Are CIOs in Trouble?

 Technology is changing the CIO role.

Are CIOs in trouble? Last week, a Chief Investment Officer joked (we think) that rebalancing tools like ours will put him out of a job. This is new. Everyone, including us, has speculated on whether robos will put advisors out of a job (you can read our view that they won’t here). But CIOs? What have they got to worry about? The answer is that while rebalancing technology isn’t going to make CIOs obsolete, it might make individual CIOs obsolete. The CIO job isn’t going anywhere, but rebalancing technology is changing the role of the CIO.

Technology makes the CIO role more important

Advanced rebalancing technology makes CIOs more powerful, enabling them to consistently implement their investment ideas across their firm’s entire book of business. Contrast this with the current state of things. When we ask CIOs of firms with traditional workflows how long it takes them to implement tactical asset allocations across their firm, the standard answer is “somewhere between two weeks and never.” The challenge is to update every account in a manner that respects its customization needs. Without a system like, well, ours, that’s a manual and time-consuming task. It can take so long to implement a tactical change that by the time half the book has been updated, the tactical shift is reversed. Hence the “never.” A CIO’s ideas are useless if the CIO’s firm has no capacity to implement those ideas. But advanced rebalancing systems “connect the gears,” empowering CIOs to have their judgment reflected in every portfolio. It reduces “two weeks to never” to one business day. In a real sense, rebalancing technology finally puts CIOs in charge.

Technology makes the CIO role more demanding

But precisely because CIOs are more meaningfully in charge, they have more to do. It is not enough for a CIO to publish market commentary, create buy lists, and establish asset allocation and concentration guidelines. CIOs have both the opportunity and the obligation to design the entire wealth management process, in a manner that just wasn’t previously feasible. They need, for example, to state their firm’s policy on:

• Preferred trade-off between dispersion and tax-sensitivity
• Permitted substitute products for each asset class
• Permitted custom asset allocations, e.g. if the default Growth Model has a 5% allocation to Real Estate, it may be OK to lower the recommendation to 0% or increase it to 10%, but it’s not OK to make it 50%
• Rebalancing policy, e.g. should it be based on the calendar or a cost/benefit score? A combination? Should the rebalancing policy be different for small and high net worth accounts?

This is all good stuff, but it’s also new stuff. Most firms we deal with have never systematically answered these questions.

So, will all this put CIOs out of work? Not likely. In part, this is because deciding on policy is not a test. There are no wrong answers. The CIO needs only decide what they and their firm really believe. The job of an advanced rebalancing and portfolio optimization system is not to tell a CIO how to run their shop. It's to enable them to run it the way they want. New? Yes. Maybe a little intimidating? Possibly. But at heart, it's a promotion of the CIO, who will enjoy greater power, responsibility, and the ability to make a positive difference in investor's lives.

For more on this topic, check out Automated Rebalancing & Specialization.