Advisers could cut portfolio rebalancing costs by as much as 90 per cent with a new algorithmically-determined tool, according to Damon O’Brien, Consilium chief investment officer.
O’Brien said the automatic portfolio rebalancing tool – released last week on the Consilium platform – removes much of the inefficiencies involved in the process.
He said advisers have to date typically used a manual process to bring portfolios back into line with client risk profiles, which can lead to errors as well as costly trading strategies.
“Many advisers ask ‘how often’ to rebalance portfolios,” O’Brien said. “But a better question is ‘how’ to do it.”
The Consilium tool, built in-house to a set of bespoke rules, determines the most efficient way to rein-in out-of-kilter portfolios with an emphasis on minimising trades – especially expensive ones.
“About 90-95 per cent of the time you can rebalance just by using cash, which comes into portfolios through dividends and other income,” O’Brien said.
And when trading underlying securities is necessary he said the Consilium algorithm would determine the most cost-effective transactions to carry out.
O’Brien said the evidence suggests that annual rebalancing should be frequent enough to keep portfolios within risk tolerances.
“If you rebalance too regularly the excess costs will outweigh any benefit,” he said.
The Consilium portfolio rebalancer was now embedded in the group’s FNZ-backed platform, O’Brien said, with further enhancements to come.
“We want to have an alert for advisers to let them know the best time to rebalance but we’re not quite there yet,” he said.
Importantly, O’Brien said advisers who were not licensed to supply personal discretionary investment management services (DIMS) would have to seek explicit permission from clients to use the rebalancing tool.
“If non-DIMS advisers can create a simple description of how the algorithm works then they could get pre-approval from clients,” he said.
By definition, DIMS-approved advisers already have the discretion to rebalance without seeking client consent each time they trade.
After gaining net inflows of more than $1 billion over the previous 12 months, the Christchurch-headquartered Consilium now holds more than $2 billion on its administrative platform. The group provides services to more than 80 advisory firms, O’Brien said, including via groups using the SBS Bank-owned Synergy DIMS.