Nudging Clients to Rebalance Their Portfolios

Americans are way too lax on tracking their retirement investing portfolios, and that could cost them big time when that work paycheck stops hitting their bank accounts.

This casual attitude toward retirement finances is likely playing a huge role in leaving many people unprepared to retire, a new study found.

Despite industrywide advice, investor portfolios remain stagnant, blindly unaware of all of the dollars they could be leaving on the table,” concluded the study by Wells Fargo and Gallup.

“It is critical that investors begin to evaluate their portfolios and consider rebalancing. The current bull market, which strategists believe to be over-inflated, is predicted to correct in the near-future.”

This correction could leave some investors scrambling as they lose significant gains they made in the last three quarters.

Here’s just how far rebalancing has fallen on investor priority lists, according to Wells Fargo:

• Nearly 60 percent of investors feel that their financial situation would be hurt – moderately to a lot – if a major market correction were to occur.
• But only 40 percent of investors plan to consider rebalancing by years end.
• The study found that less than half (48 percent) are currently consulting with a financial advisor. Roughly the same number (49 percent) would consult with a professional financial advisor to help them through a market correction.

“It’s noteworthy that investors say that their financial situation would be hurt by a market correction and yet they’re still not highly prepared,” said Heather Hunt-Ruddy, head of client experience and growth at Wells Fargo Advisors. “This underscores the need for professional financial advice or, at the least, a written investment plan and regular rebalancing of one’s portfolio.”

'It Always Amazes Me'

Yet ask an investment advisor and you’ll likely hear a great deal on how much risk investors take when they don’t rebalance.

“I’ve been working with retirement clients for the past 20 years, and it always amazes me that a 55- or 60-year old retirement investor is still 100 percent in variables, like mutual funds and stocks, in their long-term investment portfolios,” said Meladee Rudolph, senior consultant at Stryde Savings, a financial advisory in Fenton, Mich.

That’s one area where regular retirement portfolio rebalancing can help.

“Portfolio rebalancing is a critical risk-mitigating strategy,” said Matthew S. Eads, portfolio manager at Eads & Heald Investment Counsel. “Good companies can turn into bad companies. Or, stocks (or industries) which have been out-performing can eventually turn sour.”

A prime example of this is the "tech bubble," which was not unlike the tulip mania of the Dutch Golden Age, Eads stated.

“Tech stocks skyrocketed during the late 1990s and early 2000s,” he said. “Many people not only allowed their tech stocks to keep growing without trimming, but some also continued adding to those speculative positions.”

How can advisors encourage investors to rebalance? By reminding them of how many investors were whipsawed by the tech bubble bursting.

“Many tech bubble investors … ended up going back to work, often with a fraction of the savings they once had,” Eads said. “Had they been more apt to rebalance their out-sized tech positions, they likely would not have suffered as badly.”

When they do sit down with clients to revisit their investments, money managers should have their clients go back to basics to properly rebalance, and deploy effective technology tools, as needed.

“The main purpose of rebalancing is to help maintain a client’s original risk objectives,” said William G. Ryon, managing partner at Compass Investment Advisors in Dover, Del. “It’s a way to buy low and sell high by selling off a portion of investments that have gains and reinvesting those proceeds into investments that may not have performed as well since the last rebalancing.”

The simplest way for advisors to ensure clients rebalance on a regular basis as chosen by the client, is to use an investment platform that automates this process, Ryon said.

“The client, with help from the advisor, will determine their risk profile and choose an appropriate investment model,” he noted. “These models can be made of individual securities, mutual funds, exchange-traded funds or a combination of investment vehicles.”

Automatic Rebalancing

The models should allocate the client’s dollars, usually on a percentage basis, to predetermined investments. The system automatically rebalances and re-allocates any earnings across the portfolio, Ryon explained.

“This prevents any one security from growing too large or small and ultimately changing the risk profile of the portfolio,” he added.

It’s also worth noting that clients may not rebalance regularly for a number of reasons – most of them valid in the investor’s busy mind.

“In our experience clients simply do not know what it is until we educate them about it,” Ryon said. “This is where an automated platform can help, because the client will see his or her portfolio’s structure and performance over time and, as an advisor, I can remind them of what’s happening and its importance to the overall investment plan.”

If a client has never rebalanced the best thing to do is to perform a complete review of the client’s goals, objectives, risks, make any plan adjustments and model the investments to meet the updated objectives, Ryon said.

“When implemented, the portfolio will be rebalanced and future rebalancing can be automated or otherwise scheduled,” he said “It’s really all about education from the advisor.”

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected].

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