Not All Financial Advising Firms Rebalance Client Portfolios

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We’ve written a great deal on the science and art of regular rebalancing. Periodic rebalancing is important even if it is scheduled and automated. Rebalancing with asset location in mind is even better, adding additional after-tax value.

Unfortunately, rebalancing is not standard in thee financial services industry.

Every financial planner needs to file a form called the ADV as part of compliance with the SEC. Among other things, Item 8 (Methods of Analysis, Investment Strategies, and Risk of Loss) declares how the firm handles rebalancing. These ADV forms are public record and I took some time to read how other companies handle rebalancing. The most interesting one was Ameriprise Financial Planning Services (CRD#6363):

Periodic rebalancing of your portfolio and reallocation among the asset classes is recommended in most circumstances, and rebalancing and reallocation may not be part of AFPS [Ameriprise® Financial Planning Service]. Rebalancing your non-retirement portfolio to meet asset allocation to meet asset allocation objectives may result in taxable gains or losses. Ameriprise Financial Services does not rebalance your portfolio or reallocate your target asset allocations on a continuous basis.

While they know rebalancing adds value to clients’ portfolios, “Ameriprise Financial Services does not rebalance your portfolio…on a continuous basis.”

Merrill Lynch (CRD#7691) is no better:

The Portfolios currently offered are dynamically managed and are not subject to rebalancing. Changes to Portfolios, including changing the allocations of the underlying Funds that the Portfolios comprise, can be made at any time, as described in the Portfolio Summary. Additional Portfolios may be offered over time, which may include rebalancing services.

Laughably, this statement comes under the large, bold heading “Rebalancing Service.”

“Managed account programs” are offered by many large financial firms, but at least for Edward Jones (CRD#250), this doesn’t mean they actually manage your account:

Edward Jones Managed Account Program®. The Managed Account Program is an advisory program that provides clients with a customized asset allocation that is implemented by one or more independent professional money managers (Portfolio Managers) who are most capable of meeting the client’s objectives, with the Edward Jones financial advisor acting as the client’s key relationship contact. Each Portfolio Manager will implement an investment strategy that may include individual stocks, bonds, and exchange-traded funds (ETFs). The Portfolio Managers will buy and sell the securities in the strategy they are managing for you. You may have relationships with several Portfolio Managers within your Program accounts. You will have a separate Edward Jones account for each Portfolio Manager strategy. We will have no investment discretion over your assets in the Program.

Apparently at Edward Jones since each investment strategy is handled in a different account by different Managers, there is nobody looking out for your portfolio as a whole. To rebalance effectively, you would have to call your advisor to move assets between accounts.

This year, we have added to our ADV Part 2 to make it clear how important rebalancing is. For 2017, our ADV reads:

We advocate periodic rebalancing, which means buying more of markets that have gone down and selling some of the markets that have gone up. …

We review your accounts regularly and rebalance according to your target asset allocation. Accounts are set for review and rebalancing quarterly or more frequently if necessary. Our investment philosophy is formed by our Investment Committee and then individual managers review client portfolios.

While comprehensive wealth management means much more than rebalancing, you deserve better than an advisor who won’t even regularly rebalance your portfolio.

Photo used here under Unsplash Creative Commons Zero.

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President, CFP®, AIF®, AAMS®

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.