Automated Portfolio Rebalancing Tool – Discover Automated Investment Management

Automated Portfolio Rebalancing Tool – Discover Automated Investment Management

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 portfolio rebalancing: the solution for strong management

An automated portfolio rebalancing tool is not merely a nice-to-have, but is 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.

The advantage of using an automated portfolio rebalancing tool

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

The tool significantly increases the efficiency of the portfolio management process for financial advisors. A good tool must be highly customizable and let the advisor choose if he wants to operate in fully automated, semi-automated or manual mode. Therefore, it allows the wealth managers to rebalance simultaneously many portfolios, multiple accounts, joint-accounts, relationships, sleeves or any kind of items, and even conduct tactical rebalancing that is focused on specific models, asset classes and that takes into account subclass level.

How to choose a portfolio rebalancing tool?

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 provide a financial advisor with key functionalities, including the following:

Investor 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.

Automated portfolio rebalancing as a tool to optimize taxes

Portfolio rebalancing using an automated rebalancing tool opens many tax optimization opportunities. Indeed, selling assets during a rebalance generates tax for the investor and could cause a big tax hit if not done properly. Here are a few investor strategies:

Rebalance using new contributions

Instead of selling an asset class and realizing a tax event, an investor can invest in the other asset classes with “new” money. This will still balance the portfolio without triggering a tax consequence. However, it is only available to investors with sufficient available cash. For those with available resources, it is the optimal strategy.

In fact, the advanced software takes into consideration the anticipated cashflows during the rebalancing process.

Leverage tax-advantaged accounts

Rebalancing assets in tax-deferred account allows investors to avoid large withdrawal taxes following the sale. Those tax-deferred accounts trade tax-free; once money is in, it is possible for an investor to sell any asset class.

Offset asset class gains with losses (tax loss harvesting)

A way of improving your required rate of return or decreasing taxes due on your income is tax loss harvesting. Gains from a traded stock-based financial asset can easily be eaten by taxes. However, that financial gain can be matched by the losses of those asset classes in order to avoid any tax consequences. A harvesting strategy involves selling an investment that has lost value and replacing it with a more favourable investment. You then use the capital losses to offset gains more quickly or decrease your tax burden.

The key is that the losses have to occur when the same tax period as the gains does. Without the proper management tools and training, this can be a risky strategy for an investor, and is best left to professionals and investment management firms. Another advantage is that this asset management process can improve your portfolio’s overall performance.

Learn more about portfolio rebalancing and helpful tools

What is portfolio rebalancing?

Portfolio rebalancing is the principle of assigning different weights to different stocks or sectors within a portfolio, in an attempt to maintain a target asset allocation. As well, if your investment strategy or tolerance for risk changes, rebalancing helps you to return to the original balance of stocks, or the initial mix of stocks or sectors.

What are the benefits of rebalancing a portfolio?

When creating an investment portfolio, it is common to separate it between low-risk and moderately high-risk investments. Holding a higher proportion of equity (higher-risk investments) in a portfolio has the potential of higher annual returns, but they make the portfolio riskier. Portfolios that include a high proportion of fixed-income securities (lower-risk investments) such as bonds are unlikely to offer high returns to an investor but, as opposed to stocks, offer more stability and predictability.

Maintain target asset allocation for stock, bonds and cash

Portfolio rebalancing is essential to maintain target asset mix allocations within a portfolio. Every investor has a different risk tolerance determined by factors such as age, expected future income, etc. By constantly reevaluating and rebalancing, an advisor maintains the target allocation of the portfolio, keeping the same level of risk for the holder while maximizing returns on their investment.

Reduce the long-term risk

Equity investments offer higher potential revenues than fixed-income investments, but with more upside potential comes more volatility. By maintaining a target asset allocation, an advisor can avoid increasing the risk level of a portfolio: thanks to higher returns, a stock’s price is expected to go up in value and represent more and more of a portfolio.

This leaves the portfolio at the mercy of market volatility, with potentially large losses should the market go down. Rebalancing back to the target allocation can control the portfolio risk level over the long-term.

What are different ways to rebalance a portfolio?

Rebalancing an investment portfolio can be done in a number of ways, but is made extremely efficient and fast by powerful automated portfolio rebalancing tools. Three common ways for doing this include:

Redirect most of your current money to the lagging asset classes until they return to the percentage of your original target allocation;

Add new investments to the lagging asset classes (stocks, bonds, treasury, fund, mutual funds), concentrating a larger percentage of your contributions on those classes to increase their proportion in asset mix;

Selling some assets that are outperforming the market in order to reinvest excess gains or profits back into underperforming assets. It doesn’t necessarily mean buying in a different asset class: high-performing equity could be sold to buy underperforming equity instead of bonds;

What are common rebalancing strategies to maximize investments?

Calendar portfolio rebalance

A popular method for individuals to rebalance their portfolio is at predetermined times throughout the year and make purchases or sales according to the current asset mix allocation. By making the right investment decisions, the portfolio can be rebalanced to reflect the investor’s risk tolerance.

Percentage of target allocation

Using the percentage of allocation strategy, all assets are assigned a tolerance level, such as 50% -/+ 10% of bonds. If that tolerance level is exceeded for any asset class, the portfolio will be rebalanced. It is important for those using automatic rebalancing to set appropriate thresholds to avoid significant costs in transaction fees.

Combined calendar and percentage of allocation

Combining calendar rebalancing and the percentage of allocation approach, this approach involves checking in on the portfolio’s balance on a regular schedule: specifying the rebalancing frequency and the tolerance levels. The rebalancing is only done if an asset class is outside the allocation tolerance range.


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