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Diahann Lassus
Diahann Lassus
Rebalancing: More Than Software

Processes, weaknesses and goals identified.

April 22, 2010
by Diahann Lassus, CPA, PFS

We celebrated our 25-year anniversary this year and during that time we have used many different systems to review client portfolios and for rebalancing accounts. Reducing the manual effort is always a priority because we recognize how little value the process adds to the client experience. Prior to 2005, the overall process included a long list of manual steps starting with printing reports. We would review gains and losses, dates of purchase for long-term gains, transaction costs for trades and many other factors. We also structured a client’s account model by replicating it in the many individual accounts. The process was riddled with inefficiency, extra cost in time and in higher transaction costs for the client. With the advent of iRebal© and other software designed to assist in this process, we have moved from a largely manual effort to a process driven by technology where the value added to the client is truly significant. (Reader note: Gobind Daryanani led the development of iRebal© with funding from three large wealth management firms who recognized one of the primary challenges we all face in our firms is meeting our objectives to provide a high level of service in a cost effective way. Copyright © iRebal products and services property of ThinkTech, Inc., an affiliate of TD AMERITRADE, Inc. member FINRA/SIPC.)

When we first adopted iRebal©, the program was still in the early stages of development so we were able to suggest some very innovative changes and to design custom reports for both management purposes and for clients. The bottom line is that it has been a tremendous learning experience over the past few years. There are two critical steps to getting the most out of a software system for your firm and your clients. The first step is to document your process completely to the point of identifying who is making what decisions and the second step is to “really” understand how the software program functions so that you can get the most out of it.

It is a huge challenge to implement an investment plan and it takes a significant amount of people time to do it right. Think of all the steps required to simply rebalance one account. It must be reconciled to make sure prices are current and accurate. It has to be reviewed against the model in terms of asset class, asset subclass and individual investment. It has to be reviewed based on the overall investment of all the client’s accounts (which could include up to 20 different accounts) including brokerage, 401(k)s, deferred compensation, annuities, IRAs, 529 Plans and many others. If a sell is suggested, the purchase dates must be reviewed for possible transaction charges if not held long enough and short-term capital gains if it is sold too soon. Trades must be generated and approved. Depending on the approval process, the client may need to be notified. The next day the trades must be reconciled.

Processes

Processes vary based on the size of the firm and the value of the assets under management. When we looked at iRebal© and made the decision to use this rebalancing system, we also made the commitment to update all of our processes based on the following specific objectives:

  • Increase consistency in applying methodology to clients’ portfolios
  • Rebalance across accounts to reduce overall trading costs to the client
  • Eliminate a significant part of clerical/administrative effort
  • Refocus employees on adding a higher value to the firm and to clients
  • Reduce the likelihood of errors through better use of electronic trading Acquire the ability to quickly and efficiently switch out of specific investments for clients

Objectives

We have accomplished these objectives and more. The rebalancing system has consistently added value to our practice, but the greatest return on investment has come from the learning experiences in our investment group. Building the new system required a step-by-step review of how we build portfolios and why we build them the way we do. It was a painful experience at many levels but we came out of it smarter, stronger and better able to more cost effectively meet the needs of our clients.

Although everyone needs some level of technology to provide this service, we learned many lessons that weren’t directly related to the technology. The transition to the new system helped us identify existing weaknesses in our process.

These weaknesses pointed to the need for documenting the process at a very detailed level. This type of documentation becomes more and more important as the firm grows and adds more employees. If you have one person making investment decisions, it creates issues with others learning and understanding the decision process. If you have more than one person reviewing and making decisions, you run the risk of inconsistencies in the way different clients are treated. The key is to have established policies that define how decisions are made concerning different situations. For example, we hold individual stocks only when it is driven by the client for whatever reason so our policy is basically that we sell stocks unless there is a specific reason to hold them.

Rebalancing

Rebalancing is a work in progress for us but we have come a long way by continuing to discuss the subject in our weekly investment committee meetings. Many of our topics cover process and not just investment decisions. Another important lesson is making sure everyone is really “well” trained on the new software and extra time is taken to make sure it is set up correctly in the beginning. And remember that it doesn’t end there. It requires a continuous focus on improvement and identifying ways to take advantage of the system. It is critical to communicate with the software developers on issues or suggestions that will make the process operate more effectively for the firm. We continue to develop new management reports and to work with iRebal© to help us refine the way we take advantage of the critical elements of the software.

We have come a long way from our early goals in adopting rebalancing software but continue to learn and look for better ways to provide this service to our clients in a cost effective way.

Additional Resources: The AICPA PFP Section provides information, tools, advocacy and guidance to CPAs who specialize in providing tax, retirement, estate, risk management and investment advice to individuals and their closely held entities. All members of the AICPA are eligible to join the PFP section. For CPAs who want to demonstrate their expertise in this subject matter apply to become a PFS Credential holder.

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Diahann W. Lassus, CPA, PFS, CFP, is president and co-founder of Lassus Wherley, a wealth management firm with offices in New Providence, New Jersey and Bonita Springs, Florida. She was named one of Worth Magazine’s Top Financial Advisors an unprecedented seven times. Lassus was named to the 150 Top Advisors for Doctors by Medical Economics.  She has been profiled in the Dow Jones Investment Advisor magazine, CPA Wealth Provider, the Journal of Financial Planning and Financial Advisor magazine.