Saving Time and Money in Operations - Rebalancing Hot

Blane, thanks for this article. We (www.tamaracinc.com) 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

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.

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.