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Quick and Easy Portfolio Rebalancing

ASI continues to improve, does credible job of automatically rebalancing portfolios.

Joel P. Bruckenstein, 07/12/2007

Advisor Software, Inc. recently unveiled the latest version of ASI Portfolio Rebalancing Solution. The application performs three tasks: rebalance an existing account or a group of accounts to a model portfolio, rebalance an existing household to a model or target allocation, and create an investment proposal for a prospect. This latest release builds on the success of the original version by further automating time-intensive rebalancing processes, thereby boosting advisor efficiency. It also adds a number of important new features.

Never heard of ASI? That's not surprising; few advisors have. It's a good bet that you or an advisor you know has used one of ASI's products, however. If you've ever used the Allocation Proposal Tool on the financial professional's section of the Barclay's Global Investors iShares site, for example, you've used an ASI application. If you've every used the TD Ameritrade Institutional Rebalancing Tool, you've used an ASI product. The firm's applications are deployed by other institutions, too, including Fidelity Investments, PowerShares, ShareBuilder, and State Street Global Advisor, to name but a few.

ASI's management team is experienced and knowledgeable. Andrew Rudd, CEO and founder of ASI, is a former CEO of BARRA, Inc., a company he co-founded. Rudd is an expert in asset allocation, modern portfolio theory, risk management, and performance measurement. Neil Ringquist, president and COO, served as vice president of sales and marketing for Morningstar Associates, LLC, a registered investment advisor and wholly owned subsidiary of Morningstar, Inc. Before Morningstar, Ringquist was the executive vice president responsible for sales, marketing, and client service for mPower, a privately held San Francisco-based investment advisory firm that was acquired by Morningstar in July 2003.

Getting Going
Before you begin using the program, you need to set your preferences. I'm going to describe the setup process when using the "standard" application. Since this software is deployed on an institutional basis, your experience may vary based upon what institution is supplying the software. In addition, some preferences that I'm required to set in my version will most likely contain default settings supplied by the institution. In some cases, the advisor might have permission to change these settings...in others, the defaults may be locked down with no option to change them.

The first time I enter the program, my first stop is the main preference page. This page contains links to the four preference areas that must be addressed before the program can be used: target allocations, model portfolios, investment universe, and advanced settings.

First, I went to the target allocation area. Here is where the advisor sets up asset-allocation models that can then be applied to multiple clients. When I entered that target allocation area, I found that ASI had created four sample target allocations for me. It is highly likely that any institution offering the application to advisors would pre-populate their version with at least some optimized, ready to use target allocations suitable for various risk tolerances

I decided to create a new target allocation. ASI allows the user to create allocations based upon either capitalization/style targets or upon sectors. I chose the former. As you can see here, it is possible to quickly create target allocations using the broad asset classifications (equities, fixed income, cash, and, if desired "other").

The program also offers the flexibility to create more detailed allocation targets employing sub asset classes, if desired. Clicking the plus signs next to an asset class instructs the program to display the underlying sub menus. Here is a view with all the programmed allocation options displayed.

Once you have established your allocations, you can then apply those allocations to clients at the individual account level or at the household level. Assuming that the institution supplying the software has set up its own default models for various risk tolerances, you can chose to apply the institution's, or if you have permission, you can apply yours globally.

The institution offers a default enterprise target allocation for moderate risk portfolios. You can choose to use it, or you can apply one of your own moderate risk allocations instead. You also have the option here to create a new, one-time allocation on the fly.

The investment universe section allows the user to create a "pick list" of frequently recommended investments and map them to asset classes. For example, if you regularly recommend the PowerShares Dynamic Large Cap Value ETF PWV as your preferred large-cap value choice, you can list it here. If your firm builds most, or all of its portfolios from the same set of building blocks, be it a list of ETFs or a select list of mutual funds, this functionality is a real time saver. You enter the investment universe once, and then you select the investments from that universe in the future. You can even create multiple universes, so if you mange some accounts using solely a list of ETFs, and others with a combination of ETFs and actively managed mutual funds, you can create a separate universe to represent each.

The advanced settings section offers some major improvements over the previous version. For example, advisors can now create "security locks" at the individual account level. There are often times when an advisor may not want to include a security in a rebalancing plan. It might be because the security has a zero cost basis, or it might be because the client has specifically told the advisor not to sell this security. Whatever the case, the lock feature allows the advisor to "freeze" a position and rebalance around it. This is a welcome addition.

A second enhancement here is the minimum transaction amounts or the tolerance bands. Sometimes the cost of rebalancing small portfolio imbalances outweighs the potential benefits. This section allow you to partially address this issue by creating minimum dollar amounts for major investment product types (stocks, mutual funds, ETFs, money market, generic).

The application now lets advisors set global cash buffers. Buffers can be a dollar amount or a percentage of the portfolio. Cash buffers are very helpful in making sure that sufficient cash is on hand to pay for management fees, client's monthly income needs and the like. The function can also be used to insure that emergency funds are on hand, or for investment policy purposes.

Finally, the advanced settings section is where advisors can customize reports by selecting which report pages to omit from printed reports. While the application is billed as a rebalancing tool, it can also be used as a prospecting tool. Those who use the application primarily for prospecting will probably not want to include all of the possible report pages when dealing with prospects. This is the place to adjust the reports to suit your needs.

While the setup process sounds time consuming and complicated, it needn't be. If your institution has already created defaults that you are happy with, you can be up and running in a matter of minutes. Even if you need to tweak the setting, the process is quick and painless, provided that you know what values you want to enter into the system. PAGEBREAK

Working With the Application
Once setup is complete, working with the application is easy and intuitive. If you want to create a proposal for a client or prospect, you can either upload an existing portfolio or you can enter it manually. To manually create a portfolio, you can enter asset classes, or securities. If you want to enter securities but you do not know the symbols, you can use the system's search function.

To create a proposal for a prospect, you would most likely enter their current security holdings. In the example below, I entered a portfolio with equal amounts of four equity mutual funds: Pioneer A PIODX RiverSource Fundamental Value A AFVAX, Selected American Shares SLADX, and T Rowe Price Dividend Growth PRDGX. My fictional prospect thought that the four funds offered broad diversification. With a mouse click, I was able to create this view illustrating that the prospect was not as diversified as he thought. In fact, with roughly 60% of the portfolio in U.S. Large Cap Value, and almost 25% in U.S. Large Cap Growth, there wasn't much diversification at all. This was an immediate indication that I could add some value with diversification advice.

With a few additional mouse clicks I was able to get style analysis information, a Monte Carlo simulation on portfolio volatility, sector analysis, historical information and an overlap analysis.

Next, I decided to apply one of my fictional firm's all equity allocations to the prospect. Since the prospect is not yet a client, I might want to create the prospect's report using only suggested asset classes, but for my own internal use at this point I can create a report with actual investment recommendations.

If I'm using an existing model, my work is almost done. I can have to program auto solve to produce the proper allocations, and then I can review the new proposed portfolio and perform diagnostics on it if desired. These diagnostics include a view of the new proposed portfolio vs. the existing portfolio as well as a summary of the increases and decreases to the respective asset classes. Assuming that I am now satisfied, I can generate a proposal for my prospect.

If this is a new model, I'll also have to create my allocation bands. I create "bands" so future rebalancing will take place only if the target allocations moved outside the specified bands. I decided in this case to go with global bands of 20%, however, if I had chosen to, I could have set different bands for each individual investment.

Once you get the hang of it, creating proposals is simple.

Basic rebalancing is an even easier five-step process.

First, you select the accounts or the household that you want to rebalance. A list appears with all positions and their status (unlocked, locked or partially locked). Before you go any further, you may want to review the status of the positions and make changes if required. As was the case with proposal generation, you can also view portfolio diagnostics here. Next, you select the model that you want to rebalance to. This can be the existing model, or, if the client's circumstances have changed it can be a different model.

In step three, you can rebalance using the securities in the model. If necessary, you can add one or more additional securities before performing the rebalance. The quickest way to perform the rebalance is to use the automated tool, but you can perform manual tweaks if you prefer. When the initial rebalancing is done, you go to step four, where you can view portfolio diagnostics for the proposed portfolio, create a proposal from the proposed portfolio, or move to step five. Step five generates the proposed trade list for review. If it is okay, it can be saved or used to generate the actual trades. If after review, the advisor needs to make changes, this can be done manually before the list is saved as a Microsoft Excel CSV file or passed on for execution.

Bottom Line
As was the case when I reviewed the TD Ameritrade version of this tool for Virtual Office News a little over a year ago, I continue to be impressed by the applications appeal as a client prospecting tool. The ability to create quick meaningful reports that look good and are somewhat customizable is very appealing. The application's ability to create target asset allocations and investment models with a minimum of fuss is also appealing, as is the ability to perform some basic portfolio analytics with a minimum of fuss.

I ran into some minor annoyances while navigating the program. On a couple of occasions I tried using the browser's back button, and that inevitably led to problems. In at least one instance I had to re-key data that I lost because I failed to use the applications built in navigation keys.

When it comes to rebalancing, the application does a credible job, and it is a clear improvement over the previous version. The security locks are well thought out. The ability to set tolerance bands for rebalancing is a major improvement. To can set minimum dollar transaction amounts, which is good, but I'd like to see an option to set transition minimums as a percentage as well as a fixed dollar amount.

One feature that is clearly lacking is tax-aware rebalancing. As was the case with the initial version, you can create different models for taxable and non-taxable accounts. The ability to differentiate between models is useful, since advisors often create separate models for each type of account, but currently, all that the program really provides is labels; there is no difference between the way the application currently handles the respective accounts. ASI tells me that some sort of "tax aware" rebalancing functionality is under development and it will be available to those custodians who can feed tax lot information into the system. If the tax aware functionality works well, it would be greatly improve the value of this tool; however that is a discussion for a later date.

Currently, ASI's tool still requires some user interaction to complete the rebalancing process, and it is still a far cry from iRebal, the industry's gold standard, but it is a solid entry level rebalancing solution. While it has some limitations, the pricing is likely to be compelling (TD Ameritrade has been offering it at no charge to their EIA clients). If you are currently performing portfolio rebalancing manually, this tool will save you some time and possibly improve your results.

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