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A Request for Vanguard (or Fidelity, or Schwab…)

I don’t particularly enjoy the administrative aspect of managing my portfolio. And my correspondence with readers suggests I’m not alone. Many people find rebalancing to be confusing and/or a hassle.

Some financial advisors provide a rebalancing service. But I don’t think that’s an ideal solution in this case. The value of a financial advisor is in the advice that he or she provides. If you don’t need any advice, it’s probably not worth hiring an advisor just to handle menial stuff like rebalancing.

Similarly, target retirement funds are a step in the right direction, but they still leave some things to be desired:

  • At companies other than Vanguard, they cost too much;
  • Even at Vanguard, it’s possible that none of the funds have an allocation that’s a good fit for a particular investor (for example, somebody who is in a high tax bracket and investing in a taxable account would probably want to use tax-free muni bonds for his/her bond allocation); and
  • There’s always the possibility that the fund company will shift the fund’s allocation (away from the allocation you were counting on) without you noticing.

My Request: A Rebalancing Service

I’d like my brokerage firm to be able to handle rebalancing for me.

In its simplest form, this would just be an alternative method of placing buy/sell orders. Currently, when I rebalance, I calculate the dollar amount of each fund that I need to buy/sell, then I place a transaction for each fund.

Rather than using dollar amounts, and rather than having to execute multiple transactions, I’d like to be able to just enter a percentage for each fund, click one button, and have the account rebalance to that overall allocation.

Even better would be a “build-your-own-target-date-fund” concept. I’d love to be able to:

  • Pick a group of funds,
  • Pick a current allocation between them and an asset allocation glide path (i.e., what the allocation will be in the future), and
  • Have my brokerage firm automatically rebalance back to that allocation for me on pre-determined dates.

Potential Hang-Up: Multiple Accounts

Admittedly, I’m not entirely sure how the service would most-ideally work in the case of a portfolio made up of multiple accounts. It’d be easy to set things up to rebalance each account to the desired allocation, but that’s not always ideal, as it can result in higher costs as a result of:

  • Holding tax-inefficient funds in taxable accounts, or
  • Not qualifying for the lower-cost admiral shares as quickly as could be done otherwise.

In addition, things get tricky when the investor has a retirement plan at work that has to be considered as well when calculating the investor’s overall asset allocation.

But I don’t think that’s necessarily a problem. It seems to me that as long as the current method of rebalancing is still offered, investors could simply use that approach when it’s a better fit.

What Do You Think?

For investors: What do you think of this idea? Would you use it? Do you have any suggestions for ways to improve on it?

For fund companies/brokerage firms: Is there anything stopping you from offering this service? I know of one brokerage firm (Folio Investing) that offers something like this, but why not the larger brokerage firms too (ideally those that offer commission-free trades)?

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Comments

  1. I have the service you described on my Schwab 401K account, but I don’t have it on any other account so it is still fairly manual. It was enough of a pain that I wrote a program to calculate which shares to buy – so that I could set up rules easily: such as keep the asset allocation as close to the target as possible only buying an integer number of shares and investing as much of the available cash as possible. That has made it easier for me but it is still a pain. A more complete program could probably automate most of it… I wonder if there would be enough demand to make it worth writing a more comprehensive program.

    -Rick Francis

    -Rick

  2. Hi Rick.

    Yes, from what I gather, it’s pretty common in 401(k)s. That’s part of what makes me wonder why it isn’t more readily available in other types of accounts.

    I’m not certain, but I’d imagine there probably already are programs out there that handle such a thing. I just wish the brokerage firms would bundle it in for us. :)

  3. Mike, thanks for the comments, and this sounds like a great idea!

    I get really frustrating by rebalancing. Part of it is easy. I’ve written a program that can download price data from Yahoo! Finance and tell me exactly how much I need to move around to get back to my target asset allocation. But I find it to be such a pain to go in and actually do it. Perhaps because I don’t really understand how long I need to wait. With Vanguard ETFs, I feel like once I sell some find, I need to wait 3-4 days for it to clear before I can by the next fund, and the whole process can take more than a week, and also I’ve gotten unlucky with price movements between the times I can sell and buy. Perhaps the other complication is balancing in the tax issues for what I’m trying to sell.

    Yes, I wish it could be more automatic!

  4. If you use +/- 5% re-balancing bands, The Finance Buff had a great post showing that the market has to move a LOT for it to trigger the need to re-balance.
    http://thefinancebuff.com/5-percent-rebalancing-band.html
    So, if it ends up being pretty infrequent, do we really need someone to do it for us?

  5. my2fish,

    For those of us who don’t mind the math, it’s definitely not a need (regardless of how often rebalancing is needed). Just a want. It’s something I’d like to have.

    If my email correspondence is any indication though, many people aren’t entirely sure of how to do the math for rebalancing — especially if the allocation includes more than 1 account or more than 3-4 funds. Or just as common, they think they know how to do it, but they’re not 100% sure, and having something to check the math (or just do it for them) would provide some peace of mind.

  6. TIAA CREF has “Rebalance on my birthday,” and I’ve used that for years. It does exactly what you describe; you create an allocation ahead of time, and then the appropriate transactions occur on your birthday or the next trading day. The fees in TIAA CREF are not as low as Vanguard, but they are pretty competetive, and the rebalancing option is very nice.

  7. Hi Don.

    I wasn’t aware that TIAA CREF offered that. Very neat!

  8. I love this idea. In fact, I have written to Vanguard in the past suggesting they implement an automatic rebalancing feature.

    My ex-husband’s 457 plan at Hartford had this feature. You could rebalance anytime you pleased by entering your desired percentages. You could also sign up for annual or bi-annual rebalancing.

    Betterment automatically rebalances quarterly. Not really all that desireable in a taxable account IMO, but I think they have the right idea.

  9. Petunia,

    Good point re: rebalancing in taxable accounts. Automated transactions can certainly lead to problems when they’re taxable.

    As far as Betterment, I agree that they have a good idea. My qualms are:
    1) The costs are too high, in my opinion, and
    2) The whole point is that you need to be able to set your own allocation — otherwise what’s the benefit over a regular target date fund?

  10. I’ve been asking Vanguard for the same thing for a while now. They keep saying they’ll let their development team know. It seems like it would be such a simple thing to implement given that most 401(k) plans have a similar setup.

    It does get slightly more complicated in taxable accounts if you want to do tax loss harvesting and have a little more control. But there’s no reason they couldn’t set up an alert service to let you know (a) when your allocation has shifted outside your preferred percentages and (b) when you have significant tax losses available (exceeds some threshold you’ve set).

  11. Oh, please please please. This is exactly what I would love to see. And at Vanguard more than anywhere else. Good benchmarking of your portfolio against its weighted component indexes would also be a huge win, and I haven’t seen that *anywhere*.

  12. I have this in my Fidelity 401K and didn’t realize it wasn’t widely available to other account holders. I agree it would be a great idea, and shouldn’t be all that difficult to do from their end.

  13. Baba Ghanoush says:

    My Vanguard 401k has this feature, but it only looks at my 401k account, despite the fact that I have taxable and IRA accounts at Vanguard. I’d also want my wife’s accounts (also at Vanguard) considered — we manage our assets as a single portfolio. If you think about the complexity and tax consequences of trying to manage rebalancing across multiple accounts (and individuals), it’s easy to understand why it isn’t an option. But restricting the service to a single account because it’s expedient for Vanguard doesn’t keep it from being of low value to me.

  14. I have never used the service but I am almost positive the company betterment does that.

  15. Evan,

    My understanding of Betterment is that they don’t actually let you choose the allocation. You get to pick how much in stocks and how much in bonds, but they choose the composition of the stock and bond portfolios.

    Also, Betterment’s costs (0.3-0.9% in addition to the underlying ETF fees) are on the high side IMO.

    To me, that doesn’t seem any better than a target date fund. It results in higher overall costs, and it still has the same problem in that there are many investors for whom the provided allocation isn’t a good fit (investors who should be using munis, for instance).

  16. Paul Williams: “I’ve been asking Vanguard for the same thing for a while now. They keep saying they’ll let their development team know. It seems like it would be such a simple thing to implement given that most 401(k) plans have a similar setup.”

    You’re not the only one. Every time I speak to Vanguard I complain about the same thing. And of course they act as if it’s something they’ve never heard of before. By contrast, it is very easy to rebalance my Fidelity 401(k) because I just punch in the percentages I want and I’m done. At this point, however, I keep only one fund in my 401(k) because it’s just about the only Spartan fund from Fidelity that my company offers.

    Vanguard, by contrast, forces you through all kinds of hoops to rebalance. You have to sell off all or part of a fund and buy another. If you sell off a restricted fund, you have to wait two months more before making another transfer. When I moved most of my 401(k) to Vanguard (using the little-known in-service transfer feature for people over 59.5), I spelled out to Vanguard exactly how I wanted my funds allocated, and they got it all wrong – sometimes by 4-5 percentage points. When I e-mailed to complain, they told me it would take several days to get it all back to my request. It was unbelievable.

  17. Emily Booth says:

    It’s very easy to rebalance at T.Rowe Price.

  18. Mike,
    What do you think of Amervest by TD Amertrade? With this system I am able to rebalance any number of times with no addtuonal cost. All I pay is a. 075% fee and I have no trade commissions. I have been slowly transferring my IRA into this account. So far so good if only the market were going in the right direction.

  19. Ereiss,

    I’m not familiar with that program. And, for some reason, I’m having difficulty locating any information about it. Would you be able to provide a link?

    In general, I can say that I think TD Ameritrade is definitely one of the better places to have an investment account. Their list of ETFs that they have accessible in their commission-free trade program is super.

  20. Mike,
    Here is the link to the amerivest program. Please let me know what you think.

    http://www.tdameritrade.com/planningretirement/portfolioguidance/amerivest.html

    Thanks,

  21. Ah, thank you.

    Truth be told, a 0.75% fee in addition to the underlying ETF fees seems a bit much to me. In many cases, I’d prefer a simple target retirement fund from Vanguard if you can find one that’s anywhere near the allocation you’re looking for.

  22. I double and triple this sentiment. I’ve been begging for a simple rebalancing tool for years.

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