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Make the Most of the Portfolio-Management Process

Smart portfolio rebalancing, asset allocation, and diversification amplify the value of advice

Morningstar Staff


Whether an investor is managing their own investments or seeking the advice of an advisor, there are three primary elements to an effective portfolio-management process—asset allocation, diversification, and portfolio rebalancing.

While many robo-advisors offer a combination of these, they take a simplified approach focused on individual accounts, not a holistic approach based on an entire portfolio or household. And more importantly, they lack the expert advice and personal attention a financial advisor can provide.

The benefits of professional financial advice in the portfolio-management process

As fiduciaries, advisors always put the client at the center of the portfolio-management process. They strive to meet the clients’ financial goals while improving their lifestyle through a combination of financial coaching, goals-based planning, sustainable investing, and tax awareness. They go beyond the numbers to help clients prioritize and pursue goals that meet their individual aspirations.

To offer this level of personal financial advice at scale, advisors turn to technology to reduce their administrative burden. This allows them to automate repetitive tasks, so they can focus on improving outcomes for clients.

Technology’s role in the portfolio-management process

Asset allocation and diversification are key considerations of portfolio management. Advisory firms use model portfolios to optimize their asset-allocation strategies across clients. These models are used to set allocation targets for client portfolios and preferred investment lists are indicated to diversify the holdings for each asset class in the model.

As client portfolios are funded and maintained, individual preferences often dictate an alternate holding within a category, creating additional work and increasing the potential for trading errors. In our recent tech survey, we found that advisors spend an average of 1.5 hours per client researching appropriate investments.

Once clients are assigned to a model portfolio (or custom allocations are set), technology can handle the implementation of the investment strategy and invest according to model allocations, location optimization parameters, tax sensitivities and client preferences. But that’s only the beginning. To maintain consistent asset allocation and diversification, periodic portfolio rebalancing is necessary.

How to manage portfolio rebalancing

Because portfolio rebalancing can be very time-consuming, advisors typically rebalance on a periodic cycle of one to four times per year. In our recent tech survey for advisors, we found that advisors spend an average of 1 hour rebalancing each client portfolio. Advisors may also rebalance when a client need arises, such as a significant cash withdrawal or contribution.

Ideally (if given unlimited time), each client household would be rebalanced as holdings drift away from the target allocation, or when a tax-harvesting opportunity arises in clients’ portfolios. Add to this the risks of trading errors, wash sales, and short-term capital gains, and it becomes difficult for advisors to manage the portfolio-rebalancing process effectively across all clients and multiple custodians on an ongoing basis.

For these advisors, a smart portfolio-rebalancing tool can effectively solve this challenge and perform ongoing monitoring with alerts when client portfolios need attention. In addition to global parameters, advisors can enter custom settings for each client, portfolio, and account as well as manage ad hoc trade exceptions. This level of personalization adds value to client portfolios over time and reduces the manual workload and potential for trade errors.

Throughout the entire portfolio-management process, advisors add value by personalizing their advice and building relationships focused on investor success.

See how advisors are using Morningstar Cloud Platforms to build and manage effective portfolios to help their clients pursue better outcomes. 

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