It is often difficult for advisors to accept or believe that they need automated rebalancing-or that it can even work! And, it's hard to want to spend time and money to fix something that isn't broken.
It forces consistency and discipline.
This might sound like a good thing in theory, but in reality, it's tough. Advisors are famous for individualizing strategies, allowing exceptions, changing directions and/or wanting the flexibility of applying personal judgment at any given moment. A disciplined structure requires forethought, some realignment of what's currently being done and a commitment to stick with it.
Consistency and discipline must be accepted and embraced by the whole team-including all the advisors in the group. This can be problematic both for decision-making and internal relationships.
It raises the firm's standards-both internally and externally.
Once automated rebalancing is in place, the advisor will be inclined to hold his or her firm to higher standards. With automation in place, it is common for the advisor to look at clients' accounts more often. After all, if you're able to keep portfolios more consistently rebalanced, why not look more often? If there is a market dip, since it is possible to harvest losses for all clients, why not?
Once the clients become aware of the value of tax-loss harvesting, location optimization, etc., they become more informed consumers. They will actually pay attention to tax efficiencies and expect their advisor to stay on top of opportunities. This requires a real commitment on the part of the advisor, yet it is also a huge differentiator when showing current and potential clients the value of professional portfolio management.
Why Do It?
According to Sheryl Rowling, CEO of Total Rebalance Expert (www.trxpert.com), "It is critical in terms of profitability and growth to have a formal rebalancing program. It is very difficult to do portfolio rebalancing using spreadsheets or paper. If your firm needs consistency and [needs] to eliminate trading errors, then rebalancing is a must. Tax-loss harvesting is difficult to do by hand if you have to choose which clients go first, etc."
While there are many rebalancing programs from which to choose (Tamarac, i-Rebal, and the aforementioned Total Rebalance Expert, to name a few), it should be taken into account which solution best matches up with the way the advisor's firm handles rebalancing and the degree of sophistication to be employed in the process. With any decision that involves substantial costs, installation, customization and employee training, weighing the costs against the benefits is always a good idea. However, in most cases, the increased efficiency and lower ongoing operational costs will far outweigh the initial costs and possible aggravation of setting up automated rebalancing.
David L. Lawrence, RFC, ChFE, AIF, is a practice efficiency consultant and is president of EfficientPractice.com, a practice consulting firm based in San Diego, Calif. (www.efficientpractice.com). The Efficient Practice offers an advisor network and a monthly newsletter.