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What to look for in portfolio rebalancing software

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Sheryl Rowling can easily and confidently share with her clients the advantages of the portfolio rebalancing software used by her San Diego-based advisory firm Rowling & Associates.

“We tell them that our software allows us to monitor their portfolios daily, trade when necessary and not too often, and maximize tax benefits,” she said.

But Rowling boasts a distinction from many advisers, which makes her claims about the software more credible.

“The fact that I invented the software makes them feel more secure,” she said.

Rowling invented the software nearly a decade ago, after she discovered that another larger company was acquiring the software that she had been using, raising concerns that product’s quality may decline. Within a few years, her invention led to Rowling launching Total Rebalance Expert (TRX), which markets annual software licenses.

Last year, Morningstar acquired TRX with a commitment to keeping the software’s architecture open and possibly expanding its integration potential.

As a creator and user of portfolio rebalancing software, Rowling said that marketers of such software often make inaccurate claims about what their product can do. Among the chief claims that advisers should recognize as a likely overstatement: The software is free.

“There is no such thing as a free lunch,” Rowling said.

“Going with the low-cost leader typically means less functionality and worse," she said. "Rebalancing software is an investment that can save money for clients and time and errors for advisers."

Another suspect claim: The software is 100% tax-efficient.

Often, the rebalancing is missing key functions in the tax analysis.

Advisers should look for software with location optimization and household level rebalancing, tax loss harvesting, tax gain harvesting, short-term gain avoidance, and capital gain distribution avoidance, Rowling said.

A third dubious claim: The software is easy to implement.

“Some rebalancing software takes six months or more to set up and is very complex in use,” Rowling said.

“Advisers can be swayed by price or claims made by salespeople,” she said, noting that “choosing the wrong software can lead to months of frustration and even risks throwing in the towel altogether [and] going back to manual rebalancing.”

Worse, advisers unwittingly using imperfect software can ding clients’ returns.

“Choosing software without full tax functionality means clients will not get optimal tax benefits,” Rowling said.

When advisers attempt to make up for the tax functionality gaps of such software and rebalance by manual means that leads to less-than-maximum tax savings, she says.

What questions should advisers ask marketers or other trusted resources to make sure that they are getting the straight dope on portfolio-rebalancing software?: “May I speak with a few of your users? Can I get my money back if I'm not satisfied?” Rowling said.

But advisers should also remember the advantages of automated rebalancing.

It “is more accurate and produces better results than manual rebalancing,” Rowling said.

Just don’t forget to review proposed trades, update settings regularly, train back-up users at their firms, and be wary of rosy sales pitches for the software from the outset, she said.

Craig Iskowitz, founder and chief executive of Ezra Group, a consulting firm in East Brunswick, New Jersey, for financial advisory firms, has reviewed portfolio-rebalancing software, including Rowling’s product.

He thinks that vendors can be trusted.

“I have not heard [of] any that intentionally make inaccurate or misleading claims,” Iskowitz said.

But he, too, encourages caution, suggesting that advisers drill down to determine the software’s functionality in terms of alternative investments, tax strategies, and connectivity to custodians.

“Software marketers are no different from those in other industries. They know they have to accentuate the positive and minimize the negatives in order to help sell their product,” Iskowitz said.

"In general, clients don't care about the rebalancing software their adviser uses," he said.

Miriam Rozen writes about the financial advisory industry and is a staff reporter for Law.com.

This story is part of a 30-30 series on building a better portfolio.

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