- Investment Approach
- Research Alliance
- Contact Us
A large part of our job as wealth managers extends beyond pure investment management. Tax-managing portfolios is key to maximizing our clients’ overall financial well-being, which is the true overarching goal of our services. In a year where nearly everything is down—stocks, bonds, commodities—there were likely a lot of opportunities in our clients’ portfolios to harvest losses. But there are also a lot of considerations. It’s not as simple as identifying share lots with the biggest losses, choosing acceptable swaps for them, and avoiding wash sales at the end of each year.
Tax-loss harvesting is hardly a one-size-fits-all value-add. Depending on the niche an advisor is serving, and each individual client’s situation, many variables may be involved:
For advisors with businesses dominated by mass-affluent clients or HENRYs (High Earners, Not Rich Yet), the benefits of tax-trading are not as clear-cut compared to high-net-worth (HNW) clients with large tax bills and potential future estate liabilities. In general, the robo-advisors are targeting the non-HNW groups and one of their big selling points is that they automate tax trading, despite the fact that the benefits are lower or possibly absent for these types of clients.
If you have prospects or clients in this group where the robos or similar offerings are your competition, it could be impressive to show how you’ve thought through the issue in a sophisticated way. Explain how automating this without human judgment could lead to suboptimal decisions. The appearance is that tax-trading is universally beneficial and commoditized. However, this is an area where we think the human advisor still beats the algorithm. Make that case.
Year-end is a typical time to think about taxes and portfolios, but shouldn’t we be screening for tax-mitigation opportunities year-round? Investments can be subject to a drawdown earlier in the year! This is why setting policies on tax trading is important. A prudent long-term planning policy needs two key components to be effective (more on this decision architecture framework in “Investor Behavior: The Psychology of Financial Planning and Investing” by Baker and Ricciardi, Chapter 11):
At Litman Gregory, we also look for tax-trading opportunities when cash moves in or out of client accounts and at every rebalancing or tactical adjustment. At the same time, we often say we try not to let the tax horse drive the investment cart: the investment implications should always be paramount as the so-called tax alpha is generally lower than many think. As a firm that’s had in-house research expertise for over 30 years, we’ve found that our time is best spent focusing on finding investments that will produce the highest pre-tax return, as that’s frequently the best predictor of after-tax returns. But the wealth managers that oversee trading for client accounts can seek to add value by opportunistically executing tax trades and coordinating with clients’ accountants and tax/estate attorneys.
—Chad V. Perbeck, CIMA®
Take the complexity out of navigating the investment landscape for your clients. Sign up below to receive free Litman Gregory research.
This Website is specifically intended for and limited to financial planners, investment advisors, accountants, registered representatives of licensed securities firms, and other financial and investment professionals with a sophisticated and advanced level of knowledge about investments.Yes, I am an investment professional No, I am not an investment professional