Of the many processes and/or procedures performed by financial advisory firms, investment rebalancing is arguably the most time-consuming and offers the greatest risk of inefficiency. One of the reasons this may be is that many firms choose to perform rebalancing manually, often using rudimentary tools such as self-created Excel spreadsheets.
Another reason could be the decision by some firms to customize results for each client's accounts, rather than use pre-selected standards that would presumably apply to all affected accounts. Whatever the reasons, taking excessive amounts of time to perform tasks that could have been automated offers too many opportunities for errors and/or inconsistencies in the rebalancing process.
Many firms choose to create their own rebalancing systems, using manually executed procedures for each client. With repetitive tasks that require substantial detailed input of data, such procedures expose the advisory firm to the risk of errors and inaccuracies in the trading process associated with rebalancing. Tax-loss harvesting is just one example of a rebalancing procedure that requires a high level of accuracy. It also requires a decision process on "who goes first" if performed manually.
Automated solutions typically enforce a strict procedure that would be defensible in an audit situation. And most automated solutions offer the opportunity for tax-loss harvesting throughout the year, not just at the end of the year.
Required minimum distributions (RMDs) are another example of inefficiency when performed manually by advisors. Most advisors set aside time near the end of the year to perform such calculations. Yet this may not be the best solution for the client, particularly in cases where the need for distributions must be considered against the inevitable tax consequences.
The advantages of using an automated solution for rebalancing include the following:
It streamlines the trading process by automatically applying the advisor's strategy quickly and efficiently.
Automated rebalancing can produce trades that rebalance at the household level, calculate trades needed for cash management and propose tax-loss-harvesting trades all at the touch of a button.
It gives the advisor the opportunity to rebalance according to specific triggers, rather than quarterly or semiannually. With specific triggers, rebalancing could be based instead on specific "out of balance" requirements such as a percentage applied to asset classes, etc.
It enforces consistency in applying the advisor's strategy across clients.
It virtually eliminates trade errors-reducing costs and business risk associated with trade errors.