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Tax-smart transitions allow advisors to help investors and grow their businesses

With tax season and market uncertainty on the minds of investors, now is the time for advisors to capitalize on one of their greatest opportunities to drive new assets to their practice: tax-smart portfolio transition. Recent market volatility, as well as preparing for tax day, likely have many prospective clients receptive to ideas on how to update their portfolios from a risk and/or tax efficiency perspective. Yet, it could be the looming taxes on the accumulated—but unrealized—gains already in the portfolio that deter clients from taking action. This poses an opportunity for advisors to demonstrate how tax-smart technology can optimize the transition of assets to new model portfolios, enabling investors to stick to their “tax budget” and capitalizing on market volatility to ease the transition.

Breaking Down the Capital Gains Barrier

With 55ip’s ActiveTax Technology®, advisors can show investors that tax transition is not an all-or-nothing process. Historically, a large potential tax bill has prevented many investors from making the move to an updated portfolio, but advisors can potentially achieve a higher success rate in landing taxable accounts by lessening or removing the pain of these capital gains. Our ActiveTax Technology can optimize for a combination of legacy positions and new positions to get a combined portfolio as close as possible to a targeted portfolio given the investor’s allowable budget for taxes, whether that budget is 80% , 40%, or even 0% of the total tax cost to transition. The 0% option can be especially intriguing to investors because sometimes it can allow a client to get their foot in the door with a new portfolio with no upfront taxes and then transition the rest over time with zero net out-of-pocket taxes.

Tax-smart transitions are tailored to meet end-clients’ tax budgets:

This determination is made by analyzing the gains their current portfolio has generated and matching them with losses to generate proceeds that can help to transition the investor into the new model. The technology also looks at holdings to see how they can be further optimized by combining old and new tickers to minimize the tracking error of the combined portfolio to the ultimate target portfolio. Some of those old positions can actually add value during the transition by providing at least some of the desired exposures.

Further, the advisor can explain that if the investor is willing to pay even a little in taxes now, more assets could be transitioned to accelerate the process and further reduce the tracking error. Typically, paying even 20% of the total tax bill may reduce much of the tracking error and align the portfolio more closely to the desired performance profile, which is important for an investor focused on risk.

The Power of an Ongoing, Systematic Approach

How is the rest of the transition accomplished over time? Once an advisor begins to transition a client’s portfolio, they can leverage tax-loss harvesting opportunities, which our technology attempts to identify on a year-round basis, to take advantage of market volatility by capturing tax losses. These losses can then be offset against gains that need to be realized on legacy positions to further transition the portfolio. As an example of the value of this approach, during the extreme volatility in February and March of last year, nearly 70% of accounts leveraging 55ip for tax transitions were able to complete their transitions with no incremental out-of-pocket taxes.

Thus, advisors guided many clients to positive outcomes in a market environment that was seen by many as extremely negative. A key aspect of ActiveTax Technology is the automated capability to monitor portfolios year-round for volatility-induced opportunities for tax loss harvesting that can help further transitions.

Historically, model adoption has been dominated by smaller retirement accounts, largely due to the pain of capital gains taxes when transitioning taxable accounts. The average account size for advisors using models is $100K. For advisors using 55ip, the average taxable account size is ~6x that amount.

In summary, advisor-led, tax-smart transitions can be a powerful tool for advisors in growing their practice.

For information on partnering with 55ip or leveraging our tax-smart transition technology, contact our Advisor Success Team at (617) 960-9559 or at

* Average account balance in models with 55ip as of June 30, 2020.

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