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11 min read

Should You Keep Your Rebalancing Automation a Secret?

 It depends on what you're trying to accomplish. 

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What, if anything, do you tell your clients about your rebalancing automation tools? Advertise it? Hide it? Something in between?

Opinions differ. We know firms that explicitly incorporate their use of rebalancing automation directly into their marketing— they want their clients to appreciate that the firm is using the best tools available. We also know firms that go out of their way to disguise their level of automation — their goal is to provide the impression of bespoke, highly manual operations. Why the difference? And which makes most sense for your firm?

Whether or not a firm is  open about their automation is largely determined by their motivation for automating in the first place. At heart, are they trying to scale something that’s already working well, or are they trying to change the game? Let’s call these two basic motivations “Don’t mess with success” and “I can use technology to do better.”  Let’s examine each in turn.


“Don’t Mess with Success”

The “don’t mess with success” firm has a problem precisely because they have grown so much so fast. They’d be happy to just keep doing what they did before, but they’re running into scaling problems. So they embrace technology, not so much to make things better, but to keep them the same. They want to keep doing what they were doing before, albeit more efficiently.

And what does “the same” look like? It looks like rebalancing where the advisor was personally responsible for every trade. And that’s the impression the advisor and the firm want to keep.  This affects how they use automation. They’ll turn on lot rounding (because a human would never buy, say, 337 shares of IBM, but a computer would). They’re less likely to embrace optimization, preferring simpler rules-based approaches that generate a series of trades, each directly tied to a motivating event such as a model change — an approach that more closely approximates the workflow of a human trading an account manually.

The primary goal is to free up the advisor to spend more time with clients. Secondary goals are cutting down on errors, increasing consistency, improving customization and improving tax management. Automation doesn’t fundamentally change the business (which, for the “don’t mess with success” crowd, is the whole point). It doesn’t open up new markets. Automation is just a step. Not a leap.  


“I Can Use Technology to Do Better”

The “I can use technology to do better” firm is looking to create something new, to change the game in some way. They may aim to go upmarket (with better service) or downmarket (with more efficient service). They may aim to create new price points or reinvent and improve their client experience.  

These firms have no reason to hide their use of automation. Their value proposition is elsewhere: in financial planning, and in the sophistication of their tax management and customization.  

Robo-advisors are an obvious (if small) example of firms using automation to create something new. Their openness about their use of automation is partly a matter of necessity — what realistic alternative do they have?

But robos are a special case. The firms we work with that are open about their use of rebalancing automation are very much advisor centric. They’re just not portfolio management centric. The focus is on financial planning and holistically managing a client's wealth.  Customization and tax management are critical, but talking about individual trades is not. They’re happy to share that they employ sophisticated technology to serve the client better.

With rebalancing automation, they can review every portfolio daily. They can look across hundreds of tax lots and make complex trade-off decisions among multiple competing considerations. Their clients gain in terms of higher levels customization, greater risk control and higher after-tax returns — all of which contribute to helping their clients achieve their goals. Higher efficiency also translates directly into freeing advisors to spend more time with clients. Objectively, it’s better for clients. But it also means changing the client experience.  Client meetings are different. Client conversations are different. There’s less talk about trades and more talk about value and meeting goals. It’s no coincidence that firms that embrace rebalancing automation also tend to embrace goals-oriented approaches. This innovation is driven, in part, by the belief that they have no choice, that going forward they won’t’ be able to charge for anything that a robo can do just as well, like rebalancing.


Which Approach is Right for You?

Doing something new sounds a lot more interesting than keeping things the same. But does it make good business sense? I recently spoke at length with the President of a regional broker/dealer. He latched onto the power of rebalancing automation to change wealth management, and started down a list of projects he’d like work on. But the projects didn’t include fundamentally changing his current business, which was growing and profitable. Every aspect of what it did —from marketing, to recruiting, to technology — was built around the “old school” approach. He shared that he thought it was probably an obsolete business model, but that didn’t mean it made business sense to change it drastically, at least not all at once. He considered creating a centralized rebalancing group as a free service bureau for his broker, or creating a new unit. But no strongly worded memos requiring everyone to change.

Personally, I think he was right. It’s notable that among our clients, firms that embrace automation openly are growing faster. It might seem that this is an argument in favor of everyone embracing rebalancing automation, but (as much as this might be good for our business) we don’t think it’s true. It’s all well and good to talk about embracing disruption, but it’s never easy and sometimes unwise. If an organization does something well, or if it isn’t broken, then, romantic notions of daring innovation aside, it doesn’t necessarily makes sense to change it.  


Whether you should be open about your use of rebalancing automation depends on why you adopted automation in the first place:  is your goal to keep doing what you’ve always done, just more efficiently? Or are you looking to leverage technology to its maximum extent, with the potential to fundamentally change your business? If the former, there’s no value in talking about automation. More to the point, beyond a minimal level, automation will actually get in the way, precisely because it it will start changing the client experience whether you talk about it or not. On the other hand, if you’re looking to leverage automation, there’s no particular reason not to talk about it — it will not interfere with the underlying value proposition. In the end, the key decision isn’t what you talk about, it’s what you want to do.


For more on this topic, check out What is Rebalancing Automation?


President, Co-Founder