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Technology is transforming the world of wealth management, enabling advisors to deliver greater capabilities to clients with increased efficiency. Among these potential capabilities is a more advanced systematic approach to year-round tax management – it no longer needs to be a burdensome, manual, year-end process reserved for larger accounts. Advisors can now deploy Tax-Smart Investment Management across their practice with intelligent automation, delivering greater value to their clients and their business.

What is Tax-Smart Investment Management?

No client ever wants to see their portfolio fall in value, but tax-smart investment management reveals a silver lining by using market-based declines to add value to their portfolio. At times, it can be challenging for clients to get comfortable with realizing an investment loss. However, in many instances, when employing a tax-managed approach, the proper management of these losses can make a positive contribution to a client’s after-tax investment outcomes. Even brief periods of market turmoil and decline can provide opportunities to reduce the current year’s taxes and potentially increase the client’s long-term wealth.

In our piece, “Building a Successful Model-Based Practice,” we discussed 3 keys to leveraging the full potential of models and technology to increase the value of an advisor’s practice. Read on to see how all three of these keys can also be applied to Tax-Smart Investment Management: 1 Customize at scale, 2 Co-sourcing, 3 Demonstrate where you are adding value.

Tax Loss Harvesting (“TLH”) is a key feature of tax-smart investing. TLH seeks to capture investment losses in a portfolio that may be used to offset the client’s tax burden in the near-term and increase after-tax returns. Because the tax code1 allows the use of investment losses to offset investment gains (as well as up to $3,000 of income in certain cases) capturing even a temporary loss opportunity can create real tax savings).

Harvesting a Loss for Tax Savings

Replacing the harvested security with a similar proxy3 maintains the desired investment exposure in the portfolio while offsetting capital gains elsewhere in the portfolio.
With today’s technology, advisors can use intelligent automation and models to co-source the implementation of Tax-Smart Investment Management and customize the portfolio construction in consideration of the particular client’s needs.

Managing Tax Savings

In the prior example, by reducing the client’s cost basis in this portfolio exposure by $2,000 the client is able to defer this tax liability until realized at a later date, which means they hold on to those tax savings for the time being so that they can stay invested.

If the market recovers its losses, the client retains the value created by tax-loss harvesting and can choose to keep the money invested, resulting in the potential for compounded returns.

In addition to the tax deferral, there are other potential benefits to tax loss harvesting that can potentially reduce the eventual taxes paid:

Tax Rate Arbitrage: Deferring short-term gains into long-term gains
Age/Tax Rate Timing: Deferring gains until investor is in potentially lower tax bracket
Estate Planning: Potential to bequeath and use cost basis step-up to avoid taxes on those gains4

Demonstrating and Delivering Value to your Clients

Conveying the value of tax management to clients can be difficult because it seems theoretical – much like compounding in tax deferred accounts – it is not typically as transparent to the investor. By providing Tax Savings reports, advisors can allow clients to monitor “what have you done for me lately,” just like traditional performance.

Additionally, with incremental sources of return becoming more and more scarce, focusing on what you can control becomes increasingly important. Today, many advisors are delivering limited tax management, such as matching losses versus gains, side-stepping capital gains distributions from legacy mutual fund positions, or general portfolio clean up toward the end of the year. However, we believe that the more systematic and disciplined the approach, the more successful the approach is likely to be over the long-run. With the use of models and co-sourced intelligent automation, advisors can deliver systematic, yet customized Tax-Smart investing solutions.

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. 55ip’s active tax management approach offers the following combination:

Chart illustrating 55ip platform difference

Contact the Advisor Success Team at
617.960.9559 or
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Important Information
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.

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