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Navigating the New Era of Portfolio Management: The Rise of Advanced Rebalancing and Trading

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New Era of Portfolio Management

Investors have more options today with whom to invest their money compared to just a few years ago. Competition for business has increased, and advisors are using technology that will define a new era of effective portfolio management and scalability and enable them to compete and scale in a meaningful way.

The advent of sophisticated rebalancing and trading software offers a paradigm shift in how portfolio managers do business. Effective portfolio management and scalability now hinge on technology. With certain technologies, advisors can leverage new rebalancing methods offered with advanced software to navigate market complexities at greater speeds, with a nuanced perspective, and to edge out the competition.

Sleeve and Node Rebalancing

One of the key drivers in the growth of rebalancing and trading software has been its ability to provide precision-based solutions. Adopting multi-tier models allows for the construction of top-down approaches within numerous strategies. This step simplifies the management of complex portfolios, streamlines the rebalancing process, and reduces the overall complexity of working within portfolio models.

Innovative concepts such as “sleeves” have emerged, where security models form the layers of a multi-tier model. In essence, sleeve rebalancing is the practice of rebalancing each “sleeve” or strategy of the portfolio in isolation from the others. This unique approach enables traders to target specific combinations of sleeves for rebalancing, allowing for a more focused approach to specific investment strategies. It also enables traders to define high-value trades and discern where best to allocate their efforts.

The ability to customize actions, including buying and selling, rebalancing to targets, and enforcing buy rules ensures that portfolio adjustments align precisely with the client’s investment goals.

Even more granular approaches to rebalancing have become increasingly important with the introduction of nodes, representing the different levels within the multi-tier models. This practice enables traders to target specific layers of a model, or node, for rebalancing, providing a more nuanced and strategic approach to overall management. To visualize, imagine fine-tuning a single guitar string versus all six.

By allowing users to select from various actions like buying and selling, rebalancing to targets, and enforcing cash minimums, the software provides a comprehensive toolkit for optimizing portfolio positions. The adaptability ultimately empowers financial professionals to tailor their strategies to the unique needs of each portfolio, ensuring a more effective approach to trading and while optimizing the advisor’s bottom line.

Tax-Aware Rebalancing

A significant development in rebalancing software is its ability to rebalance portfolios in a tax-sensitive manner. By incorporating location optimizers, these tools enable the creation of unlimited rule sets and rules at the household, account, and asset classification levels, as well as for cash. Tax-loss harvesting features allow for realizing of gains or losses at the position or classification level, considering restrictions, minimum trade size, and loss or gain thresholds.

In addition, financial professionals can leverage substitute securities to maintain market exposure while avoiding potential wash sales. This level of precision enables the maximization of tax benefits within the constraints of certain restrictions or minimum thresholds. This range of factors fundamentally influences trade recommendations within the tax-aware rebalancing framework. Advisors can consider close positions, selling lots based on a cost-basis method, or selling specific lots altogether to provide a more nuanced approach to tax management and make more informed decisions based on a client’s unique requirements.

In the past, many of these tasks were the responsibility of the advisor or designated accountant. Aside from the time it gives back to advisors to concentrate on higher-value tasks, like engaging with their clients, the control provided by this feature enables them to tailor rebalancing strategies to meet specific tax objectives and focus on growth.

Tangible Growth

Firms have already caught on. In February of 2023, YahooFinance reported on the use of intelliflo redblack by State College, PA-based investment manager and advisory firm Vicus Capital to support the firm’s revenue growth to surpass $2 billion in assets under management (AUM). The software platform, intelliflo redblack, is a rebalancing and trading platform that provides deep automation and employs the precision-trading techniques that have transformed advisor operations. Vicus Capital CEO Eric Dare stated, “We have been able to expand our investment model options and accelerate our AUM growth without adding dedicated traders, while simultaneously increasing the complexity of the assets we manage,” regarding the intelliflo redblack platform.

For growing RIAs, such trading platforms emerge as a linchpin for sustained growth. A multi-tier approach to trading not only simplifies management but also reduces overhead costs. Managers can focus current advisor output on strategic decision-making rather than operational intricacies, optimizing workflows and eliminating the need for additional advisors to handle the overflow.

Although these software platforms are tools, they also operate as allies for RIAs to strategically position themselves for growth. Operational efficiency, but more so operational agility, gives RIAs the capability to scale at sustainable levels. According to a recent report by research firm Cerulli Associates, RIAs listed the time required to run a business as one of the most significant challenges. Significant operational responsibilities and selecting and integrating technology were the next challenge for investment advisors. The research firm also stated that many of the challenges that are inhibiting the growth of RIAs can be overcome by working with strategic partners.

As with Vicus Capital, RIAs should consider a strategic partnership in the form of advanced trading platforms to optimize their growth. As consolidated markets make it more difficult for advisors to grow their businesses, technological innovations will redefine operational standards for portfolio management and its underlying business growth.

As the financial landscape continues to evolve, underscoring the significance of rebalancing and trading software in day-to-day operations is paramount. The enhanced precision provided by scalable rebalancing, sleeve rebalancing, directed trading, and tax-sensitive rebalancing empowers financial professionals to navigate market complexities with renewed speed and efficiency.

The availability of innovative options from providers like intelliflo redblack signifies a shift in the industry’s focus and the need for advisors to evolve their definition of holistic portfolio management. What was once an advisor’s entire responsibility is now transformed into a strategic partnership with elevated complexity of assets and a top-down approach to better portfolio understanding – ultimately positioning advisors for a sustainable competitive advantage.

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