The COVID-19 pandemic has created market volatility never seen before. At the same time, remote work is placing technology at the center of everyone’s day – financial advisors and investors alike – and personal touches with clients matter more than ever. Any advisor doing manual rebalancing in spreadsheets is clearly at a disadvantage in the current financial markets, taking as much as three months to perform. Is the client’s money where it needs to be, or wants it to be? Advisors and asset managers need technology that can keep up with the timing of markets and client preferences, and instantly perform calculations and what-if scenarios at scale.
Continuing Market Volatility
Although there have been signs of stabilization since the first few weeks of the pandemic, market uncertainty continues throughout phased re-openings and the threat of a second wave of infections lingers. Markets are constantly reacting to daily headlines on potential treatments and cures, infections rates, and how specific sectors and businesses are dealing with new challenges. For the most part, financial advisors have been able to calm and guide their clients, rebalance and take advantage of tax loss harvesting, and many have actually onboarded additional clients.
But continued market volatility underscores the need for advisors and asset managers to quickly monitor and make tactical decisions across their investment portfolios. This requires readily accessible information to make the appropriate moves based on knowledge – rather than fear – at scale. In addition, the ability to change investment strategies according to shifting client preferences, and perform large rebalances in timing with the market, are crucial to ensure readiness for what may be coming down the road.
Rebalancing in a Changing World
For advisory firms, having the right technology is a must in the current environment, and will continue to be a must in the post-COVID world. This is the case regardless of the frequency of rebalancing: that is, whether the advisor uses a “buy and hold” strategy focused on coaching clients and weathering the storm, or a more aggressive one focused on timing the market at high trading volume. The right rebalancing capabilities are needed at the right time and needs to be able to scale.
Advisors who are coaching clients through buy-and-hold strategies will still need to assure them of the choices made, while quickly aligning portfolios to changing risk tolerances and preferences. Environmental, social and governance (ESG) investment strategies have gained significant traction in bull markets, but will continue to going forward. In the wake of pandemic-driven market volatility and recent calls for social justice, investors will likely shift their preferences and restrictions based on corporate past histories and commitments to social responsibility and values-based policy changes.
Increasingly, advisors are leveraging what-if scenarios on model allocation changes or tax-loss harvesting events. With the right solution, advisors can test different types of scenarios across their entire client base or a subset. One particular firm using RedBlack’s trading and rebalancing platform was looking to tax loss harvest across 6,000 accounts but was unsure of the specific day they would (or should) execute the rebalance. Using what-if scenarios in RedBlack, the firm was able to run a tax loss harvesting rebalance each day to mock-up orders in case they decided to trade that day. When the day came to execute the tax loss harvest, they were able to execute more than 70,000 orders worth over $1 billion seamlessly using RedBlack’s order management functions.
Clients are not the only ones who need guidance in this climate. Advisors need to be continually striving to improve their efficiency and performance. If an advisor wants to execute on an idea, how quickly can s/he do it? If action is delayed, then the best idea or intention is meaningless.
Advisors often face multiple roadblocks, such as spreadsheets and difficulty recalling client preferences, preventing them from executing on the best ideas in fast-moving markets. Having the right technology in place can help firms institutionalize knowledge. This means extracting the preferences of portfolio managers, traders and advisors and placing that knowledge into a powerful rebalancing and trading application. The ability to easily work around specific client constraints, rules and exceptions is paramount to surpassing the standard rule for how a book of business should behave. In addition, institutionalizing knowledge reduces risk and provides continuity. Should a client’s primary advisor or portfolio manager leave the firm, another advisor with the firm can easily pick up where they left off.
Firms should also be documenting their rebalancing and trading procedures on a daily, weekly or monthly basis, whether or not they are using an automated system. However, having an automated rebalancing and trading system can certainly make procedures more efficient and documentation faster to produce.
Going Forward in the New Normal
In an increasingly complex world, the last thing advisors need is more roadblocks hampering their ability to best serve their clients. Markets are moving faster than ever and uncertainty is at an all-time high. Going digital is no longer an option – it’s a must. Advanced rebalancing and trading can empower RIAs, family offices and investment managers to quickly adapt to change, scale to growth, and do more for their clients.