Our investment management strategies aim to capture the long-term returns of markets using a diversified, transparent approach. We always start with a market index that provides broad-based coverage of regions, sectors, and securities. Diversification is one of the key tenants of our investment philosophy and starting with a market index helps ensure that we achieve that for client portfolios. We then ‘tilt’ the portfolio to overweight securities that have positive exposure to certain ‘factors’ and underweight those that have a negative exposure. These ‘factors’ are attributes of stocks that are important in explaining their historical – and expected – risk and return characteristics. Some of the factors we commonly employ for client portfolios are value, quality, and volatility. The types of factors that we select depend on both the requirements of the client as well as their personal preferences. An investment strategy is only useful if the client can stay invested in it irrespective of market environments. That is why we implement strict tracking error (active risk) constraints for each client account. This ensures that our factor-based strategies are constructed in-line with client expectations.
One of the key benefits of our investment strategy is that it is easy to understand irrespective of a client's investment experience. At the same time, our investment offering is exceptionally robust and enables us to handle even the most complex client situations. Our approach works for all clients – from those who are starting to build wealth with savings to those who have already accumulated significant wealth from existing stock options or prior exits. While each portfolio is customized to meet the needs and requirements of the client, the overarching investment philosophy that drives our decisions remains grounded.
Once a client understands their current situation from a finance and tax perspective, we layer on our investment solution to ensure their investable assets are aligned with their planning objectives. This includes making sure clients have enough cash for immediate goals and taxes, have less volatile investments to bridge shorter-term needs, and more risky investments to grow over the long term. Instead of using pooled investment vehicles such as mutual funds or ETFs, we implement a direct indexing strategy using individual stocks to construct client portfolios. There are several benefits to purchasing individual stocks instead of using actively managed mutual funds or ETFs.
Cost Savings: By purchasing stocks directly for client accounts, we eliminate the expense ratios associated with mutual funds and ETFs.
Incorporating Existing Positions: In many instances, clients may already own individual stocks with unrealized gains. These stocks would need to be liquidated in order to purchase a mutual fund or ETF triggering capital gains. At Upstart, we incorporate existing positions into the stock portfolio to avoid paying these unnecessary taxes.
Customization: By using individual stocks, we can customize the portfolio to meet the exact needs and requirements of the client. These may include adding restrictions to specific stocks or sectors based on the client’s current job profile or building around a concentrated position that cannot be sold because of legal or tax requirements. Factor-based and regional constraints can also be customized to suit the needs of the client. This may involve eliminating a specific industry from their portfolio and/or overweighting stocks and sectors that are negatively correlated with their human capital exposure.
Control Capital Gains Tax: Portfolio managers of ETFs and mutual funds incur capital gains throughout the year while trading within the pooled investment vehicle, and the taxes are passed along to investors in the form of capital gains distributions. Because each of our client's stock portfolios are customized, we help clients avoid unnecessary taxes by controlling when capital gains are realized based on their unique situation.
Tax Loss Harvesting: When a stock in the portfolio drops in value relative to the purchase price we can sell it to capture the loss for tax purposes, and then buy a different company with similar risk and return characteristics to keep the portfolio on track. Capturing losses allows us to offset gains in other parts of the portfolio or to counter the tax implications of selling shares of private company stock at liquidity.
Gifting the Winners: Gifting appreciated assets is more tax-efficient than gifting cash. Since our stock portfolios have at least 150 holdings, it is much easier to isolate the winners than in an investment portfolio of a dozen mutual funds or ETFs. This offers clients an extra benefit to their philanthropic spirit.
Most fiduciary advisory firms use third-party investment products such as mutual funds, ETFs, or SMAs (separately managed accounts) for their client portfolios. These investment products have a cost associated with them that comes out of the client's pocket and is in addition to and separate from the fee being paid to the advisor. At Upstart, the majority of our clients’ stock portfolios are invested in SMAs - but we are unique in that we do not pass the SMA fee onto our clients. For smaller accounts where it is not feasible to run an individual stock strategy and for the fixed income portion of most client portfolios, we use low-cost ETFs and mutual funds. This makes our all-in fees much less than the traditional wealth management firms, leaving you with more money to compound!