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6 min read

How Many Investors Does it Take to Rebalance a Portfolio?

 None. It should take none.

 Joint Authority Picture cropped-1.jpg

When I think of investors working with advisors to select trades, I’m reminded of a (possibly apocryphal) rate card I once saw for an auto mechanic that read “Rates: $75/hour. $100/hour if you help.” Reviewing trades with clients before they’re executed is a time-honored practice in wealth management. When this arrangement is formalized, it’s called “joint authority.” More often, it’s not formally required, but advisors review prospective trades with clients "as a courtesy." In either case, we're seeing more heads of wealth management conclude that it’s a bad idea, and it’s time to stop. Whether formal or informal, joint authority accounts are time-consuming (and therefore expensive), error-prone and serve clients poorly. Compounding the problem, investors often think that advisors should charge less for joint authority accounts. This is backwards  joint authority takes more time and carries more risk.

Don’t get me wrong. Advisors should talk with their clients. Just not about trading. Advisors should explain risk and trade-offs, set realistic expectations and understand a client’s hopes and fears. All of this takes time, and it’s worth it. But investors are not helping themselves by getting involved in stock selection and rebalancing. It’s worse than just a waste of time. It focuses client attention on the wrong things  away from long-term planning and investing and toward short-term returns.

I think there's a useful analogy with doctor/patient interactions. You want your doctor to speak with you to explain options, probable outcomes and risks. But it would be a bad idea (and probably malpractice) for a doctor to let you act as the “co-surgeon” during an operation, consulting with you on each step.

The solution to joint authority? Increasingly, we're seeing firms decide to just not do it. They are insisting on sole discretion and firing clients who don't go along. Many firms are skeptical, claiming, “Some of our largest accounts are joint authority. If we insist on discretion, they’ll leave.” The counterargument is that joint authority is not in a client’s best interest. An advisor’s job is to do things for their clients that the clients can’t do for themselves, and it’s OK for advisors to say this explicitly. Most clients will understand and respect their advisor for taking a principled stand.

And, yes, we have data, if only anecdotal. One firm we know sent an “In order to serve you better, we ask that you…” letter to all their joint authority clients requiring them to convert their accounts to sole discretion. They had a 98% success rate. Two other firms had 100% success. The challenges are real and some firms will make exceptions, but it turns out that the reality of converting is just not as scary as most firms believe it is.   

Arguably, joint authority accounts never really made sense. Today, it makes less sense than ever. With the rise of robos and automated rebalancing technology, advisors shouldn't be spending their time rebalancing portfolios. How can it possibly make sense for investors to do it?

So, as an advisor, talk to your clients. Talk about trade-offs and risk. Talk about happiness. Just don’t talk about trades. It’s time to say goodbye to joint authority accounts.


For more on this topic, check out Automated Rebalancing & Specialization.


President, Co-Founder