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Use of rebalancing software data soars in 2015

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When looking at the rebalancing software data from Financial Planning’s 2015 tech survey of 600 financial advisors, perhaps the most striking thing is the overall rise in usage.

As recently as the 2013 survey, 39.4% of respondents said that they use rebalancing software. Last year, that number rose to just over 50%.

This year, however, 62.7% of respondents said that they use rebalancing software, an amazing jump in such a short time span.

There are a number of reasons for the rise in the popularity of this software.

Risk management is an obvious one.

If an advisor creates an asset allocation across a portfolio or household, the object is to match the portfolio to the client’s appetite for risk, as well as to achieve the highest possible return for the given level of risk. If a portfolio drifts away from the target allocation, it is no longer optimized for risk and/or reward.

A more likely reason for the rise in popularity of rebalancing software has to do with compliance and regulatory concerns. Increasingly, regulators are looking at what advisors say they will do for clients and comparing it to what they actually do.

If an advisor’s documents or correspondence with clients indicates that they will keep the portfolio aligned with targets, they had better do so. Doing so manually, without the aid of rebalancing software, is difficult, time-consuming and ultimately inefficient.

Having said that, not all rebalancing software is created equal.

Just about all rebalancing software allows users to set up target asset allocations. Usually, users can set bands around those target allocations (e.g., 10%).

So, for example, if an allocation to an asset class is 20% and the allocation goes above 22% of the portfolio or below 18%, the user is alerted. Some applications rebalance it only at the account or client level, while the better ones allow users to do it at the household level.

Some optimize for taxes and location, while others don’t.

Generally speaking, there is a correlation between price and features. The more expensive programs can rebalance at the household level, optimize for location and taxes, and perform other premium tasks.

The overall leader in the category, Morningstar, historically hasn’t offered tax or location optimization. But with Morningstar’s purchase of Total Rebalance Expert (tRx), those capabilities are now available, at a somewhat higher price.

As the line between Envestnet and Tamarac, now an Envestnet company, blurs, it is difficult to get a read on what percentage of respondents who answered “Envestnet” are actually using the more sophisticated Tamarac rebalancer.

The overall leader in sophisticated rebalancing software is iRebal, followed closely by Tamarac.

A look at the independent registered investment adviser arena shows a different picture.

Here, iRebal actually leads with a 9.9% share, followed by Morningstar with an 8.3% share. Right on their heels is Tamarac, with a 7.8% share.

The survey broke out iRebal cloud separately for the second year running.

This is a free, web-based version of iRebal available only to TD Ameritrade advisors. Although its overall 1.9% market share is small, among independent RIAs, it commands a 4.2% share.

The conclusion to be drawn from these data is that a larger percentage of independent RIAs are using sophisticated rebalancing software when compared with their peers.

This means one of two things: Either they are delivering tax alpha to their clients while many of their competitors aren’t, or they are doing this in an automated, cost-efficient fashion, while many of their competitors aren’t. In either case, it seems that independents using the sophisticated rebalancing software have a distinct competitive advantage.

A look at rebalancing software usage by age group, shows that younger advisors seem to appreciate its advantages: 62.7% of 25- to 34-year-old advisors use it, versus 53.4% of the overall sample.

Once firms surpass the $100 million assets under management mark, there is about a 60% chance that they will use rebalancing software. Intuitively, this makes sense.

As firms grow, manual rebalancing becomes more difficult and time-consuming. It is also likely that they will be competing for higher-net-worth clients who can benefit more from the addition of tax alpha.

Finally, larger firms have the financial resources to purchase premium rebalancing products.


We don’t know whether to be puzzled, disappointed or shocked by the responses to our client-risk-assessment question.

From our perspective, every advisor has a duty and a regulatory responsibility to gauge a client’s risk tolerance before making any investment recommendations, yet just 56% of advisors said that they use this software.

Did they not understand the question? Are they still using paper forms? Or are they not performing this basic function at all?

We certainly hope it isn’t the latter.

The leading providers of risk tolerance software remain the broker-dealers and custodians at 30.5%. Of the third-party software providers in the group, Riskalyze edged out FinaMetrica for the top spot in the category.

The rise of Riskalyze has been impressive.

Founded in 2011, and a virtual unknown until two years ago, it now leads the category with an 8.9% market share. As the firm builds its brand and expands its product line, we expect its growth to continue at an impressive pace.

Read more about the tech survey tomorrow, when we look at how the robos are settling in.

Joel Bruckenstein, a Financial Planning columnist in Miramar, Fla., is co-creator of the Technology Tools for Today conference series and technology guides for advisors, including Technology Tools for Today’s High-Margin Practice. For more information, visit JoelBruckenstein.com.

This story is part of a 30-day series on leading tech trends for advisors. It was originally published on Dec. 1, 2015.

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