The science and art of asset location
Simply put, "asset location" is the process of determining which asset classes go in which account. You've decided in your IPS how much to allocate towards small-cap emerging market stocks, short-term government bonds, and everything in between -- now how do you parcel out these asset classes between your Roth IRA, your 403(b), your brokerage account, your spouse's 401(k), and all of the other retirement accounts you've picked up over the years?
(Warning: this can get pretty complicated pretty quickly. If you're the type who easily falls into analysis paralysis, implement the "mirror" strategy to start with and come back when you've got cycles to spare.)
The straightforward approach is to "mirror" your portfolio across all accounts. You've got a 70/30 stock/bond split? Implement a 70/30 stock/bond split in each of your accounts. It won't be fully optimized, but it's a good enough place to start, and it's definitely the easiest strategy to implement and maintain.
Now, you may find that some of your accounts simply don't have access to some of the asset classes you'd like to implement. Maybe that 403(b) doesn't have any emerging markets funds, or this 401(k) doesn't have any real estate investment funds. In this case, the solution is to choose the available asset class that's most similar to the one you're looking for, as a proxy. For example, a broad international fund may have to substitute for emerging markets, or a mid-cap fund for real estate.
Avoid Asset Class Holes
When you're ready to optimize, the first change you may consider making is to undo the "hack" just mentioned. Your 403(b) doesn't have access to Real Estate Investment Trusts? Bring the real estate allocation of that account to zero and increase the other asset classes proportionally. Now increase the real estate allocation of your other accounts, such that across all of your accounts your total real estate allocation matches your goal.
Avoid Inefficient Asset Class Implementations
Similarly, you may find that when it comes to implementation of the asset classes, some accounts may have only poor choices, e.g. funds that are likely to underperform relative to their asset class, or funds that carry a high cash balance rather than being fully invested in the desired asset class, or funds that use leverage in a way that doesn't fit your IPS. Cost is a good predictor of performance (low cost predicts high performance), and you may find that your 401(k) has access to a good low-cost S&P500 index fund for investing in large-cap stocks, but its only bond fund is highly leveraged and very expensive, which may not fit well with your IPS.
(Side note: high-cost, inefficient funds are very common in 401(k)'s. The companies that provide 401(k)'s to employers generally charge employers a fee for doing so...but that fee can be offset if people purchase certain (high-cost) funds. Why? Because the purveyors of said high-cost funds share revenue with the plan providers -- basically, a commission. The employer is happy because they don't have to foot the bill for the plan (or pass it on to employees); the 401(k) provider doesn't care because they get paid either way; and the high-cost fund providers are happy because they get to be one of a very small list of funds approved for purchase by the employees.)
In this case, you can treat said asset class as another "hole" in that account: reduce its allocation to zero, and increase the allocation across other accounts accordingly.
Make Best Use Of Efficient Implementations
The flip side of avoiding inefficient implementations is to "double down" on efficient implementations, ones that match your IPS well. Perhaps your IRA has access to a particularly efficient emerging markets fund, or perhaps your 403(b) has access to a "stable value" fund that you believe would make an excellent implementation of your short-term bond allocation. In this case, consider overweighting that asset class in that account, and underweighting that class in your other accounts accordingly.
Then there are tax considerations. Your traditional 401(k) and IRA are tax-deferred until you withdraw from them; qualified withdrawals from your Roth accounts are completely tax-free; your standard, non-tax-advantaged brokerage accounts are taxed normally. Given this, it makes sense to allocate your funds in as tax-efficient a manner as possible.
For example, you may consider keeping highly tax-inefficient assets (like REIT's and bonds, which pay out most of their returns in the form of dividends) out of your brokerage accounts.
Also, you may consider keeping high-growth assets (like emerging market stocks) in your tax-advantaged accounts, particularly your Roth accounts. More growth means more taxes, so the more growth that is sheltered in tax-advantaged accounts, the better.
Of course, you might have seen the conflict here. Bonds are tax-inefficient...but low-growth. Stocks are tax-efficient, but high-growth. Also, some stocks are high-dividend and high-turnover, which makes them less tax-efficient than no-dividend, low-turnover stocks. Ultimately, determining the optimal asset location from a tax perspective will depend on projected pre-tax growth rates, a class's dividends (or lack thereof), its turnover, and other tax-efficiency factors, all combined.
(For more reading, there's an excellent paper in the January 2005 edition of the Journal of Financial Planning called “Asset Location: A Generic Framework for Maximizing After-Tax Wealth”, by Gobind Daryanani and Chris Cordaro.)
Putting It All Together
Of course, conflicts don't just exist from a tax-efficiency perspective -- what if you want to put emerging markets stocks in your Roth 401(k) from a tax-efficiency perspective, but it only offers a broad international fund? What if you decide that your brokerage fund is the most tax-efficient place to put your bond allocation, but it means you have to give up that excellent stable value fund that your 403(b) has?
At this point, you can imagine that things are getting pretty complicated. In order to put it all together, you'll likely need to create a scoring system, whereby each asset class is scored based on how well it fits a particular account, taking both tax-efficiency and other aspects into account. Then you would go through each account, placing the highest-scoring assets for that account until the account is full, and then moving on to the next account. (This is effectively what we do at Seaborn.)
Don't forget -- when the time comes to actually implement your asset location strategy, there will likely be a price in terms of transaction costs (in your non-employment-related accounts) and taxes (in your brokerage accounts). Do any experiments in your spreadsheets, and don't pull the proverbial trigger until you're absolutely sure you'll be satisfied with the outcome!