Rebalancing: Art or Science?

The eternal debate of right brain vs. left brain, art vs. science, or logic vs. gut is one that can be applied to a myriad of topics, including portfolio rebalancing. When it comes to the act of rebalancing, it’s usually a very clear case for science.  Concepts like the efficient frontier and tax-loss harvesting scream cold hard science and it’s almost impossible to argue against the value offered in regards to maximizing return while minimizing risk. 

However, at times, human behavior gets in the way and muddies the water.  I don’t have to look much further than my own experience to see this reality in play.  As a child, my parents bought me a modest number of shares in Disney – likely to create an early nest egg. We lived only a few hours down the road from the amusement park and we spent a lot of time there.  Now as an adult, I still hold and have an oddly personal connection to those Disney shares. Logically, I should probably divest and liquidate some, but something is blocking me.  My emotions are overruling my brain. 

This is something I hear repeatedly from advisors in terms of how they have to manage their clients’ portfolios.  It should be easy.  But when that emotional side creeps in, the artist in the advisor needs to come out.  Consistent cries of, “No! Don’t sell that!” Or, “My cousin told me to never buy stock ABC,” make an advisor’s job challenging.  And, this is before we even begin to sprinkle in complicating factors like tax burdens that require advisors to play Picasso and do their best to meet both the client’s needs as well as their wishes.

Throughout the development of the Black Diamond^® Wealth Platform’s Rebalancer, finding the answer for this divide was top of mind.  Whether through trade restrictions or capital gains limits, the Rebalancer engine was designed to work around constraints while still getting clients as close to the model as possible.  Additionally, critical data such as tax consequences or cash balances are front and center. This gives advisors maximum transparency and allows them to tweak trades as they see fit. 

When scenarios arise that require science to trump art, such as during March of this year, firms have the power to make wholesale changes across their entire client base. In a matter of seconds, as opposed to days, advisors can submit trades directly to the appropriate broker via the FIX network.  The following morning, advisors have access to a robust reconciliation dashboard validating that the accounts executed properly at the custodian.

Ultimately, there is no right answer to art vs. science.  But, Black Diamond provides the toolset that supports the inner Picasso and Einstein in all advisors.  To learn more about how the Black Diamond Rebalancer takes a client-centric approach, request a personalized demo today.