It helps advisors meet their fiduciary obligation by treating all clients fairly. For example, the advisor can harvest tax losses for all clients in less than one day versus taking several days to process all clients-which can lead to some clients not getting the benefit of losses should the market turn during the extended manual process.
It simplifies compliance through a documented consistency and review process.
It allows advisors to add sophisticated tax saving strategies without increasing the workload.
Good rebalancing software should automatically avoid short-term gains, specifically identify high-cost trade lots to minimize gain recognition, avoid wash sales and integrate location optimization (across household rebalancing) as well as identify opportunities and calculate trades for tax-loss harvesting.
A good automated rebalancing solution should also offer capital gain distribution avoidance, which allows advisors to trade out high distributing funds for lower distributing funds without incurring offsetting gains.
A rebalancing program should also calculate the tax benefits from applied tax-saving strategies and produce client-friendly reports to document those benefits.
The disadvantages of using an automated solution for rebalancing include the following:
It will cost not only money, but impose costs in the start-up effort and in the learning curve.
A firm considering automated rebalancing has to be prepared to spend money. Obviously, the ultimate benefits must be expected to exceed costs. No matter how "simple" or "easy" software is, the start-up effort and learning curve are part of the deal.
A firm considering automated rebalancing has to be prepared to put in elbow grease and commitment. Here, it is imperative to consider complexity, estimated implementation time and functionality-in addition to cost-in relation to the firm's specific needs, budget and time availability.