What is Investment Integration? (2024)

You probably know about asset allocation (the process of selecting what assets to own and in what percentage). And you may have heard of asset location (placing your least tax-efficient assets in tax-deferred accounts). But what the heck is asset (investment) integration?

Simply put, investment integration is the process of viewing all assets as a coordinated whole (as opposed to a traditional, segregated approach), utilizing each component for its highest and best use.

Due to industry constraints (especially within the wirehouses), coordinated management across all accounts is not typical—and may in fact be prohibited by your financial advisor’s firm. However, by managing your accounts separately, you are missing out on several key benefits.

In this post we will examine the advantages of investment integration, and show you how you can set up an integrated portfolio.

The Advantages of Integration

There are several advantages to integration; ranging from time saved to potential incremental returns. Let’s take a look.

1. Incremental Returns – Often times, restrictions in a company 401(k) plan do not allow a robust asset allocation (including global diversification and alternative assets). Integrating all assets solves this issue and may lead to incremental returns.
2. Lower Taxes – With asset location, you can reduce your tax bill by holding the investments with the highest expected tax impact in your tax-deferred accounts. If you are employed and have both a company-sponsored plan and outside assets, this benefit can only be achieved via investment integration.
3. Lower Investment Costs – Again, due to restrictions in a company sponsored plan or at a particular custodian, the lowest cost investment vehicles may not be available given your target allocation. By selecting the best available vehicle options in your retirement plan and integrating them with your other accounts, you can lower your underlying investment costs while staying in line with your unique risk tolerance.
4. Customized Risk Exposure – Managing accounts separately makes it difficult to align each allocation with your targeted risk exposure. Only by integrating all accounts can this be done efficiently and effectively.
5. Execution – Integration allows for timely execution across all assets, so that necessary adjustments are made and opportunities are not missed.
6. Monitoring and Adjustments – Monitoring all of your assets in the same system enables ongoing rebalancing and other necessary adjustments.

How to Integrate Assets

Interested in setting up an integrated portfolio? Follow these steps:

1. Utilize Technology – The first step is to have one system containing all necessary information about all your financial accounts (balances, holdings, transactions, etc.) This can be as simple as a spreadsheet (although this has proved to be very difficult, cumbersome and time consuming) or as sophisticated as a suite of technology designed for trading, monitoring and reporting.
2. Customize – After your accounts are in one consolidated system, it is necessary to customize the exposure. If any vehicle restrictions in a company plan exist, they must be worked around, and a decision regarding asset location must be made based on the mix of tax-deferred to taxable assets.
3. Monitor and Adjust – Once all your accounts are positioned correctly, your work is not done. It is important to constantly monitor your accounts to ensure they stay within your risk tolerance, and to take advantage of any opportunities that present themselves.

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