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Automated Rebalancing: Why Investors Care

This is part 5 of a series on the implications of automated portfolio rebalancing technology for the wealth management industry. You can read previous installments here: Part 1, Part 2, Part 3, Part 4


What about the investor? This is the fifth and final installment in a series looking at how automated rebalancing will change the wealth management industry. We’ve looked at how automated rebalancing will change your organization, change compliance and change how you rebalance. But what about your client? What about the investor? What do they get out of this and how will their experience change?

Ultimately, the investor will be the greatest beneficiary of automated rebalancing. The bottom line: investors will get more for less.


Automated rebalancing will give investors more in three different ways:

  1. Superior tax management: This one’s easy. Automated rebalancing systems are really good at tax management, and they reduce the cost of tax management and customization to zero. Automated rebalancing can do better than manual processes even for complex, ultra-high net worth (UHNW) accounts. That’s good for UHNW clients. Even better, because the tax management is automated, it's economically feasible to provide all clients, even small investors served by robo solutions, the same superior level of tax management as UHNW clients.
  2. More customization: We’ve spoken to firms with conventional rebalancing workflows that discourage customization (especially Environmental/Social/Governance (ESG) constraints and custom asset allocations) because it's too complex and expensive to implement. Automated rebalancing eliminates this barrier by reducing the cost of customization to zero. And because it’s operationally free, these customization options can be offered to more investors.    
  3. Improved access to the firm’s best thinking: Wealth management firms put a lot of energy into creating recommended strategies with a superior combination of return and risk characteristics. But the limitations of current rebalancing processes mean that most clients do not enjoy the benefits of the firm’s best thinking. I once asked a Chief Investment Officer of a large wealth management firm how long it takes for his tactical asset allocations to be reflected in all client accounts. His answer: “somewhere between two weeks and never” — a measure of the inefficiency of current rebalancing methods. Automated rebalancing fixes this. It implements any tactical change automatically, in a manner that reflects the individual tax management and customization settings of each account. It reduces “two weeks to never” to “one business day.” Investors get the benefit of the firm’s best thinking—always.

More speculatively, we’re seeing experimentation with firms interested in delivering customized target-date strategies and strategies tied to a client's particular set of goals — all implemented in a scalable manner using automated rebalancing.

For Less

Not surprisingly, automation lowers costs. In the long run, it seems reasonable to speculate that most or all of the cost savings will be passed on to clients (In the interim, it’s likely that early adopters of rebalancing automation will enjoy above-average earnings, both from their lower cost structure and their ability to deliver superior services. Conversely, we’d expect to see lower earnings for firms that are laggards in adopting the technology).  

Costs and taxes are the most controllable sources of investment returns, and automated rebalancing will lower both. We think 75 bps a year in combined savings is a conservative estimate. This sounds dry in the abstract, but for a long-term investor, it can be a game changer — over 30 years, an extra 75 bps on top of, say, a 6% return means an extra 135% total return.

Investors Care

We assume most investors aren't all that interested in the mechanics of portfolio management — especially arcane details like rebalancing processes. But investors do care about results: they care about taxes; they care about customization; they care about costs. And they care about getting your firm’s best thinking. Which means that (though they may not know it) investors actually do care about rebalancing automation. 


Related: Part 1Part 2Part 3Part 4


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


President, Co-Founder