What more should a portfolio rebalancing software offer?

What more should a portfolio rebalancing software offer?

Portfolio rebalancing is a necessary and beneficial process that is best to be done regularly. That is why selecting the right automated or semi-automated portfolio rebalancing solution can not only offer better and faster rebalancing but also open up a world of possibilities.

Ed.: This article was published by CIOReview in his 2022 Canada Tech Edition. Click here to see the original page.

Even today, many rebalancing operations are performed manually, even though there is a vast choice of technological solutions. Some are basic, while others have tax optimization and compliance features. But the best in breed solutions are the ones that provide an array of built-in features and support a variety of portfolio management styles.

We asked the automated portfolio rebalancing solutions team at Croesus, the Canadian WealthTech leader, what features a next-generation solution should offer to enable optimal use:

“The keyword here is automation. To make life easy for portfolio managers, the rebalancing solution should suggest the next best actions to take or series of tasks to do”, summarizes Claude Laurendeau, Strategic Initiatives Architect at Croesus.

“The solution should be easy to configure so you can create a custom workflow assigned to a group of portfolios. The advisor should have the option to operate the tooling in automated, semi-automated or fully manual mode. In this way, advisory teams are walking into the office in the morning and already seeing proposed rebalancing orders prepared for them, viewing those proposed orders and then validating or modifying these transactions before submitting them to the market”, adds Michael Blicker, Product Manager at Croesus.

What is portfolio rebalancing?

It is no longer necessary to prove that it is better to rebalance a portfolio than to let it drift with the markets. Rebalancing ensures that portfolios stay aligned with mandates within the investor’s investment objectives, choice of assets and other requirements.

While the reasons and strategies for rebalancing are different from investors to investors, the timing and frequency are among the most important criteria, making it a core activity of many portfolio managers.

What is an automated portfolio rebalancing tool doing?

An automated portfolio rebalancing solution analyzes the investment holdings within the portfolio and suggests adjustments to the manager in order to comply with the mandate or investor policy statement. To be effective, a good rebalancing solution must provide several items and functionalities.

“The solution must be more customizable but without the long-time necessary to onboard, reconfigure or retool the solution for each firm,” says Blicker. It means that it should adjust to the portfolio’s asset class targets or manage drift on the fly.

It also needs to accommodate a wide range of client types and lets the portfolio manager choose the best way to manage them using multiple preset models that can be customized.

To save time, the solution must be flexible enough to rebalance multiple accounts, joint-accounts, relationships or sleeves in the same environment. “The operation needs to be less linear and more parallelized. It means that instead of clicking each account, rebalancing them and viewing the result, you should be able to customize and group items together,” says Annik Voyer, Product Leader at Croesus.

Once it’s done, the tool must allow advisors to see and evaluate the proposal before sending them to the market.

The solution should also automatically evaluate pre-trade and post-trade compliance breaches and offer suggested actions.

Finally, the solution should have a built-in tax optimization functionality and recommend proposed orders in the appropriate registered or non-registered accounts.

What are the features of cutting edge tools?

A good way to save time is by avoiding wasting it. That’s why having predefined recurring scenarios or task management capability embedded into a rebalancing system is a must-have, according to Blicker. Using it, the portfolio manager doesn’t have to puzzle about what to do and refer to the tasks from the day before.

“To be complete, the rebalancing process needs to take into account multiple models at multiple levels”, says Blicker. In other words, the line between a good rebalancing solution and an advanced one is this ability to follow a general model while respecting the condition associated with another model at the subclass level.

“Even if I want to put the model at the relationship level and have an independent model at the sleeves level, I should be able to customize it in the way I want to manage my client and my rebalancing optimizer should take those inputs into consideration,” insists Voyer.

Manually assessing the potential impact of a change in a model takes time and resources. It must first be evaluated and then tested before being applied to all affected portfolios. Once the new model is in place, you need to be able to assess the long-term impact of the change.

“You need to be able to see the theoretical impact of applying a new model or a change of an existing model applied to a group of portfolios, before you commit that change. With a “what if scenarios” functionality you can easily simulate these changes and see the potential impact on the portfolios, even before committing to those updates,” explains Blicker.

“Once you make the decision to adopt a change in a model, you should be able to apply it automatically to all items subject to that model. A powerful tool saves managers valuable time by not having to perform the same operation repeatedly to multiple accounts, relationships and sleeves,” adds Voyer.

A good rebalancing tool should also provide an overview of the evolution of the model. This allows the manager to track the effect of a change over time, including who made the change and when.

Because a good manager anticipates deposits and withdrawals from his investors when updating his strategies. A state-of-the-art tool allows these anticipated transactions to be included in the automated rebalancing process.

Some rebalancing tools are API-based, which, among other things, offers the ability to use a rebalancing tool as a complement to virtually any portfolio management system.


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