As many advisers know, portfolio rebalancing and optimization has many benefits for their clients. Investors’ portfolios can stay on track, reallocated due to changes in goals or risk tolerance, and even save money through tax efficient investment decisions.
Portfolio rebalancing is not a simple task; going portfolio by portfolio, investment by investment, can be very tedious. Many advisers, however, choose to do their rebalancing manually, foregoing automated rebalancing software. This approach incurs a cost that’s not often realized by advisers – time. So much time, in fact, that the time-cost of manually rebalancing can quickly exceed the cost of rebalancing software subscription.
Take a step back and think about your own practice – how much time are you, or a member of your staff, spending on trading and rebalancing client portfolios? If you’re doing it manually, or using a free tool provided by your custodian, it’s likely much higher than you think! Some simple math can give you a good idea how much time you’re dedicating to rebalancing manually.
Let’s say, for example, that a manual rebalance of a client account – particularly at the household level – takes about 20 minutes to calculate the trades you’ll have to make across all a family’s accounts. Let’s assume that you’re rebalancing each household twice a year. That’s 40 minutes per client a year. Not too bad, right?
However, multiply that across 200 client households, and you’re up to 133 hours a year spent rebalancing manually. If you bill hourly at $150, that adds up to nearly $20,000 a year! If we assume that rebalancing software costs around $7,500 annually, not using software to rebalance is actually costing you $12,500 year in this example. Once you factor in the lost opportunity cost as well, it really is a false economy thinking you are “saving money” by not utilizing rebalancing software in your practice.
Besides the time and money benefits, using rebalancing software can help your clients as well. With its built-in tax efficiency, you can help your clients minimize their tax bill on their investments, leading to real-world savings for your clients. In addition, manually rebalancing exposes you to potential human error – such as mistyped data entry, or accidentally selling a position your client instructed you not to sell – which opens up a whole compliance can of worms.
There’s clearly a great deal of downside to rebalancing manually. On the flip side, there’s so much to gain by investing in technology – both for advisers and their clients. I encourage advisers everywhere to take a hard look at their processes – are they efficient and effective? Are they working for you – or against you? There’s no time like the present to analyze how your time is best spent!