Rebalancing act: Keeping model portfolio permissions in check

Rebalancing act: Keeping model portfolio permissions in check

By the time you read this, we may well be in the new tax year and we may even have had a Brexit. I’m excited to see what happens, in much the same way as I was excited to see just how much my feet resembled hamburgers when I took my boots off after a 54-mile charity hike some years ago.

The real winners from Brexit will be the people who make their coin writing about financial markets, of course, and that’s as it should be. We don’t want them out on the streets. They’re still a bit delirious from the market wobbles at the end of 2018, and who knows what they’ll get up to if the Brexit high they’re craving for doesn’t happen.

I’ve been out on the road on various tours for the past four weeks or so, talking to advisers about centralised investment propositions, and in particular what Mifid II does to them. It’s been an interesting ride – about half of the firms I’ve spoken to run their own advisory models and virtually none have the required administration in place to be compliant with the regulation. 

Most model portfolio admin is just a pain, but there’s one thing I’d like to pick up on here. A core tenet of advisory permissions in terms of running portfolios is that you have to get client permission for rebalances. 

This is a pretty frustrating experience. Clients don’t always behave the way they’re told to, and so you end up with a few awkward sods who haven’t returned their permissions, or ticked the little boxes or whatever stuck in an old version of the model.

Or maybe you don’t, and you just shift them into the new version of the portfolio anyway – after all, it’s what’s best. The only thing is you’re then acting as a discretionary manager without actually being one, and there is a whole dedicated naughty step for that.

Technology is trying to come to the rescue here – think online portals, push notifications on mobile phones and so on – but that’s a partial solution at best. Dave Awkward is perfectly capable of being awkward via a mobile.

A potential solution

The answer might be to switch on automatic rebalancing, and that’s a subject worth dwelling on for a moment. The idea here is that you get permission from your client to rebalance their portfolio within given parameters and at specific intervals. You, as the adviser, have no discretion – you simply rebalance a portfolio back to its target allocation on a preset date.

If done right, this doesn’t need further client permission, and so the ‘ticky-boxy’ is all done. If you’re lucky, your investment platform of choice will also automate this for you. You will still have all the boring admin disclosure to do, but the permission is taken care of. Result!

Or is it…

Let’s have a think about when rebalances happen. Some 94 per cent of all rebalances (this is a made up stat, but I bet it’s right) happen early in a month, and the vast majority happen on the first working day of a new quarter. So your wording for a client agreement might read as follows: “We will rebalance your portfolio back to its original allocation on the first business day of each quarter; that is to say, January, April, July and October. By investing in Mark’s Awesome Portfolio (risk level four), you agree that you are totally fine with us doing this and won’t moan about it later.”