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4 min read

What is Rebalancing Automation?

The implications of automated rebalancing: Part 1.

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We want to talk about the implications of automated portfolio rebalancing technology for the wealth management industry. Not the implications of our solution in particular, but the broader picture of how this rapidly developing technology will affect your business.

What is automated rebalancing?

Let’s start with the basics. When we talk about an automated rebalancing solution, we mean a system that, well, automates rebalancing. Not an alerting system. Not a suggestion system. A proactive system that generates solutions in the form of actionable trades. This seems obvious, but it it’s worth emphasizing. The word “automation” is commonly used to describe pretty much any efficiency tool. Here, we’re using the term in its more literal sense.

That being said, “automation,” does not mean no humans are involved. Stuff happens, such as delayed processing of corporate actions creating inaccurate holding records, that will require human intervention. And most firms will want to take a second look at accounts where the system’s proposed trades trigger a review—for example, a $10 million account with proposed turnover that exceeds 20%. These accounts are “exceptions,” but not in the sense of being accounts that need to be rebalanced; these are simply the accounts with trades that merit a review.

Not just for simple accounts

At a basic level, automated rebalancing has been around for decades. Think of a strategy made up of five mutual funds rebalanced back to target weight on the first of every quarter.  

What’s new is the ability to automate highly customized, tax-managed accounts, including those with individual equities and legacy holdings. Not only can the rebalancing of these types of accounts be automated, we have reached the stage where machines can do it better than portfolio managers. Specifically, computers are better at tax and drift management, even for HNW accounts. Automated rebalancing is not just a mechanism to do things more efficiently. It is a mechanism for doing things better.

Next week: the implications of automated rebalancing on how your firm is organized.


Related: Part 2Part 3, Part 4Part 5 

President, Co-Founder