Saving Time and Money in Operations - Rebalancing

Friday, October 02, 2009 15:07
Saving Time and Money in Operations - Rebalancing


I recently completed a survey with an advisory office in California who were exploring automated rebalancing solutions. This can be an area overlooked if all of the labor and resources related to rebalancing accounts are not taken into consideration.
In the case of this office – with 123 clients and $211 million in assets under management – it was a clear decision once the analysis was completed.

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The team has three scenarios when rebalancing:
1)      Accounts with no individual bonds
2)      Accounts with individual bonds
3)      Accounts held on a TAMP (third-party asset management platform) with its own rebalancing engine
The task areas included:
·         Identify accounts for rebelancing via drift report review
·         Meetings both as a team and with individual clients to discuss options and ramifications
·         Updating of the manual template and linking to records for documentation
·         Principal review of accounts to be rebalanced to confirm trading activity
·         Create trade tickets for rebelancing
·         Principal review of trade tickets
·         Place trades
·         Principal review of posted trades
Based on these scenarios and processes – the team found that for each round of rebelancing en masse, they were using up 100-120 hours across five staff. This was done up to four times annually – resulting in a maximum of 480 hours spent on rebalancing. At the rate of growth forecasted for this practice – they saw this eventually tailing upward to nearly 600 hours over 5 years.
By looking at automated solutions in the marketplace – they found that not only could they automate much of the reporting and assembly, but also the most burdensome task – assembling trade tickets – would be nearly eliminated using a third party solution. Also – the major providers in this sector also integrated directly with the custodians they utilized.
In first year costs – buying an automated rebalancing solution will frequently break even – however – it is the ongoing reduction of hours spent on the rebelancing process (in this case a 75% reduction in time spent on the process) will reap ongoing savings.
The remaining 40 hours per rebalancing session are well spent on valid tasks – client and team meetings, principal review and documentation. The system handles the administrative and labor intensive tasks. This practice now has significant scale to grow without overwhelming administrative staff or having to hire additional team members for trading-related activities.


Comments (3)

Excellent summary of the internal hours that can be saved by adopting a smart rebalancing solution. Another advantage of rebalancing solutions is the reduced liability. Mistakes and keystroke errors occur when trades are manually keyed into a trade system. Unfortunately, the wrong kind of error can lead to a multi-thousand dollar trade error which the firm and/or its E&O carrier must repay to make the client whole. Consider that avoiding one $50,000 trading error covers the cost of even the most expensive rebalancing tool.
billwinterberg , October 03, 2009
Chris Winn
Great analysis Blaine! Throwing bodies at the challenge may have worked somewhat in an up market with less frequent rebalancing or tactical moves. However, as you stated, this does not scale. Aside from the operational aspects of manual rebalancing, I urge Advisors to consider the the high potential for error, lack of controls, and lack of documentation that is associated with manual rebalancing. When the regulators come in (tomorrow or several years from now), will your Excel sheet be "bullet-proof"? Will you be able to find it? Will the Operations person that customized this still be employed with you? Can you be certain that Excel - cell ZZ21432 really mapped to Mrs. Smith's account? When selecting a system, ensure that it at a minimum has the following features: 1. Encryption/access control. 2. Complete audit trail tracking every keystroke to a client account. 3. Retention of transactions and account changes. 4. SAS70 review of the system and internal controls at the provider. 5. Provider must also have a solid Business Continuity Plan. 6. Model management features to facilitate the rebalancing decisions. Ability to factor in numerous scenarios, including client restrictions, holding periods, contributions/withdrawals, etc. 7. Ability to analyze data at the lot, sleeve, account, group or household level. As many clients are requesting rebalancing at the household level, you need to make sure your technology is sophisticated to manage this. Otherwise you risk making unnecessary trades, potential tax issues like wash sales, and burning unnecessary resources. These features will also aid you Chief Compliance Officer with risk management, compliance review of client accounts and ongoing assessment of the effectiveness of the Advisor's compliance program.
AdvisorAssist , October 05, 2009
Blane, thanks for this article. We ( have been told a similar time commitment from our RIA clients regarding their time spent per account manually rebalancing. Of our ~300 client firms, we've heard an average 20 minutes per account spent when manually rebalancing. Granted, this is for a basic individual account. Time spent on more complex household accounts goes up from there. Conversely, when using our rebalancing software, our clients can abbreviate the calculations process down to just minutes for thousands of accounts. The main time spent after the automation of the rebalancing software is that of reviewing the recommended trades and approving them. The rebalancing software then outputs pre-formatted trade files that can be easily uploaded and executed. The time savings continues when it comes time for post-trade reconciliation, as out rebalancing system will auto reconcile the previous day's trade orders with the actual executed trades. One other mention on time savings, is that when using a rebalancing system that allows for bands to be applied to accounts that define an acceptable level of drift per account from its target allocation, the adviser can take an "always on" rebalancing approach. This means they are conducting daily monitoring for various trading triggers and then only trade/rebalance those accounts that meet their criteria. This real-time approach, as opposed to a calendar rebalancing approach, is only possible through automation and drives additional efficiencies at the firm. Thanks again Blane
Mathieu , October 06, 2009

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