. So at the top of the program will say advisor peak, and then have the outer part logo right next to it. So, gotcha, we’re going to continue to use the advisor peak name in the marketplace, at least for the time being. But yeah, you know, coming back to the question, and any, and maybe even some further explanation on how advisor peak and life yield are working together today, I think is really interesting and unique. So when we announced our partnership, roughly 18 months ago, one of the things that we are currently have in place that’s out in the marketplace now is we’re working with life yield, to do our location optimization within the models inside advisor peak. And so what this allows our advisors to do is they can have all their models loaded up in there. And we have a button at the top that says something effective, you know, run the life yield analysis, or, you know, LifeYield location optimization. And what the system does that we send all of our models over to LifeYield, they’ll analyze all the positions within that model in terms of efficiency and determining which assets belong in which account type. So within the model, structure, inside advisor peak, we have those three main categories of taxable tax deferred.
Jack Sharry: Damon, if I could, if I could, pardon me, but just to explain for our audience who may not be familiar with asset location, essentially, asset location at its most base is to put the tax inefficient assets in a qualified account the tax efficient assets and the taxable account, not a hard fast rule, but that’s generally speaking, so what you’re looking to do is minimize taxes as you accumulate. And when you do that, and avoid unnecessary taxes, you have more money from what to draw down later. So just a little bit of an explanation.
Damon Deru: Not a problem at all. Yeah, good explanation, because it’s, you know, not obviously, I live in this world. And so, you know, I started talking about things like location optimization, like everybody understands us. So yeah, thanks. Thanks for that explanation, Jack. Sure. So yeah, so just getting back into it, the, as I was mentioning, so within the adviser peak models, we have those three main categories, like you were just mentioning of, you know, taxable tax deferred and tax free. And so the life yield engine will look across all the assets, all the securities in the model and determine these assets belong in tax free, these ones in tax deferred, and these ones in taxable, and it goes beyond that to where we do have that ability where, you know, because particularly with like tax free tax deferred, you know, all clients might not have both a tax free like a Roth account and a tax deferred account. And so they can be a little bit interchangeable in those scenarios. And so what our system will do is we’ll actually rank both of those. So that that way is very flexible, when it’s looking across the different households in the, you know, the mix of different account types, it can still be very opportunistic in that in that rebalancing.
Jack Sharry: Gotcha. And so for now, you’re doing a lot with asset location, and I know on the drawing board is or is income maximization? Yep. also wondering how do you factor in risk with what you do maybe talk about those two elements that you have?
Damon Deru: Absolutely. So we do factor in risk as well. And so that’s, we currently do not do any risk analytics native. And inside of our program, again, at the end of the day, we’ve tried to stay in our lane, and just focus on building, you know, the best rebalancing engine. So we do work with several risk analytics providers. So currently, we have integrations with Stratify Totum, risk, and then Mason for the risk scores. And so an advisor can pull these scores enter the system, and run that risk analysis right along-side the rest of the other analysis.
Jack Sharry: On the risk. One of things I like to point out, because people, you know, soon as I say, you’ll say, Oh, of course, but people don’t tend not to think about it. So when you look at a risk program called cold, you know, we’ve worked with a bunch we work with BlackRock’s, Aladdin, we, we work with Riskalyze, the ones you mentioned, we’re agnostic on the risk. However, whatever the adviser deems is, the appropriate way to manage risk is important. But as soon as you make an adjustment for risk, you have a tax event, a tax consequence, we talked about that before you move on to income people kind of forget that, oh, risk, I’m gonna manage the risk just right, well, great. And then you’re gonna have a taxable event. So wouldn’t it be smart to do at risk smart and tech smart? So please, please explain.
Damon Deru: Yes, exactly. And I think that’s the beauty of marrying up risk with a system like ours, which is a rebalancing engine because there’s always a quote unquote sweet spot in the rebounds where you’re looking at the risk, but you’re also have to keep in mind the real world, you know, tax consequences, and even going back to what we were just talking about a moment ago with location out atomization it has that same conundrum of you know which assets belong in the right account, I but at the same token, you’ve got to be very mindful of, you know, if you make this trade, what are the tax consequences. And so, again, that’s something that, you know, advisor B, handles very well and can do a very quickly because again, we’ve got all the tax law data loaded into the system. And so when an advisor runs the rebalance, they can immediately see the tax consequences of their proposed trade. And with the settings as well, they can put those parameters or those guardrails around that to automatically even just go ahead and kill those, you know, for instance, it was going to create a short term gain, you can just put a setting on a system just to restrict off short term gains, for instance. So we’ll, you know, ignore the risk recommendation, balancing that out with the tax recommendation.
Jack Sharry: You know, there’s another thing, just nothing, not fully understood people think about tax smarter tax optimization, or tax efficiency, and then immediately think of tax loss harvesting. But frankly, asset location, actually is a more important long-term impact over time. And that often, if you do tax loss harvesting, you can actually create a bigger problem down the road. So maybe talk about the asset location versus tax loss, harvesting Canada, not to geek out too much. But yeah, it’s kind of an important, it’s kind of fundamental to the whole idea of being tech smart. Yep, exactly.
Damon Deru: And so, you know, probably the simplest way to break that down is think of the location optimization is going to be always on the buy side of the trade, you know, where are we going to purchase these assets, and put them in the correct account. Whereas obviously, tax loss harvesting is always going to be on the sell side. And so the nice part is, as advisors are going through this process, you can even kind of balance these two factors out, you don’t necessarily have to run, for instance, a specific tax loss, harvest, you know, rebalancing mode, and only focus on the sales. Now, granted, you can do that, but we’re going through the trading rebalancing process, again, just working on balancing this all out. And again, trying to find, you know, quote, unquote, that sweet spot of, you know, balancing out risk balancing allocation optimization, and balancing out the tax consequences as we go through that. And I think that’s also a really good segue into also, you know, again, what we’re continuing to work on with our life yield partnership is working on, you know, this opportunistic rebalancing, where we are, you know, combining the science and the art of rebalancing. And again, looking for that sweet spot balancing, you know, taking into account all these different factors.
Jack Sharry: Talk about know if would in terms of where you see the world going, I know, on the roadmap for you is, is income optimization, or multi count income optimization, or maximization, I really want to, and I’m sure your friends, your newfound friends that ad apart probably have a few things they’d like to see you do. So talk a little bit, but to the degree, you can really see the world going for Advisorpeak and for the industry.
Damon Deru: Yeah, so definitely, there’s a lot to talk about, we could probably be honest for another hour. But again, kind of coming back to I want to, you know, hopefully leave listeners with a few interesting ideas or concepts and like said, where things are going. So yeah, maybe to start out with, again, with what we’re doing with life yield on the income optimization. So that is something else that is on our roadmap. And again, this is in conjunction with life yield where we can actually do that income distribution analysis. So, for instance, if a client is in that RMD mode, or just he needs to do a one-time distribution, we can actually send the household over to life yield, they’ll run, you know, they’ll look at all again, all the different factors, and healthy advisor quickly determine what is the most efficient, or what is the appropriate account to be pulling distributions from, you know, again, the most tax efficient manner. So that’s something that we’re really excited about, again, it’s coming down the pipe in the future. So I’ve got a few other industry ideas here too, time permitting, I can throw those out. So go for it. All right. So another big one that we’re at this point, just keeping an eye on is direct indexing. It’s definitely one of those, you know, buzzwords in the industry right now, kind of like, you know, AI and different things. But, you know, it’s interesting, I think, from the advisor perspective, because I see a lot of, you know, news in the industry talking about direct indexing, but we’ve seen very little advisor adoption thus far. What’s interesting is like, right now, a lot of the direct Indexing Options are typically SMA solutions for advisors, which also, you know, typically leads to only, you know, very high net worth clients can actually take advantage of those. And so, what we’re keeping an ion from a trading and rebalancing perspective, and I think what’s really interesting is, you know, is, you know, looking forward is, you know, what is that next step for advisors to potentially take advantage of direct indexing and the tax efficiencies that can come with that, you know, but also bringing that scale down so that we can get it down to more of, you know, just an advisors, average client could actually take advantage of it. And again, what’s the structure of that going to look like? Is it going to be inside an SMA? Or, you know, we’re looking at it as a technology vendor, you know, and we have the capability inside advisor peak today to actually, you know, load indexes up and allow the adviser betrayed on those and analyze all the tax analysis around that’d be, you know, bring that tax Alpha advantage to that, you know, but I think one of the things that is hindering that so far as well As you know, the custodians have yet to open up the fractional share trading to advisors so that we can actually bring that scale down to a size that actually makes sense to start doing this. And so that’s something that I think is really interesting that, you know, a lot of these custodians are offering fractional shares on the retail side, but we’ve yet to see it come over to the institutional revisor side of the community.
Jack Sharry: Yep, well, there’s a lot more I know you’re working on that probably can’t share explicitly. So we’ll do what we normally do at about this time of the show. And we’ll the first let’s talk about maybe three key takeaways in terms of what you’ve done, and where you see the world going. What are the key things that our listeners might want to know? Yeah, absolutely.
Damon Deru: You know, I’m going to keep it short and sweet here and just do two takeaways, how about that, that’ll be my Christmas present for everybody. So, you know, as I was thinking away, you know, what, what could be two key takeaways from this, the field could actually walk away from the first one is practice really basic, but it is, if you’re not currently using rebalancing software, I would highly, highly encourage you to take a look at that. I mean, again, maybe it’s something that you looked at in years past, but it’s been a while since you’ve really evaluated implementing rebalancing software inside your practice. And so, so that was gonna be my first takeaway was, you know, take the time to truly evaluate that. And because again, I feel like there’s been a lot of industry surveys done and the utilization of rebalancing software still really low in the industry. And I feel like this is one of those areas that advisors can see some of the biggest back office efficiency gains. So that was my first one. And then the second one kind of goes hand in hand with it, just from the sense of, again, if you’re not using rebalancing software, you’re also probably not looking at things from a unified managed household perspective as well. Just getting back to what we were talking about earlier with just the complexity of trading and rebalancing on a household basis. And so again, this is this is real world savings that you can bring to your clients by looking at things on a household basis and trading tax efficiently. And so even if you are an advisor using rebalancing software, what we’ve seen, you know, as we’ve looked across advisors is, you know, there’s still a good portion of them that are still just trading on an account only basis, just because that’s the way that the firm’s always done it. And so you can I invite you to explore what that would look like, actually starting to transition clients to trading on a household basis and bringing that real world tax efficiency to your clients. Because again, I feel like that’s something that advisors can really communicate and can be a differentiator for them. We again, which client doesn’t love saving money on taxes?
Jack Sharry: Yep. But as it’s also been properly determined by those who are listening to an interest in this topic, this stuff is complex, and it’s hard. But as you’ve demonstrated, it’s a highly beneficial for the firm for the advisor and certainly for clients. So it’s a big win all the way around. So one of the things that we do, my favorite question each week on our podcast is talk a little bit about what you do outside of work, that people might find interesting or surprising, something that you’re particularly passionate about. Interested in that might be fun to hear about. So tell us that we what do you do?
Damon Deru: Yeah, absolutely. So like, like a lot of people, you know, I’m a family man. So that’s my typical my second full time job. But I just listening to one of your podcast recently with Brian Ross, from the Flyer Network. And he was talking about how he’s, like swim in the English Channel. And I was like, man, like, I thought that so?
Jack Sharry: Yeah, he gets the award. Yeah, definitely gets the word so far.
Damon Deru: So but I’ll try my best. So it’s a one of my unique hobbies, you know, being based here in Utah is a hobby called canyoneering, which is down in southern Utah. They’ve got all these, you know, narrow slot canyons that you can go through, I don’t know if you ever saw the movie, Under 27 hours, that’s what that guy was doing was, he was going down one of the slot canyons in southern Utah. And so the basic concept of that is, there’s only one way to go through these canyons, you have to go down them, you can’t go up them because there’s several, you know, cliffs throughout them. And so you have to basically hike around at the top of the canyon, and you hike and repelled down through it. And it’s just it’s a real unique experience. You see some places in the world that very few people get to see your experience, just going through these canyons, and it’s absolutely beautiful. So that’s my unique hobby.
Jack Sharry: I think if you know the top, Brian, just yeah. But are you scared to death?
Damon Deru: Yeah, good. Good question.
Jack Sharry: Actually, no, there another movie, or maybe it’s the same movie referring to some guy gets stuck in one of those things.
Damon Deru: The mistake that guy made was he was by himself. And he didn’t tell anybody where he was going. So I always go in a group and everyone knows where we’re going. And yeah, so so definitely learn from that guy’s experience. But now it’s a lot of fun.
Jack Sharry: Wow. Well, I’m impressed but I’m not going to do it. Yeah. Well, David great as always good to catch up. Good to hear about what you’re working gratulations on. You’re working without apart. It’s a great company and you guys are doing great stuff. I know it’s a sounds to me like a marriage made in heaven. So thanks for joining us today. This has been a lot of fun for our audience. If you’ve enjoyed our podcast Please rate review subscribe and or share what we’re doing here on WealthTech on Deck. We’re available wherever you get your podcasts. Damon thanks to spend some time chatting.
Damon Deru: Thank you. Thanks for everyone joining appreciate it.