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Rowling & Associates Blog

Understanding Automated Rebalancing Software

by Josh Clavell

Over a decade ago, Rowling & Associates was tired of spending almost a week out of every month rebalancing client accounts. The time had come to invest in a cutting-edge, automated rebalancing tool to help facilitate the process.

Child playing on the park play structure balance beam

Our firm, not afraid to adopt new technologies, chose what was the most robust software available at the time, which was not only expensive, but also took a very long time to implement.

However, the results spoke for themselves and what was a tremendous initial investment of time, energy, and money proved worthwhile, allowing the firm to add quantifiable value to our clients’ portfolios all while managing them more efficiently. Although the technology proved to merit the upfront cost, the software just didn’t quite check all the boxes that we needed as wealth management practitioners who employed sophisticated tax management strategies.

You hopefully know the part of the story in which Sheryl Rowling designed and developed Total Rebalance Expert (TRX),

an automated rebalancing tool that was not only easier to set up and more intuitive than its predecessor, but was also more tax-efficient for clients and cost-effective for advisors. What people might not realize is that this endeavor came out of the practical need for a better tool, especially one that could be created and tested with real world applications to our own practice, not hypothetical scenarios in a vacuum. Rowling and Associates was instrumental in the development, testing, and fine tuning of the software, as the TRX programming, testing, and training teams worked closely with our firm to advance the software to the product that was eventually sold to Morningstar® in 2015. We consider ourselves the experts in our utilization of automated rebalancing because of this unique experience.

In the last decade, we have seen the utilization of automated rebalancing software go from exclusive to mainstream.

It started with firms like R&A, who wanted to be pioneers of a new technology. Now, if you’re not doing it you might have already been left behind. As the whole industry trends toward automation, the term “rebalancing” has become a buzzword to the point that most of our prospective clients have heard about the concept or inquire about it. Ultimately, we want you to know how it applies to you.

It keeps you on the path to financial wellbeing:

As part of our financial planning process, we take a close look at your current assets, debts, goals, savings strategies and get to know and understand your specific financial situation. We then fit an investment strategy that matches with your long-term financial goals and your personal ability to take on risk. Rebalancing software helps ensure that your personalized strategy is maintained so that you have the best chance to succeed. We use the software to check your portfolio every day to see if your investment strategy is compromised by being overweight in some areas or underweight in others. We can then quickly determine if any action is needed to restore your portfolio to your balanced strategy.

It facilitates managing assets at the household level:

Rebalancing software allows us to utilize “location optimization”, which is fancy term for the tactic of placing particular investment types into specific account types to obtain better tax results. This enables us to keep your investments from generating excess tax each year and also avoids high tax rates in the long run. The software also gives us the ability to manage ALL of your accounts, even those that are in employer 401(k) plans or annuities, allowing your investment strategy to be consistently applied to your entire portfolio. Managing at the household level can also minimize transaction fees and get you more tax savings when it comes time to making charitable contributions.

It reduces your taxes in even more ways:

Rebalancing software helps us systematically harvest tax losses, a technique which can lower your taxable income for not only this year, but future tax years as well. It does this without ever compromising your overall strategy, a sophisticated maneuver that can be prone to errors if done without the aid of software. It also allows us to sell out of a fund before a taxable event occurs, such as capital gain distribution – an event which could have significant tax consequences.

It makes us better at our jobs.

Automated rebalancing software ensures that we rebalance your portfolio when it’s needed, not when the calendar dictates, so your strategy is always at full throttle. It does hours of calculations in seconds, allowing us to better serve you in other ways. The software also facilitates our ability to change tactics when needed, meaning you are never stuck in an outdated strategy. Finally, we can even quantify your tax savings and document the service that we provide, ultimately making you know that we take your investment in us seriously.