Automated portfolio rebalancing tool: Checklist

Automated portfolio rebalancing tool: Checklist

Balancing multiple portfolios at scale without the proper tools can be challenging even on a good day. In the current environment of interest rate fluctuations, a tense geopolitical situation, and changing customer expectations, it can become a nightmare. So how does a firm choose the right tool?

Automated rebalancing solutions are not merely a nice-to-have, but are very much a need-to-have. Indeed, they ensure that portfolio exposures remain squarely within the investor’s choice of asset and risk exposure, thus protecting clients from undesirable risks and staying aligned with mandates.

What does it do?

Portfolio rebalancing is a day-to-day operation for portfolio managers. An automated portfolio rebalancing tool analyzes the investment holdings within the portfolio and suggests adjustments to the manager in order to comply with the investor’s investment objectives.

When it comes to selecting your automated rebalancing solution, choices abound. Some applications come with an impressive array of standard built-in features such as cash management, tax loss harvesting, and asset allocation. The latest and most sophisticated automated rebalancing solutions are user-friendly, intuitive, and highly customizable, and are designed to meet the unique needs of a broad and diverse client base.

An effective automated rebalancing solution should also provide certain key functionalities, including the following:

Account aggregation

Portfolio management platforms of the past did not have the flexibility to accommodate different types of investment instruments in portfolio rebalancing, so clients could only be managed on a per-portfolio basis.

Fortunately, innovative rebalancing tools can accommodate a wide range of client types and let you choose how to manage each portfolio individually based on an unlimited number of models at the UMA, UMH, and SMA levels. Effective WealthTech solutions also afford you the ability to segregate for externally managed accounts or sleeves.

A crucial feature to look for in automated rebalancing tools is the ability to group different account types (for example, cash accounts and RRSPs) and manage them as a whole based on a single governing model portfolio, which can dramatically maximize gains and minimize tax losses across all accounts. In addition, the rebalancing tool should distinguish between different asset classes or subclasses to prioritize certain trades over others within an account type and reduce tax exposure.

Scenario analysis

An effective automated rebalancing solution should offer scenario analysis that allows investors to visualize how market events may impact their specific portfolio objectives, or model anticipated cash flows into or out of accounts.

This helps wealth managers minimize the risks associated with non-compliance, based on predetermined rules, thus ensuring that portfolios remain aligned with the client’s investment goals.

A scenario analysis functionality should be configurable on a client-by-client basis and deliver information that enables wealth professionals to streamline their ability to monitor, analyze, and adapt to global market volatility and incidents that can threaten portfolios.

Ultimately, an automated rebalancing solution should provide scalable and actionable risk insights that allow you to optimize portfolios while reducing or mitigating all associated risks.

Tax optimization

A built-in tax optimization functionality that considers the potential tax implications of rebalancing is essential to minimizing the impact of your rebalancing strategy on after-tax returns. Indeed, no rebalancing solution is truly effective without considering the impact of realizing capital gains on taxes.

To minimize the tax consequences within an investment portfolio, the tax attributes of each account type and security must be considered – which can be extremely time-consuming if you are not using automated WealthTech software.

Tax optimization allows wealth managers to make informed decisions that lead to the best outcome regarding their clients’ current and future tax liability.

Choosing the right portfolio rebalancing solution will not only allow you to execute key investment decisions across hundreds of client portfolios efficiently and effectively, but it will also save you considerable time and effort. The right portfolio rebalancing solution is key to succeeding in the wealth management industry.

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