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The explosion of low-cost investment products and model portfolios provides significant opportunities for advisors to transform and grow their practices while improving client outcomes. However, there is a major obstacle getting in the way of advisors taking full advantage of these opportunities – Taxes!

Capital gains taxes can get in the way whenever there is “money in motion” for non-qualified accounts. Whether it is money flowing into accounts or money flowing out of accounts – taxes pose an obstacle.

Onboarding a new prospect with legacy holdings
Withdrawing money to meet client need for funding
Modifying a client’s  investment strategy
Typical Model Usage1 Chart. Average taxable account $75k. 30% of  accounts  are taxable. Capital Pains
Capital gains taxes to transition taxable accounts has hindered advisors in the broader adoption of model-based strategies beyond small, tax-deferred accounts.

Most advisors understand these obstacles, but may not be aware that new technology capabilities are available that allow advisors to efficiently manage them to take the “capital pains” out of money in motion for their clients and practice.

Tax-Smart Transition: A Growth Tool for Advisors

Clients often face a dilemma when they consider hiring a new financial advisor or transferring their taxable assets into a new strategy. Selling their current holdings to make these changes may trigger a large tax bill, which can be a barrier to action–yet clients may not realize the potential cost of remaining in a strategy that might be misaligned with their risk tolerance or goals.

Such changes don’t need to be “all-in” or “all-out” decisions based on tax considerations. One of the potential benefits of a model- based practice is the elimination of manual, client-by-client workflows. Now this can include scaling tax calculations.

Automated tax-smart transition can “unlock” stranded assets like concentrated stock holdings and accounts transferring from other advisors with embedded gains–and systematic, automated tax loss harvesting may be able to seize on volatile markets to accelerate transitions, just when advisors and clients may need it the most.
Chart showing how advisors can illustrate how much of the client portfolio can be transitioned for a defined tax budget.

This chart is for illustrative purposes only and is not representative of actual model performance
* Assuming tax rates of 23.8% for long-term capital gains and 40.8% for short-term capital gains.
** Tracking error is a measurement of how closely a portfolio is tracking its intended target holdings.

Tax-Smart Withdrawal: Preserving Value

As baby boomers enter retirement, how they navigate taxes in accessing their savings is critical. Any erosion of capital diminishes the income-producing potential of a portfolio. For advisors, protecting against unnecessary tax-events improves client outcomes, preserves assets, and by differentiating the advisor, helps grow the practice.

Withdrawing needed income is a balancing act. Simply liquidating securities to minimize the current tax hit could leave the portfolio increasingly imbalanced. Pro-rata liquidation could lead to excessive and unnecessary tax bills. This is a burdensome calculation for an advisor, but yet another opportunity to use tax-smart technology to quantify the tradeoff between taxes incurred and how closely the portfolio is sticking to its target profile.

Effective tax management technology and proposal capabilities can differentiate an advisor with their ability to provide practical, beneficial guidance to clients and 
can potentially be critical to success in prospecting and growing their practice.
Tradeoff Chart

With the tradeoffs clearly illustrated, the advisor and the client can select the combination of tax bill and target portfolio tracking error that best suits the client.

Your Practice: Powered by 55ip

55ip offers an investment model adoption platform designed to help improve outcomes for advisors and their clients. By partnering with 55ip, advisors are empowered with a simple user experience and investment strategy engine for model delivery including design, selection, tax-smart transition and automated trading.

The tax management capabilities co-sourced with 55ip are helping our advisor partners “unlock” taxable assets for model portfolios.

Tax Smart Transition
Tax Loss Harvesting
Tax Smart Withdrawal
Chart showing typical usage vs. 55-ip Powered2 usage

55ip is the marketing name used by 55 Institutional Partners, LLC, an investment technology developer, and for investment advisory services provided by 55I, LLC, an SEC-registered investment adviser. Such registration does not imply a certain level of skill or training. These materials are intended for Registered Investment Advisors only and describe various risk and tax management strategies that may not work as intended, in part because the strategies may be modified only on specified cycles. Risk management strategies cannot be counted on to provide protection to client portfolios. Even when using the strategy, portfolios remain subject to multiple risks, including the risk of loss of the entire amount invested. The impact of a tax-loss harvesting strategy depends upon a variety of conditions, including the actual gains and losses incurred on holdings and future tax rates. These services are available for an additional advisory fee.

Past performance does not guarantee or indicate future results and there can be no assurance that any return objectives will be met. No representation is made that any investor will, or is likely to, achieve the intended results. All investments involve risk, including loss of principal.

The information contained herein is subject to change without notice, is not complete and does not contain certain material information about the investment strategy, including additional important disclosures and risk factors associated with such investment and information about fees, trading costs and taxes. Neither the U.S. Securities and Exchange Commission nor any state securities administrator has approved or disapproved, passed on, or endorsed, the merits of this document.

55ip does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice.

1 Data from TD Ameritrade Institutional Model Market Center – Link Conference 2020
2 Source: 55ip

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