| Review area | What to check | What action it can trigger |
|---|---|---|
| Asset allocation drift | Current % weights vs IPS targets and bands | Rebalance (tax-aware in taxable accounts); document if you chose to stay drifted within band |
| Tax-loss harvest opportunities | Positions trading below cost basis in taxable accounts | Realize loss; rotate into substitute exposure (avoid wash sale per IRC Section 1091) |
| Life events affecting the plan | Marriage / divorce / new child / new job / inheritance / health change | Update IPS, beneficiaries, contribution targets, time horizon, risk capacity |
| Tax-bracket optimization | Current marginal rate vs likely retirement rate; Roth-conversion window | Partial Roth conversions; harvest gains in 0% LTCG band; bunch deductions |
| Estate updates | Beneficiary designations, will/trust, DPOA, HIPAA forms (post-age-18 child) | Re-execute documents on title changes / status changes |
Use the annual review to renegotiate the IPS, not just measure against it. A 45-year-old's IPS from age 35 is probably obsolete: time horizon shortened, risk capacity changed, tax bracket moved. The IPS is a living document. When you update it, document WHY in writing — that's the audit trail that protects both the client and the advisor in a future drawdown when the client doesn't remember agreeing to the risk level.
Avoid the rebalancing trap in concentrated-position situations. If a client holds vested company stock that has run hard (Section 83(b) tech-employee classic), 'rebalance back to target' may mean realizing a 7-figure capital gain that the client can't fund the tax on. The right answer is usually a multi-year sell-down plan executed via 10b5-1 or charitable-remainder structures — not a single-year liquidation that triggers AMT or hits the 20% LTCG + 3.8% NIIT brackets all at once.
Schedule the annual review. Run the five checks above against the IPS. Rebalance when the bands say to, not when the market 'feels' a certain way. Update the IPS document for life events. The discipline is the deliverable — what separates a professional from a friend who happens to read finance news.
Sit with the ideas.
A client's IPS targets 60% equities / 40% bonds with a +/-5 percentage-point rebalancing band. After a strong equity year, the portfolio drifts to 68% equities / 32% bonds. What does the advisor do at the annual review?