Why Automatic Rebalancing Matters


Portfolio rebalancing is an essential part of investment management. Over time, because of the randomness inherent in security returns, portfolios drift away from their desired asset allocation. When this happens, there are a few results: none of them good.

For instance, take an investor with a longer time horizon with a high risk tolerance.  Based on market changes, there could be moments where their portfolio changes in a way where it holds too many bonds and not enough stocks. In this situation, the performance of that portfolio will likely be lower than that required to support the investor’s goals and needs. On the other hand, the portfolio could end up holding too many stocks and not enough bonds. In this case, the investor is exposed to too much risk. If that person is near retirement, and the portfolio experiences a large drawdown, they may never be able to recover.

So, how do we reduce problematic portfolio changes for our clients – especially when managing a diverse group of clients or the day-to-day demands of running an advisory business? Automatic rebalancing takes us a huge step in that direction for our clients.

The three ways automated rebalancing matters

We obviously want to monitor portfolios closely and bring them back into line when necessary. As you can imagine, this is a task that takes a lot of computational bandwidth.

With current leaps in technology, automated rebalancing is now a task well-suited for a computer. This powerful, growing tool offers several benefits for investment advisors and their clients such as:

Streamlining back-office management – Automated rebalancing removes a time-consuming part of an investment advisor’s daily workflow, freeing them up to spend more time building relationships and focusing on their client’s financial lives.

Improving trading clarity – Strong algorithms can help solve many of the complicated trade-offs inherent in determining trades.

Promoting efficiency and equality – Clients should be treated fairly.  Not only is this an important ethical consideration it is also a regulatory requirement. Because automated rebalancing is efficient and fast, many portfolios can be simultaneously evaluated with trades aggregated into block orders. This ensures that everyone gets the same average price for the same security.

Building on these ideas, good investment management fundamentally requires discipline, and this is where automated rebalancing really shines. The daily fluctuations in the market can test even the most disciplined of investors. Automating the day-to-day management of portfolios makes it less likely that investors will make common mistakes, like selling their holdings after the market has gone down.

In the past, investment advisors used to rebalance portfolios quarterly or annually because of the amount of work involved. Now, however, it’s no extra effort for a computer to evaluate portfolios daily. This helps ensure that none of the scenarios described earlier come to bear and cause a portfolio to stray from the plan. Ultimately, looking at portfolios everyday doesn’t mean rebalancing will happen daily, but it will when it matters most.

Finding a portfolio rebalancing solution

After considering the advantages, there are several features to keep an eye on when looking for the automated rebalancing solutions to fit your needs.

  • Tax optimization and the ability to use client-specific tax rates
  • Household or group rebalancing
  • Strict adherence to Wash-Sale Rule.
  • Ability to handle restricted holdings

In addition, since investment advisors and their clients all have unique needs, the rebalancing technology must be highly configurable to satisfy a wide audience. With the leading firms in this space constantly exploring innovative approaches and introducing new functionalities, it’s best to continually evaluate the impacts of automatic rebalancing and how it’s helping investors improve outcomes for their clients.

Of course, RobustWealth offers these capabilities and more. If you’d like to learn more about how our automatic rebalancing technology can help your firm, please contact our Service team at service@robustwealth.com or sign-up for a demo.

Comments and statements are based solely upon the opinions of RobustWealth® and are subject to change.  There is no assurance that any predicted results will occur.

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