Custom Indexing Meets Model Portfolios with Andy Rosenberger

[00:00:20] Doug Heikkinen: Can we start by having you tell us a little bit about yourself, your role at Orion, and how your work in custom indexing led to the development of tailored allocation portfolios?

[00:00:33] Any Rosenberger: Yeah, I'm going to give you a little bit of a long-winded history here. I'm not going to dwell too much on my own history, but rather that of the organization. I've been here for about 21 years now, so I've been around a long time. Seen the organization change. Orion is a byproduct of a lot of internal organic growth and then a lot of M&A activity.

So I actually come to the Orion organization from a merger we did about six years ago with a firm called Brinker Capital. The history of how we've evolved over that time is that back in, I'm going to start with, probably the Orion side of it. When you go back to 2017, 2018, Orion was, I would say a pioneer in offering direct indexing technology directly to advisors.

Now, direct indexing had been around for a long time. But it had always been more in a format where you go to an asset manager and they'll do it for you, right? More of a sub advisory type of capacity. What Orion did that was really unique was begin to think about taking that technology and putting it into the hands of advisors.

And so back in 2017, 2018, we rolled out a product where an advisor coming to Orion or using Orion could go do direct indexing themselves. And looking back, I can say that that offering was both a success and a failure at the same time. It was a success in that we really did something that no other firm had been doing.

it was a success in that we had a lot of firms that had engaged in the technology and wanted to use the technology. But it failed along the way in that we found that there was a large amount of attrition that was associated with advisors using that platform. So definitely you get advisors who would come in, they would use the technology, they would get up to speed on it, and then they would kind of fall out of the wayside. They wouldn't continue to use it over time.

And what we found looking back was that when you get into the technology behind direct indexing, the underlying engine can be fairly complicated. You're getting into an optimizer. And so what we found is that advisors love the idea of personalization and customization and lower cost and all the things that you could do with it, but you really needed a dedicated team to be able to manage that portfolio.

And if you're a smaller RIA and you just don't have the resources to do it. Well, then you kind of, you let somebody else do it on your behalf. So from that, we actually then went back to the drawing board and said, okay, well what if we think about taking that same technology but putting a more easy interface on top of it, putting a more of an advisor facing UI on the top of it, so that advisor can go through and they can customize a portfolio in a very simple way, but then you hand it off to somebody who's going to manage it on your behalf.

So you hand it off to a firm who're going to do tax loss harvesting and rebalancing and all the maintenance goes along with it. That way the advisor gets the best of both worlds. They get the best of both the hands-on approach, the customization, the simplicity that you would find typically working with the subadvisor.

But then you also get the efficiency in the scale of not having to worry about all the backend complexities that go along with it. And that from there was how we birthed the Orion custom indexing solution. With custom indexing, the way we think about it is that really you're taking technology and you're building scalable portfolios.

And so over time we've evolved how we define custom indexing. Custom indexing can mean replicating a traditional passive index, but it can mean creating your own custom portfolio. And as we've launched what we call tailored allocation portfolios, that's taking that same optimization technology and putting on top of third party strategists.

So again, you can take their portfolios or their strategy, their best thinking, and also offer that scalable customization to clients with tax management or some sort of overlay associated with it. And so the way we think about our offering is really just customization at scale.

[00:04:21] Doug Heikkinen: For advisors who are newer to that concept, can you walk us through what that combination actually looks like in practice?

[00:04:29] Any Rosenberger: Yeah, I'll give the example here of, well, let me talk about the underlying technology. When I say optimization, that can almost allude to a high degree of complexity. And there is a lot of complexity when you talk about optimization. You get into a lot of math. But we use and we see optimizers all the time in our everyday life, and we just don't know about it. And I'll give the example of, if you're Amazon and you need to figure out how to deliver 200 packages, if you're a Amazon delivery driver, you need to figure out how to deliver 200 packages in a day.

That's a really complicated logistical problem. You have to think about which of those 200 houses you deliver to first, then second, then third, then fourth and fifth. And when you start getting into the math behind that, it gets very complicated and very quickly. And then you start to factor in other constraints or the road closures or the traffic.

I'm sure many of you have heard of UPS, where UPS doesn't allow their drivers to make left turns. That's a constraint. It's one that they've figured out through an optimizer to best deliver packages. But it's a constraint that you put on it. And so if you're Amazon trying to figure out that problem, you're saying, well, how do I minimize the cost of delivery?

So you put an optimizer on it and you solve that problem. Or as another example, if you're thinking about how to route a plane to different airports so that you go from airport one to airport two, and they pick up passengers and drop them off at airport three and four, that again is a really tough logistical problem that you can solve with an optimizer.

And so just like logistical companies is another companies that figured out how to use optimizers to create the best outcome for a really complicated problem, we can do that same thing when it comes to a portfolio. You think about that same problem where you have a lot of different securities you're trying to replicate to an index or a target strategy.

The client has said, let me put a capital gain budget on the portfolio. And although also, by the way, I want to make sure that I don't own companies that have a high carbon footprint and make sure I don't have too much in energy. Well, that's a really complicated problem you could try and solve by hand. Or you can throw those at an optimizer and let the optimizer figure out what is the best portfolio that you can come up with.

So that technology under the hood, the engine is really just solving that complicated problem. And what we're doing at Orion, is saying, well, that could mean you put it on top of a passive portfolio, or that could mean you put it on top of an active portfolio, or it could mean that you're partnering up with a strategist like we do with Tailored Allocation Portfolios and put it on top of their portfolio.

And so now clients can say, I want to transition from my current portfolio to one of our partner strategists. I want to do it with a $10,000 capital gain budget. And I'd ideally like to transition over a five year period.

[00:07:13] Doug Heikkinen: A big theme in the Tailored Allocation Portfolios, or the TAP story, is helping clients with concentrated positions, legacy holdings, or other tax sensitive portfolio transition more intelligently. What does the Orion tax transition technology make possible that a more traditional sell and replace approach does not?

[00:07:33] Any Rosenberger: Well, there's a couple ways of thinking about this. One is that the traditional way the industry has handled this problem is, I'm going to pick on a name here, let's pick on Nvidia just because it's now the biggest name and everybody seems to want to talk about it. If a client brings over a big position in Nvidia, the typical way that we've seen advisors deal with that is they take Nvidia and they go put it into an unmanaged account and they tell the client, Hey, we're going to look at this every so often and we will figure out how to sell it.

The problem with that is that, one is that it kind of sits outside the management of the portfolio. So even though you might look at it, it's really not part of the day-to-day management. And then the second issue with that is that typically what you're doing is you're taking the other money the client may have available, investing it, and you're probably investing it in names that are either are Nvidia or like Nvidia. And so if you go out and buy a large cap exposure, well it's going to have big tech in it. Or if you go buy passive ETFs, it's going to have Nvidia already in it. So you're doubling up on exposures that the client may already own. Now, another way of thinking about that, the next evolution is, well, let's keep Nvidia outside the portfolio, but let's put a restriction on Nvidia. Let's make sure we don't double up. Well, that's a good incremental step, but you still have the problem of you're buying other names like Broadcom or Micron, or Intel, or other technology companies that have that semiconductor exposure or AI theme to it. And in addition to that, it prevents you from, you're not able to do that when you get into commingle strategies.

So if you're buying ETFs and mutual funds, they're going to have that exposure whether you like it or not. So you're either doubling up again or you're limited to what you can invest in. The evolution with what we've done with custom indexing and Tailored Allocation Portfolios is you bring it into the portfolio, you bring it into the management of it. And what that allows you to do is not only have it under the discretion of the advisor and of Orion, but it also allows you to build a better portfolio to build around it.

So rather than starting with just the biggest names out there that you need to invest in and working your way down to the smallest names, you can actually leverage that technology to say, well I already own Nvidia. That means I probably shouldn't be buying other big tech or big AI exposure. I need to think about buying Campbell Soup, or Johnson & Johnson, or Pfizer, or Hershey's, or other names that are best going to compliment that position.

So you're building a better portfolio around that legacy portfolio. Not only that, but as you think about some of the other benefits that go along with what we do, proactive tax loss harvesting as an example, what you can now do is take the losses that you're generating from the other part of the portfolio and use that to offset the gains that you're going to take in Nvidia so you can whittle that down over time from other losses in the rest of the portfolio.

Nvidia starts out like a big position. It's kinda like rolling a snowball down a hill, hard to get started, but as that position gets smaller and smaller, you free up more proceeds. those more proceeds are able to generate more losses. That helps you get Nvidia down over a period of time. We can also do it with capital gain budgets. You know, clients want to have control over their taxes. By putting a capital gain budget in the portfolio, you can take a very measured approach on how you liquidate or how you reduce that position over time. So it's bringing it all together into one cohesive plan with the client. And having a high degree of conviction that you're able to go from point A to point B in a way which the advisor and client are able to control the outcome.

[00:10:58] Doug Heikkinen: Personalization at scale is clearly central to this offering. How does TAP help advisors move beyond a one size fits all model implementation and create a portfolio experience that still feels tailored to the individual client?

[00:11:12] Any Rosenberger: And that's really important. I always try and look at it from the client's perspective.

And as you look at the trend of the industry over the past 20 or 30 years, we, and I say that meaning the industry, have gotten really efficient and gotten really scalable by going towards model-based solutions. And that's had a positive outcome on practices that have been able to take on more clients because of that model-based solution.

It's been very effective because it's been able to reduce costs. By going to a model, you can lower costs and bring down the cost for the client. Be more profitable, if you look at from an advisor's perspective. From the client's perspective, it's also created, in a good way, I think, a lot of commoditization around institutional portfolio management.

You know, I think about, if you're building a portfolio for a client, if you have a hundred different people doing it, you might have a hundred different portfolios. And some of those might be good portfolios and some of those are kind of fit in the middle, but you're going to have a good percentage of them that are being managed by people who probably shouldn't be managing model portfolios, and it's not in the best interest of the client.

And so, by going to models, you've shifted people towards this institutional way of managing money, which has been a great thing. All positives. But there's a trade off here, there's a negative to it. And the negative to it is that we really kind of have become a commoditized industry now. If you look at the model providers out there, they all look relatively similar to one another.

If you look at fund flows, if you look at where those assets are going, they're all going to the same top five model providers. And so if I'm a client, going back to looking at it from the client's perspective, and I'm working with different advisors and I'm trying to figure out who's the right advisor for me to work with, I'm probably getting pitched on the same portfolios from every advisor because every advisor is looking to allocate to those top model solutions. And so as a client, I can't differentiate one versus the other. They all look the same to me. It's just, it's very difficult to understand the competitive advantages that an advisor may bring when they all look the same from an uneducated perspective.

And so what I love about what we can do is you can take that same level of scale, and that same level of institutional investment management, but now you can bring that element of personalization into it. You can ask the client things that would fall outside of a typical model based questionnaire.

You can ask them things about tax rates and capital gain budgets and what do they, how do they view the world? Do they come at it from a political perspective? Do they come at it from a faith based perspective? And by knowing these type of questions and having the answers to them, you can now build a portfolio which still has that institutional quality to it, but is now tilted or has an element of being personalized for them.

Maybe it's tax, maybe it's something more than tax. But the point is that it now becomes more sticky. It becomes something the client really cares about, because it's custom built, custom tailored for them. And so what we ultimately want to do here is take the best of both. Take the best of personalization, which in the past has meant non-scalable.

Take the best of model management, which is scalable, and bring them together into one solution. And we can do that with technology. And quite honestly, that's our competitive advantage. It's bringing technology into the experience.

[00:14:32] Doug Heikkinen (2): One of the more interesting aspects of TAP is that it gives advisors access to third party strategist models while keeping the process inside the Orion workflow they already use.

How important is that operational familiarity for adoption, and how does it help advisors scale without adding complexity?

[00:14:52] Any Rosenberger: Yeah, it's the single biggest selling point of what we do. We are very fortunate to have a large degree of penetration with RIAs and broker dealers. And we have a lot of firms that are, we have roughly, I think it's five, five and a half trillion dollars of assets flow through the Orion technology stack.

And that penetration allows us to, think about it from the perspective of, okay, well if you have a firm who's using the right technology, how do you have them be able to set up an account, or run a tax transition or take a client withdraw and do it within the system so that it becomes as simple as buying an ETF, or selling an ETF, or trading to a model portfolio.

And those, you know, when we talk about all the different complexities that go along with the product of scale, the optimization piece of it is really complicated and really mathematical, but it's probably not the most difficult part. That's all math that can be solved for. The most difficult part is thinking about how a user can easily go through an experience, not have to think about what they're doing, but know exactly where they want to get to and be able to guide them through it.

And so we spend the vast majority of our time just thinking through those advisor workflows, hearing the feedback that we're seeing or hearing from our advisors and, thinking about how do we take that feedback and how do we structure our interface, our user interface to make sure that it's intuitive. And technology helps us to be able to do that.

[00:16:22] Doug Heikkinen: Cost is often one of the barriers to bringing a more personalized portfolio construction to a broader range of clients. Orion has positioned TAP as a eliminating that separate direct indexing fee. How does that change the conversation for advisors who want to offer more customization but are also sensitive to pricing and scalability?

[00:16:42] Any Rosenberger: Yeah. And just to make sure that we're on the same page on this one. So when we think about traditional direct indexing, you often will pay a platform fee if you're using a different platform, but you're still going to pay a manager fee or strategist fee. What we've done with Tailored Allocation Portfolios is we've said, okay, well let's partner up with some of these strategists out there, and let's put it on top of their portfolios. And those portfolios are often ETF portfolios or mutual fund portfolios, or a combination of both, where the investments that they're allocating to have expense ratios associated with them. And so if you have a fund provider and they're, they've allocated to 10 different ETFs that are their ETFs, well, they're making money through the expense ratio of those ETFs.

There's no additional cost. There's no additional cash cost. What we've done with this solution is we've said, well, let's partner up with those advisors. Let's structure economics between us and that investment manager. And then there's no additional out-of-pocket cost. There's no cash cost. The economics are in that expense ratio of the ETF or the mutual fund, and then we're getting the economics from the provider. And what it's allowed us to do is take our solution and be a lot more competitive with other platforms that have similar models, first, but also what it's allowed us to do is expand the distribution in a way where, it's not so much that cost is the issue, but it's the appearance of cost.

Said differently, there are some platforms that really like to have a zero cost offering in the marketplace, and by having the economics that are within the expenses of the fund or the ETF, that allows you to have a different conversation with the end client.

[00:18:32] Doug Heikkinen: You've referred to TAP as kind of a sister solution to custom indexing. How should advisors think about the difference between traditional and custom indexing and TAP, and what types of clients or planning scenarios are best suited for one versus the other?

[00:18:47] Any Rosenberger: Yeah, great question. Well, let's just compare and contrast for one second.

So both solutions are customizable. Both solutions use the optimizer to come up with that customization and that allocation. The real difference lies in the fact that with traditional custom indexing, you're buying individual stocks, and with Tailored Allocation Portfolios, you're typically buying ETFs or mutual funds from a third party strategist.

So when I think about benefits and downsides to both of those, within custom indexing, because you're buying individual stocks, you have a lot more levers that you can pull when it comes to tax loss harvesting or tax transitioning or customization. Maybe you want to do certain industries or sectors that you want to overweight or underweight or factors or whatever it may be.

So you have a lot more levers because you're controlling the underlying stocks that allow you to build it from the bottom up. When you go to Tailored Allocation Portfolios, you're buying ETFs or mutual funds, and so you may not have as much flexibility when it comes to the client saying that they want to overweight energy.

It's hard to do that because you're buying maybe broad-based ETFs. So when I think about the client profile and why one would go to one side or go to the other side, with custom indexing, it tends to be much more high net worth, ultra high net worth, a high degree of customization because there's just something about their portfolio that can't get through a pre-packaged ETF or mutual fund.

When I think about Tailored Allocation Portfolios, it's much more mass affluent. It's the client who's got a hundred thousand dollars, $500,000, maybe even a million dollars. They want something that's simple, easy, but they know they also want to have something that is tailored for their specific circumstance. Their unique needs.

More often than not, what we find is that tends to be a tax need. So they're trying to take positions they already have, transition them to a new provider, and they don't want to rip the bandaid off and sell everything at once. So Tailored Allocation Portfolios can help them get to that strategy portfolio, but do it over a three year period or a five year period.

When you start getting into additional needs of customization, more often than not, you need to buy the individual stocks to be able to do it. So what we see more often than not with Tailored Allocation Portfolios, mass affluent, tax transition, tax overlay.

[00:21:04] Doug Heikkinen: Orion launched TAP with relationships with firms like First Trust, Janice Henderson and Russell Investments. What does that open up for advisors in terms of investment choice, and how do you see strategist partnerships strengthening the value of the platform over time?

[00:21:22] Any Rosenberger: Yeah. Well, let me answer that last point first, which is it's extremely important. Those relationships that we have with the three different providers you listed, incredibly important.

And what you're going to find is that offering, the list will grow. We don't want it to grow infinitely, but we do want to make sure that we have a broad list of high conviction strategist partners that we're partnered up with to be able to offer the solution. But what we like about this solution is it becomes open architecture.

And I didn't go down this path when you originally asked me the first question about the history of custom indexing, but one of the reasons why we've been successful, there have been several. But one of the reasons why we've been successful is that we've taken an approach where we're really agnostic or independent of the underlying investment philosophy.

Let me say that a little bit differently. We work with something like 2,400 different RIAs. And when you go to the RIA space, It's really interesting to see how many of them have their own investment philosophy or their own way of doing things. You could talk to 2,400 different RIAs, and they're going to have 2,400 different flavors of their investment philosophy.

And so if we were to take our portfolio or our investment philosophy and our investment methodology and say, here's what we do, you need to take what we do, and if you don't like it, then we'll move on, what you'll find is that, there's only going to be a small subset that align with how you think about the world.

And so we had to take an approach where we said, let's not come at it from a hard investment philosophy perspective. Let's not force our home cooking on the RIA. Let's think about how they do it, and then let's be able to customize the strategy for how they think about the world for how their investment philosophy is oriented.

And that helped us be able to have white label solutions where we're overlaying on their portfolios or we're overlaying on top of their model strategies or whatever it may be, aligning with their asset class methodology. And the underlying technology allows them to be able to do that very efficiently and very scalably.

Well, when I think about Tailored Allocation Portfolios, it's very similar in nature. Where you listed three different providers there, they have three different investment philosophies. They have three different ways of looking at the world. They have three different ways of how they classify security. They have three different ways of being able to position the portfolio strategically or tactically.

I candidly have no idea which one's right. And the advisors that you talk to will find that they have a high degree of conviction in Russell for one group and a high degree of conviction in First Trust for another group and Janice for a third group. And what we need to make sure that we're doing is having a robust selection so that, for an advisor that wants to work with one particular provider because they like their investment philosophy, that's available. Or if they have another advisor and they want to have a different investment philosophy, then they can work with a different provider.

And so we've come at it more from a platform perspective than from a perspective of here's, our investment philosophy and you need to align with what we do. And that just generally speaks to how Orion has structured our business model and the flexibility of the technology that we have.

[00:24:31] Doug Heikkinen: Last one for you, and let's look ahead. What's next for Tailored Allocation Portfolios? As Orion continues building on its custom indexing foundation, what enhancements, capabilities, or broader vision should advisors be most excited about?

[00:24:46] Any Rosenberger: Well, I answered that tactically, and then more strategically here. Tactically, it's having more providers on the platform. So when we think about Tailored Allocation Portfolios, we have four today, expand that lineup, make sure that we have good amount of diversity across the different providers that you can align with your investment philosophy or what the client's looking for.

When I think about that more strategically, this is where it gets really exciting with what we're doing at Orion and the technology. Our big project, something that we announced actually not too long ago at our National Ascent Conference is that we're working on UMH technology. The way you think about UMH is, unified managed household, you have a client, a high net worth client, let's call it, and they have a joint account and they have a Roth IRA and they have an individual traditional rollover IRA. How do you take that portfolio, that ideal portfolio, and how do you implement it across the different registrations where the client may have a tax budget in their taxable count, but then they also want to think about how do you put the right assets in the right registration from a location perspective. So you put the growth assets in the Roth IRA, you put the tax inefficient assets in the IRA, and you put the low tax impact assets in the taxable account. And that becomes a really complicated problem.

You've heard our industry talk for maybe decades now at this point about having a UMH offering. We're working on that very aggressively right now. We're super excited. We have all the building blocks in place for how to deploy that, and right now it's just putting it all together and getting an offering in the marketplace.

And so as we look towards the back half of 2026, you're going to hear us talk a lot more about, how do you leverage that optimization technology that I talked about earlier, along with the Orion technology stack that we've built over the past 20 years? Putting those together so you can have a truly UMH based solution that gives advisors the ability to customize at scale, across not just one strategy, but across the entire household of a client.

And it's something that's going to be a game changer for the industry and something that we're super, super excited about. And you're going to hear more as we continue to make progress on that one this year.

[00:26:57] Doug Heikkinen: Andy, thank you for making this interesting, relatable, and understandable for those advisors who may be interested in this solution.

[00:27:05] Any Rosenberger: Happy to do it. Thanks for having me.

[00:27:07] Doug Heikkinen: To learn more about tailored allocation portfolios and everything Orion has to offer you, please visit Orion.com. For our producer Tory Miller, I'm Doug Heikkinen. Thanks so much for listening.