When doing research into robo advisors and automated investment tools, there is probably a lot of terminology being thrown around that you’re not familiar with. Automatic Rebalancing (also known as Automated Rebalancing, Automatic Investment Rebalancing, or one of many other similar variations,) is likely one of those terms.

Automatic Portfolio Rebalancing is the process of automatically evaluating, then buying and/or selling assets within a portfolio to ensure that the portfolio as a whole is still in line with the financial needs and goals of the investor. This is done automatically by many robo advisors through the use of complex algorithms.

But before we dive into the inner-workings of how this works, let’s look a little deeper into what Portfolio Rebalancing is as a general concept, and how it’s done.

What is Portfolio Rebalancing?

Rebalance Chart by Motif

In general, Portfolio Rebalancing is the process of moving funds between different investments to maintain the right balance for achieving financial goals.

No two investors are exactly the same. For example, some investors may be:

  • Interested in acquiring funds to purchase a home
  • Interested in saving enough money for their retirement
  • Have a high or low risk tolerance
  • Interested in the best possible investment strategy
  • Interested in accumulating wealth for future generations

No matter what the age or intent of the investor, they all have one thing in common: they have to decide on an investment strategy before deciding where to place their funds. This is referred to as asset allocation.

If they’re young or have a high risk tolerance for example, they may choose to invest a large percentage of their portfolio into stocks and a lower amount into bonds. For someone closer to retirement or who can’t handle the market fluctuations, they might place 90% of their portfolio into safer bonds.

As time moves on, the most important part of asset allocation becomes the maintenance. What this means is that the original balance of stocks vs. bonds during the original purchase of a portfolio may not be right for the investor anymore. So then they must change the asset allocation based on their current needs. This is known as portfolio rebalancing.

Rebalancing a portfolio is something every investor should do during the period of time they are making investments. Some rebalancing is necessary to unsure the original allocation is properly maintained. This type of rebalancing often occurs because the goals of the investor change as time passes. The average investor becomes more conservative with their funds as they approach retirement.

Stocks and bonds balance

The portfolio rebalancing algorithm will change along with the investor. The investor must also decide if they want to maintain their portfolio manually or consider automatic portfolio rebalancing. One of the biggest benefits of rebalancing a portfolio is keeping the risk factor under control. Maintaining the desired risk level may require the investor to take action.

A good example is an investor interested in investing 35 percent of his portfolio in Canadian stocks and an additional 40 percent in conservative Canadian bonds. The value of these assets can change as time passes. If one year later, fifty percent of his funds are no longer in Canada and just thirty percent are still in Canadian bonds, he must rebalance his portfolio.

The only way for the investor to maintain his desired level of risk is to do some rebalancing. He can reallocate his funds to bonds by selling some of his foreign stocks. This type of rebalancing will remove some of the emotions from the process. It can be difficult to sell a portfolio when it rises. It is also hard to buy once the portfolio has fallen.

When the investor is forced to either buy or sell at a predetermined time, rebalancing the portfolio becomes nearly emotionless. There are faults for rebalancing a portfolio. If the investor hates math, it is difficult to calculate percentages, adjust balances and get the correct reflection of the percentages. This type of individual should consider hiring robo advisors.

When an investor has a very small portfolio, it can easily become expensive to purchase and sell bonds and stocks every year. If the investor varies from their allotted target by even a small percentage, it may not be worth the cost or the trouble to rebalance the portfolio. A difference of even one percent can significantly raise the expense.

The Process of Rebalancing

Portfolio revision

There are many different types of rebalancing because there are different kinds of investors. Automated rebalancing is not the same as rebalancing automation and is often referred to as robo rebalancing. This is the rebalancing of actionable and auto-generated trades. Rebalancing automation refers to the tools that make the process more efficient.

Rebalancing automation helps with the process, but automated rebalancing reinvents the process and makes efficient fundamental changes possible for value proposition and scalability. This type of rebalancing is not always fully automated. There are times when the robot will need help, usually for completely different challenges than required by humans.

The most challenging tasks for humans can be automated fairly easily. These tasks include:

  • Trade-offs
  • Tax management
  • Social screens
  • Product customization
  • Transitions
  • Substitutions
  • Asset class customization

The most common issues for the robots include:

  • Bad data – unknown securities
  • File transfer failures
  • Late-processing of corporate actions

The quality of the analytics will not make a difference if the data is not good. This means any automated workflow must have a process for handling issues with the integrity of the data. This generally means the affected accounts must be suspended until the issues with the data have been resolved. This requires using the traditional process to manually generate the trades.

There are also certain situations where a manual override becomes necessary. The robot can take care of any complex combinations of constraints, transitions and tax management. A good example of a special situation is when a client calls and wants $1 million transferred the following week. This means the trading of the stock must be suspended. The most common overrides are caused by temporary suspensions.

Robo Advisors Offering Automatic Rebalancing

There are a wide selection of advisors available and each one has both pros and cons. The differences between some of the top advisors are defined below.

Wealthfront

Wealthfront logoWealthfront is one of the earliest and best-known robo advisors on the market. Their indexing service is exceptional, providing eligible accounts with a maximum of two percent per year for investment performance. The pros and cons include:

  • The first $10,000 is managed for free if you use our link to sign up
  • Daily tax-loss harvesting
  • Low ETF expense ratios
  • Direct indexing for accounts over $100,000
  • Rebalancing provided automatically
  • No discounts for large balances
  • No fractional shares

Wealthsimple

Wealthsimple LogoWealthsimple has a zero dollar balance requirement. This is an excellent service for new investors due to the available human assistance and streamlined, no fuss design. The best feature of the company among the robo competition are their SRI or socially responsible investment portfolios. This is nice for investors concerned with values-based investing.

One of their unique services are taxable investment accounts provided with tax loss harvesting for free regardless of the account balance. Pros and cons include:

  • Free portfolio analysis
  • Free access to human advisers
  • Socially-responsible investment options
  • Free tax loss harvesting
  • No account minimum
  • Limited free-management promotion
  • Higher account management fees
  • Limited personal finance tools

Betterment

Betterment logoThere is a reason Betterment has maintained their status as the biggest independent robo advisor. They provide a powerful combination of affordable management fees, goal based tools and no account minimum. The pros and cons include:

  • No account minimum
  • Robust goal-based tools
  • Fractional shares limit un-invested cash
  • No direct indexing

Ellevest

Ellevest directs their marketing towards women. Their approach focuses on goals, longer lifespans, lifetime earnings and the lower income of most women. The competitive advisory fees, zero dollar account minimum and unlimited financial advisor access make this company a good choice for all investors regardless of their gender. The pros and cons include:

  • Low fees and account minimum
  • A portfolio mix to suit the needs of women
  • Goal-focused investing approach
  • No tax loss harvesting
  • Few accounts are supported

SoFi Wealth

SoFi Wealth offers a lot of excellent features such as access to certified financial planners for free, rebalancing automatically, low-cost investments and one of the lowest fees. Customers may also become eligible for bonuses for SoFi Wealth’s other products. The pros and cons include:

  • Broad range of low-cost investments
  • Automatic rebalancing
  • Very low management fees
  • Access to certified financial planners
  • Customer support
  • No tax loss harvesting
  • Short track record
  • Limited account types

Schwab Intelligent Advisory

Charles Schwab turned up the heat with their Schwab Intelligent Advisory. This is a hybrid service created as a middle ground between Schwab Intelligent Portfolios, their existing robo advisor and financial consultants for the online broker. The pros and cons include:

  • Access to financial advisors
  • Automatic rebalancing
  • Wide ETF selection
  • High cash allocation
  • $25,000 account minimum
  • A minimum balance of $50,000 is required for tax loss harvesting