20 Aug Portfolio rebalancing tools – features, benefits, and how to choose the one that’s right for you?
Imagine reclaiming up to 50 percent of the time you currently spend on portfolio rebalancing and associated, recurring tasks. If that’s got your attention, then this webinar is a must watch!
Djaffer Maloufi and Romain Faraut, both WealthTech experts at Croesus, recently shared their perspective on the evolution of and market need for robust portfolio rebalancing tools. Especially relevant in today’s industry, which has seen a double-digit increase in the popularity of discretionary portfolio management among Swiss investors, for example.
A summary of the webinar recently co-hosted with Stephen Wall, founder of The Wealth Mosaic, and additional thoughts on the topic, are below…
What does rebalancing mean?
Portfolio rebalancing is a cornerstone of effective investment management, ensuring that asset allocations remain aligned with an investor’s goals and risk tolerance. As technology continues to advance at a rapid pace, the future of portfolio rebalancing tools promises to bring significant innovations that will enhance the efficiency, accuracy, and accessibility of this critical process. Our recent webinar looked at emerging trends and technological advancements poised to shape the future of portfolio rebalancing tools, and outlined some key considerations to take into account when selecting one.
The importance of portfolio rebalancing
Portfolio rebalancing involves adjusting the weights of assets within a portfolio to maintain a desired asset allocation. This process is vital for several reasons:
- Risk management: Rebalancing ensures that the portfolio’s risk profile remains consistent with the investor’s risk tolerance.
- Performance optimisation: By selling overperforming assets and buying underperforming ones, investors can lock in gains and buy assets at lower prices.
- Discipline: Rebalancing imposes a systematic investment discipline, preventing emotional decision-making.
What opportunities does rebalancing offer today?
Traditionally, portfolio rebalancing has been a manual process, requiring significant time and expertise to analyse and adjust asset allocations. Financial advisers and investors would periodically review portfolios, compare current allocations with target allocations, and execute trades to bring the portfolio back into balance. This approach, while effective, is labour-intensive and of course prone to human error. While effective, traditional methods have limitations, such as being reactive rather than proactive and potentially incurring higher transaction costs.
With the advent of digital technology, automated rebalancing tools have emerged, streamlining the process and reducing the burden on investors and advisors. These tools leverage algorithms to monitor portfolio performance continuously and execute rebalancing actions when predefined thresholds are met. This automation has significantly improved the accuracy and timeliness of rebalancing, making it more accessible to a broader range of investors.
Solution tailored to European challenges
In Europe, the rebalancing process is nuanced by unique factors such as cross-border tax implications and currency fluctuations.
Modern portfolio rebalancing tools excel in managing dynamic investment models. They seamlessly adapt to Tactical Asset Allocation (TAA) adjustments, ensuring that portfolios reflect the latest investment committee decisions quickly and efficiently. The ideal rebalancing tool acts as a command centre. It allows you to visualise, review, and adjust both Strategic Asset Allocation (SAA) and Tactical Asset Allocation (TAA) directly after investment committee meetings.
For effective rebalancing, European professionals need a solution that includes two key features:
- Tax-Optimised Rebalancing: analyse individual holdings, tax residency, and optimisation goals to generate personalised rebalancing recommendations that minimize tax burdens while aligning with your client’s overall investment strategy.
- Sophisticated Currency Management: For clients with international exposure, this offers advanced currency management capabilities. By integrating strategic and tactical asset allocations with target currency exposures, it generates rebalancing and hedging orders that help mitigate currency risk and optimise returns.
So, how do you choose a rebalancing tool?
While one size doesn’t fit all, there are certain key features and attributes that should be borne in mind when you make the choice of what tool to deploy. Careful consideration should be given to the following:
- Ease of use: It goes without saying, but how easy is the tool you are considering deploying to use? Have you taken it for z test drive?! Does it really do everything it says on the wrapper? And does it – most importantly – reduce the manual burden many wealth managers ‘enjoy’ today, that is, the mass of spreadsheets that require manual intervention and as a result, consume significant amounts of adviser time to ‘manage’?
- Customisation: not that you necessarily want to do this, but in the eventuality you do want to ‘tweak’ things to meet the needs of different client segments, how quickly and easily can this be done?
- Scalability: the tool you are considering might be a prefect fir for your organisation today, but does it align with your growth plans?
- Ease of integration: again, not rocket science, but are you looking at something that won’t ‘talk’ to your existing infrastructure, in which case, you’ll have yet another application to run and maintain…
Other key considerations to take into account, specifically for a European market, would be – GDPR and MiFiD II compliance, cross border tax implications, and of course currency management.
Is it worth it?
There are many, many benefits to deploying a modern, ‘future proof’ portfolio rebalancing tool. The list below is not exhaustive, but should be compelling enough to get your attention!
- Time saved on rebalancing and other related, recurring tasks: 50 percent! That’s a lot of time freed up to spend on other, more value adding activities!
- Happier clients
- A reduction in errors
- Greater cross-team collaboration
- Order optimisation
- Ongoing compliance
What does the future hold?
Artificial intelligence (AI) and machine learning (ML) are set to revolutionise portfolio rebalancing tools. By analysing vast amounts of data, AI and ML can identify patterns and trends that human analysts might miss. These technologies can predict market movements, assess risk factors, and optimise asset allocations with unprecedented precision. AI-driven portfolio rebalancing will open the door to the hyper-personalization of portfolios so eagerly awaited by the industry and investors alike.
The future of portfolio rebalancing tools is bright. Looking ahead, continued innovation in AI, machine learning, and data analytics promises to further refine rebalancing strategies. As technology evolves, the investment industry will likely see more personalised, adaptive, and efficient rebalancing solutions, empowering investors to achieve their financial goals with greater precision and confidence.