$450K AUM Saved with Proactive Rebalancing Alerts

$450K AUM Saved with Proactive Rebalancing Alerts

Executive Summary

Luminary Wealth Management, an RIA managing over $150 million in assets, faced a recurring challenge: clients making emotionally driven investment decisions during market downturns. This reactive behavior led to potential AUM losses and hindered long-term portfolio performance. By implementing a proactive rebalancing alert system using Golden Door Asset-inspired strategies, Luminary was able to retain $450,000 in AUM during a period of market volatility and improve overall client portfolio performance by an average of 3%.

The Challenge

Luminary Wealth Management, like many RIAs, recognizes that human emotions can significantly impact investment performance. Chief Investment Officer Sophia Martinez noticed a concerning trend: during periods of market volatility, a significant portion of their client base was prone to panic selling, driven by fear and a desire to "protect" their capital.

This knee-jerk reaction, while understandable from an emotional standpoint, often resulted in locking in losses and missing out on subsequent market rebounds. For example, during the market correction in Q1 2023, Luminary observed that approximately 10% of their clients were contemplating withdrawing assets from their portfolios, representing roughly $15 million in AUM at risk.

A specific example involved a client, Mr. Henderson, who held a well-diversified portfolio with a target asset allocation of 60% stocks and 40% bonds. As the stock market declined, his portfolio drifted to 50% stocks and 50% bonds. Driven by fear, Mr. Henderson considered selling his remaining stock holdings, which would have resulted in a significant loss and severely hampered his ability to meet his retirement goals. Based on historical data, Luminary estimated that similar potential withdrawals across their client base could have resulted in a loss of approximately $450,000 in AUM in just one quarter. This AUM loss directly translates to decreased revenue for Luminary, making client retention a critical priority. Furthermore, clients who sell low often miss out on the recovery, further damaging their long-term financial well-being. Luminary needed a proactive solution to address this challenge.

The Approach

Sophia Martinez recognized that the key to mitigating this issue was to proactively address clients' concerns and provide them with timely, objective information before they made rash decisions. She developed a strategy centered around a proactive rebalancing alert system designed to notify clients whenever their portfolios drifted significantly from their target asset allocation.

The core idea was to educate clients about the importance of maintaining their desired asset allocation and the benefits of rebalancing, which involves selling overperforming assets and buying underperforming ones to return the portfolio to its target allocation. This process helps to control risk and potentially enhance returns over the long term.

Sophia's approach involved the following steps:

1. Portfolio Monitoring: Leveraging the Black Diamond Wealth Platform, a system already in use at Luminary, they continuously monitored each client's portfolio for deviations from their target asset allocation. A pre-defined threshold of 5% deviation for any asset class was set as the trigger point for an alert.

2. Custom Email Alerts: When a client's portfolio drifted beyond the 5% threshold, a personalized email alert was automatically generated. This email highlighted the specific asset classes that were out of alignment and explained the potential implications of the drift.

3. Educational Content: Each email included a link to educational content explaining the benefits of rebalancing, the risks of emotional decision-making, and Luminary's investment philosophy. This content emphasized the importance of staying disciplined and focusing on long-term goals.

4. Proactive Communication: Sophia and her team followed up with clients who received the alerts to discuss their concerns and answer any questions they might have. They provided personalized advice tailored to each client's individual circumstances.

5. Rebalancing Recommendations: Based on the client's risk tolerance and financial goals, Luminary provided clear recommendations on how to rebalance their portfolio. They explained the rationale behind the recommendations and the potential benefits of taking action. This was not automated but a human review.

Sophia intentionally did not automate the rebalancing process entirely. The goal was to foster trust and communication with the client, not to replace human interaction. The alerts served as a conversation starter, allowing Luminary to address client fears and reinforce the value of their advice.

Technical Implementation

The technical implementation of the proactive rebalancing alert system involved integrating the Black Diamond Wealth Platform with a custom email notification system using Zapier.

1. Data Extraction: The Black Diamond Wealth Platform provided real-time portfolio data, including asset allocation percentages for each client. The platform's API was used to extract this data at the end of each business day.

2. Deviation Calculation: A custom script, written in Python, calculated the percentage deviation between the current asset allocation and the client's target asset allocation. This script identified clients whose portfolios had drifted beyond the pre-defined 5% threshold for any asset class. The absolute value of the difference was taken; a deviation could be an overweight or underweight position.

3. Zapier Integration: Zapier was used to connect the Python script to a custom email template. When the script identified a client whose portfolio was out of balance, Zapier triggered an email to that client.

4. Email Template: The email template included personalized information such as the client's name, the specific asset classes that were out of alignment, the percentage deviation from the target allocation, and a link to educational content. The subject line was designed to be attention-grabbing but not alarmist: "Your Portfolio: An Important Update on Asset Allocation."

5. Security Considerations: Data security was a top priority. All data transmitted between Black Diamond, the Python script, and Zapier was encrypted using SSL/TLS protocols. Access to the script and the Zapier account was restricted to authorized personnel only.

6. Backtesting: Before fully launching, the team backtested the alert system using historical portfolio data from the previous two years to ensure the alerts were triggered appropriately and the email content was clear and informative. This allowed them to refine the alert thresholds and email messaging for optimal effectiveness.

7. Compliance Review: The entire process, including the email template and the rebalancing recommendations, underwent a thorough compliance review to ensure adherence to all applicable regulations and guidelines.

Results & ROI

The implementation of the proactive rebalancing alert system yielded significant positive results for Luminary Wealth Management.

• AUM Retention: During the market volatility in Q2 2023, the alert system helped retain approximately $450,000 in AUM that would have likely been withdrawn by clients who were considering panic selling. This was determined by analyzing the withdrawal requests made by clients before the implementation of the alert system during similar market conditions. By providing timely information and personalized advice, Luminary was able to reassure clients and convince them to stay the course.

• Improved Portfolio Performance: Clients who received the rebalancing alerts and followed Luminary's recommendations experienced an average improvement of 3% in their portfolio performance over the subsequent 12 months. This improvement was attributed to the benefits of rebalancing, which helped to control risk and capitalize on market opportunities. This was measured by comparing the average performance of alerted and rebalanced portfolios against a control group of similar portfolios that were not rebalanced.

• Increased Client Satisfaction: Client feedback on the alert system was overwhelmingly positive. Clients appreciated the proactive communication and the personalized advice they received. The alert system helped to build trust and strengthen the client-advisor relationship.

• Reduced Support Burden: While not the primary goal, the alert system also reduced the burden on Luminary's support staff. By providing clients with clear and informative information, the system helped to address many of their questions and concerns proactively, reducing the number of inbound inquiries.

• Measurable Engagement: The open rate for the rebalancing alert emails was 75%, and the click-through rate on the links to educational content was 30%. These metrics demonstrated that clients were actively engaging with the information provided.

Key Takeaways

The Luminary Wealth Management case study highlights the following key takeaways for other RIAs:

1. Proactive Communication is Key: Don't wait for clients to panic. By proactively addressing their concerns and providing them with timely information, you can build trust and prevent them from making emotionally driven decisions.
2. Rebalancing Alerts Can Be Powerful: A well-designed rebalancing alert system can be a valuable tool for managing risk, enhancing returns, and improving client satisfaction.
3. Personalization Matters: Tailor your communication and advice to each client's individual circumstances. A one-size-fits-all approach is unlikely to be effective.
4. Education is Crucial: Educate your clients about the importance of maintaining their desired asset allocation and the benefits of rebalancing. This will help them understand the rationale behind your recommendations.
5. Technology Enables Scale, Human Connection Seals the Deal: Automate processes like alert generation but maintain human interaction for personalized advice and building trust.

About Golden Door Asset

Golden Door Asset builds AI-powered intelligence tools for RIAs. Our platform helps advisors proactively identify client needs and provide personalized advice at scale, leading to increased client retention and improved portfolio performance. Visit our tools to see how we can help your practice.