Financial services is a sector that is particularly intensive in its use of technology. According to Gartner, the influential research and advisory house, banking and investment businesses will spend almost USD 600 billion on enterprise technology in 2021 alone - for comparison, the entire economy of Singapore generates USD 374bn each year with Hong Kong at USD 369bn. At the same time, we are also witnessing a global surge of investment in fintech firms. Given these high levels of technology spend, you could be forgiven for thinking that digital transformation was nearing its end game in the industry. There remain however operational areas that are yet to feel the touch of automation and digitalization. In many investment firms offering Discretionary Portfolio Management (DPM) servicing, the rebalancing of portfolio is one such instance where manual processes reign even today.
Portfolio rebalancing is, of course, a positive and vital task for DPM teams. As time and markets evolve, it’s important that individual client accounts reflect the latest investment recommendations.
The challenges of rebalancing
Tracking that portfolios are aligned is a straightforward exercise, but implementing the changes needed to rebalance portfolios is less so.
First of all there are the challenges around managing fund settlement times, which can range from one to 10 days (a duration which seems incomprehensible in the digital age, and for which customers have little patience). Delay also entails the risk that the market moves decisively while rebalancing is in progress leaving customer portfolios in limbo until the process is complete. Explaining to your customer that they can’t sell or buy specific assets because their portfolio is in the middle of a rebalancing is not a great foundation for a productive relationship.
From a commercial perspective, the process as it stands in many organisations is wasteful and inefficient. With rebalancing being carried out manually, one big issue is that it is all but impossible to scale operations. If financial institutions are to ramp up their DPM capabilities and make them available to more customers, they need systems that can support rebalancing across hundreds of thousands of portfolios or more.
A better way of rebalancing
Modern technology can eliminate much of the fuss and complexity of portfolio rebalancing by automating the process. It provides the quickest, most productive route to the desired end state. And it can be carried out at scale rather than account by account or in some other piecemeal fashion.
For financial institutions that pride themselves on the quality and personalisation of their services, technology provides a platform for shaping a superior customer experience - for instance, with improved reporting, analytics and access to portfolio and performance data at any time, any place and on any device.
What to look for in DPM rebalancing technology
Once a portfolio has veered away too far from the model, there are a number of options for rebalancing it and bringing it back to a healthy state. Technology offers a wider range of options for achieving this goal too. It may be that we just need to replace one instrument with another; and yet some systems are unable to cater for this fine tuning. Instead, everything gets traded to deliver the model portfolio.
Ideally, DPM services would be able to take into account the various investment objectives, weigh their importance against each other and arrive at the optimal solution. This is a straightforward exercise for an algorithm.
At Quantifeed, our rebalancing engine can determine the best set of trades by optimizing across a range of factors, including the recommended model allocation vs. the customer’s portfolio, the size of any cash position and the portfolio manager’s tactical priorities. This can be overlayed by the customer’s investment preferences; for example, if they have a focus on ESG, or particular exclusion due to ethical or religious reasons.
Being able to rebalance portfolios using this lighter touch but with greater precision means that portfolio managers and their customers can capitalise on market opportunities more quickly than with the traditional rebalancing process. Supported by technology, DPM teams can be quicker on their feet when it comes to taking profit from gains and moving into less risky assets.
And just as importantly, working in this way is more in line with customer expectations. Customers don’t want to know the ins and outs of rebalancing. They just want to set the direction and trust their financial institution to deliver on their wealth management goals.
DPM Rebalancing – an easy win for digital transformation programmes
Digital transformation has, understandably, become one of the great business buzzwords of the modern age. And the vast scope of the term can present financial service providers with a bewildering range of competing priorities - all of which explain to some degree the vast sums currently being spent in the sector on technology.
In that context, putting an end to manual rebalancing and introducing technology to do the job constitutes an easy win. It delivers immediate productivity gains and lays down a DPM platform for future growth. Running quietly and efficiently in the background, DPM rebalancing technology gets on with optimising customer portfolios while embedding straight through processing into new operational areas. It readies DPM providers to scale their business, deliver stronger performance and, most importantly, improve customer experience.