Beginning with asset allo­ca­tions accepted by many invest­ment and aca­d­e­mic lumi­nar­ies, and best-in-class, low-cost index funds, we man­age our clients’ port­fo­lios using the 3 factor Engine™  in order to opti­mize tax sav­ings, seek­ing higher returns with min­i­mal increased risk. Start­ing with the bedrock con­cepts of mod­ern invest­ing- diver­si­fi­ca­tion and index­ing- we con­struct per­son­al­ized asset allo­ca­tions based on a client’s finan­cial goals and risk tol­er­ance.

We then seek to improve after-tax returns through our “3 factor” approach–  by imple­ment­ing advanced re-bal­anc­ing and advanced tax-engineering tech­niques, all executed at extremely low cost.

Based on thou­sands of hours of research, the “3 factor” approach adds sig­nif­i­cant long-term value with min­i­mal risk, based on his­tor­i­cal mar­ket data.  When we compare after-tax per­for­mance of a typical index advi­sor to 3 factor on a $2 million invest­ment from 02/1997 to 02/2012 by running thousands of Monte Carlo simulations; we see an average improvement of over $800,000 over the 15 year period1. Please click here for impor­tant dis­clo­sures about our analy­sis and methodologies.

What is 3 factor Indexing

Systematic Re-Bal­anc­ing

Systematic Re-Bal­anc­ing is a term that 3 factor uses to describe the three sep­a­rate port­fo­lio tech­niques we employ, each based on leading aca­d­e­mic and indus­try research.

Whole Port­fo­lio Re-Bal­anc­ing: The 3 factor Engine™ evaluates a client’s total port­fo­lio looking at re-balancing opportunities across all accounts, as opposed to look­ing at each account and re-bal­anc­ing accounts indi­vid­u­ally.  This tech­nique can often min­i­mize trad­ing costs and defer or min­i­mize tax con­se­quences of re-bal­anc­ing.  The 3 factor Engine™ also distinguishes among multiple tax lots for the same position to identify which lots, and from which accounts should be sold to max­i­mize tax benefits

Oppor­tunis­tic Re-Bal­anc­ing: Disciplined investors agree that client portfolios must be adjusted over time in order to maintain the appropriate asset allocation based on an individual clients goal, time horizon and risk profile.  Many Advisors re-balance portfolios on a quarterly or annual basis.   However, recent, cutting-edge academic research on portfolio re-balancing recommends establishing bands around major asset allocation positions and opportunistically re-balancing when positions deviate beyond the asset allocation bands.   The 3 factor Engine™ allows us to continuously review client portfolios and act on small deviations from the target asset allo­ca­tions– rather than waiting til quarter-end or year-end– which our research shows pro­vides enhanced return opportunities.

Opti­mal Asset Loca­tion: In managing client accounts, assets are ini­tially allo­cated across tax­able and non-taxable accounts according to the tax sen­si­tiv­ity of each asset.  For exam­ple high yield­ing assets are likely to be allo­cated to a non-taxable account, where appro­pri­ate to avoid any taxes from interest income.

Client asset in-flows and re-invested interest and dividends also provide opportunities to fine-tune portfolio asset allocations and asset locations.

Please click here to read a more detailed expla­na­tion of these techniques.

Advanced Tax Engineering

Advanced tax engi­neer­ing is the term that 3 factor uses for a num­ber of tax defer­ral and min­i­miza­tion tech­niques, each based on research, which has shown adds after-tax value for clients who have a sig­nif­i­cant por­tion of their assets in tax­able accounts. Among the tech­niques are Tax-Lot Account­ing, Tax-Loss Harvesting and Tax-Optimized Whole Port­fo­lio Re-Balancing:

Tax-Lot Account­ing: By keeping track of the pur­chase and sale price and date, cost basis, and trans­ac­tion size for each secu­rity in your port­fo­lio,; the 3 factor Engine™ allows for extremely efficient management of capital gains and losses.  In addition, the 3 factor Engine™ also keeps track of all newly-established positions– generated by client inflows or by accu­mu­lat­ing div­i­dends– as new lots are pur­chased – each at dif­fer­ent cost basis.  Com­pared to the more com­mon account­ing meth­ods such as lot aver­ag­ing, tax-lot account­ing does a bet­ter job of min­i­miz­ing the net present value of your cur­rent taxes by defer­ring the real­iza­tion of cap­i­tal gains and rec­og­niz­ing losses sooner.

Tax-loss Har­vest­ing: The 3 factor Engine™ also enables the on-going management of client accounts to optimize tax-loss harvesting.  This strategy involves sell­ing assets that have declined in value in order to min­i­mize cur­rent capital gains taxes or to “carry for­ward” a tax loss.  It is impor­tant to under­stand that under this approach a similar but not identical index fund is pur­chased at the time of the sale to ensure an investor’s mar­ket expo­sure is maintained.  Our software allows us to sys­tem­at­i­cally uti­lize this approach, as our own analy­sis and back-testing has validated the aca­d­e­mic find­ings on the value of Tax Loss Harvesting.

Tax-optimized Whole Port­fo­lio Re-Bal­anc­ing:  By analyzing the clients’ entire portfolio– rather than managing account separately- we can often find opportunities to min­i­mize or at least defer taxes that would otherwise be incurred by re-balancing positions in a single taxable account.

Please click here to read a more detailed expla­na­tion of these techniques.

Low Fees

3 factor focuses on cost-savings for our clients at two levels.

First, we are constantly reviewing index fund choices to provide our clients with the highest-quality, lowest-cost index fund investment positions.  By carefully constructing personalized asset allocations, we are often able to save our clients 10-30 bps annually (or potentially much more for clients currently using higher-cost separate accounts or actively-managed mutual funds).

Second, 3 factor’s fees for our investment advisory services are among the lowest in the industry.  We are able to offer the highest quality investment management services at such a low cost because of our proprietary software (the 3 factor Engine™ and our streamlined operations).

Thanks to our soft­ware and stream­lined invest­ment oper­a­tions, we are able to offer the high­est qual­ity invest­ment man­age­ment ser­vices at a very low cost.

Better Returns Through Research

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(1) Analy­sis com­par­ing after tax per­for­mance of other advi­sors (or a self-managed, sophis­ti­cated investor) to 3 factor Indexing based on a glob­ally diver­si­fied port­fo­lio with a 60% equity, 40% fixed income allo­ca­tion. Ini­tial port­fo­lio val­ues assume the fol­low­ing: (a) $750K tax­able and $250k IRA with yearly addi­tions of $20k to tax­able account and $5k to IRA.  (b)Taxes deducted via shares each April, assum­ing the high­est tax bracket for a Cal­i­for­nia investor. 

Past per­for­mance is not a pre­dic­tor of future performance.

3 factor has con­ducted exten­sive analy­sis con­cern­ing port­fo­lio per­for­mance. See “impor­tant dis­clo­sure” for details and dis­claimers regard­ing our state­ments con­cern­ing per­for­mance, and the var­i­ous assump­tions we have made in our analy­sis.

3 factor Indexing has con­ducted exten­sive analy­sis con­cern­ing port­fo­lio per­for­mance. See “impor­tant dis­clo­sure” for details and dis­claimers regard­ing our state­ments con­cern­ing per­for­mance, and the var­i­ous assump­tions we have made in our analy­sis.