Does your wealth management platform empower advisors to optimize year-end tax-loss harvesting for their clients?
The ups and downs of this ungainly year may represent a late-inning opportunity for advisors to help clients execute year-end strategies such as tax-loss harvesting.
While 2020’s COVID-fueled market volatility has upended many portfolios, those holdings with downside fluctuations do offer wealth managers a way to help clients manage the tax consequence of certain winners. Tax-loss harvesting, the selling of securities at a loss to offset a capital gains exposure elsewhere in a portfolio, provides advisors with an attractive way to demonstrate additional value to clients before this topsy-turvy year finally ends. There isn’t a minute to lose, either; the clock is ticking for those who want to reduce a tax bite that is even larger for those clients in the highest income bracket.
When Doing It By Hand Isn’t Enough
For wealth management teams and advisors the primary question is this: “Can tax-sensitive strategies at year-end be reliably scaled and managed considering all the other year-end activity to be completed?”
Fortunately, according to a recent Cerulli survey,1 the answer to that question can be “yes,” using platform technologies that enable many wealth managers to efficiently execute on these complex requirements. Among the top-technologies utilized by advisors, 80% of survey participants said they either currently take advantage of client-oriented tax and accounting software (52%) or plan to in the next three years (28%). “Creating a fully integrated platform… that includes all aspects of investment management, brokerage and advisory business can help teams work in unison and facilitate comprehensive recommendations across the client’s entire balance sheet,” the survey noted.
Timely tax strategies offer distinctive ways to attain more tax-deferred growth potential, while pursuing a higher level of risk-adjusted return. One of the best ways to consistently and tangibly add value to client portfolios, especially during volatile markets, is to deploy tax-optimized techniques like tax-loss harvesting to improve after-tax returns. According to Forbes’s Simon Moore, when advisors help clients take their losses earlier and delay payment on the gains, the total tax bill stays about the same, but clients can often pay it much later. “This way,” he added, “they can earn a return on the money they would have paid in tax because they kept it longer.”2
The Choice: Manual or Automated
For advisors, putting the right tax strategy in place to transform a negative experience into a positive result can demonstrate an additional level of value to clients beset by a year’s worth of ornery market behavior.
Here are two key questions to consider:
- Is your home office overlay team struggling at year-end to scale up and efficiently complete all of your advisors’ tax-harvesting requests in a timely manner?
- Are your advisors subtracting valuable time from counselling clients to spend their days identifying and executing tax-harvesting trades by hand?
A “yes” answer to either question suggests it may be wise to revisit your managed account platform technology, and explore the capabilities of the VestmarkONE® platform. Its automated approach is designed to reliably locate loss-harvesting opportunities across all clients and accounts, quickly and efficiently, leaving time-consuming, error-prone manual processes in the past. Consider these key advantages:
- Rather than running reports and poring over each account to determine where loss-harvesting opportunities lie hidden, the VestmarkONE platform’s alerts and heatmap technology automatically identify those accounts and securities where loss opportunities suggest immediate action.
- Manual trading workflows can be quickly replaced by automated, streamlined trading. Tax-harvesting trades of individual securities can be performed across a group of accounts or trades, or they can be done on an account-by-account basis. Whether you’re dealing with a UMA account or a Rep-as-PM account, VestmarkONE’s tax lot accounting systematically identifies the most advantageous tax lots and automatically retrieves them from the trading workflow.
- Since inadvertent wash sale violations can negate the benefits of harvesting, the VestmarkONE platform’s logic automates wash sale avoidance for you. It also enables automatic investment of sale proceeds into selected securities, and even notifies you when the wash sale period has ended.
Needed: More Time to Advise Clients
Tax-loss harvesting may make sense at other times beyond the year’s end. It can be a good strategy during market turmoil, or at any time of the year. Some advisors monitor and adjust their client’s strategy on a more frequent quarterly or semiannual basis. As Cerulli pointed out, technology platforms, such as VestmarkONE, can enable a firm “to turn on a tax-aware setting to alleviate the manual effort associated with trying to determine and manage tax optimization.” These settings operate year-round to capitalize on loss opportunities whenever they emerge, not only when someone remembers to inquire into them.
The benefits can be immediate. By digitally managing this critical accounting task instead of doing it by hand, your team can scale up and complete all requests in a timely manner. Meanwhile, your firm’s advisors have more time to provide the personal counseling their clients need during a historically tumultuous period when assurance, guidance and ongoing advice are in short supply – and in high demand.
1 The Cerulli Report 2020 Unifying the Wealth Management Experience Page 35, 36
2 Simon Moore, Forbes, Why You Should Tax-Loss Harvest Now https://www.forbes.com/sites/simonmoore/2018/11/08/why-you-should-tax-loss-harvest-now/#263804db7676
By Lauren Yeaton Hunt, VP, Product Marketing