When rebalancing client portfolios, financial advisors constantly ask themselves, “What is prompting me to rebalance?” Sometimes it’s because recent investment changes need to be implemented into the client’s portfolio. Other times, there is an immediate liquidity need. And then there is the time of the year – monthly or quarterly.

At Robertson Stephens, we characterize rebalancing in two ways: Frequency-based and Needs-based.

  • Frequency-based rebalancing is when financial advisors rebalance at some frequency; monthly, quarterly, semi-annually, etc.
  • Needs-based rebalancing is when financial advisors rebalance when an action needs to occur in a portfolio. Examples include investing a cash contribution or bringing the portfolio back in tolerance with asset allocation bands.

We believe there is an important distinction between the two rebalancing approaches, and embracing a need-based approach yields a better outcome for clients and advisors than simply following a frequency-based approach.

Why We Believe that Needs-Based Rebalancing is the Preferred Method

Needs-based rebalancing allows financial advisors to offer a more custom approach to portfolio management by defining the changes to a portfolio when something occurs with the client that impacts their account. A familiar example of a needs-based rebalance is when a portfolio trading system alerts the financial advisor that one or more asset class exposures have drifted out of tolerance. We believe that addressing the issue in real-time, rather than waiting for the periodic cycle, will provide better service and address the issue immediately.

Focusing only on the need also allows us to avoid trading in accounts that don’t need adjustments. Setting out to only act on purposeful rebalancing helps minimize unnecessary trading costs or capital gains. Here are some other examples of how portfolio management technology “flags” trigger the need for rebalancing activity and the benefit to the client:

Trigger: When the client makes a cash contribution that needs to be deployed.
Benefit: Putting the cash to work immediately rather than waiting for the next rebalancing cycle.

Trigger: When the client has an upcoming need for cash.
Benefit: Knowing about any upcoming distributions that could be funded with portfolio trading.

Trigger: There is an opportunity to take losses and execute a tax loss harvest
Benefit: Doing this year-round, rather than waiting until December, can be a better option.

While nuanced, we believe this approach helps evolve from the “trading, just to trade” mentality and gives the financial advisor the ability to act purposefully and communicate with the client why we are trading. Following this approach, paired with our innovative portfolio technology systems, helps ensure the firm’s trading execution can be optimized for clients to maintain their comprehensive wealth plan with minimal trading activity.

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