Your high-net-worth clients look to you for ways to maximize their wealth while minimizing their tax liabilities. Let’s look at three common tax-minimization strategies and how rebalancing platforms like redblack can help you achieve these objections for your clients.
Diversify client investment accounts
Diversification is the most fundamental principle of investing, but have you considered how diversification can apply to account types as well? Not all investment accounts are created equal. Where you choose to hold your clients’ investments can significantly impact their future tax liability.
Taxable brokerage accounts, predictably, can expose your high-net-worth clients to the most tax liability. However, they have several advantages, including no withdrawal penalties and higher liquidity than other accounts. How can your clients reduce their tax obligations while enjoying the benefits of taxable accounts? Place tax-efficient investments in these accounts, such as no-dividend stocks or zero-coupon bonds. Holding onto investments in brokerage accounts for more extended periods (typically a year or longer) can also reduce the capital gains tax rate.
Tax-deferred accounts, like 401(k)s and IRAs, allow investors to reduce contributions from their taxable income for the year they’re made — which can be an essential tax-savings strategy for high-earners who are on the cusp of their tax bracket (or anticipate being in a lower tax bracket in retirement). While there’s no income limit for contributing to a tax-deferred account, the catch is, of course, clients can’t access the money without penalty until age 59 ½.
Tax-free accounts, like Roth 401(k)s or Roth IRAs, offer investors tax-free withdrawals — but come with their stipulations and limitations. For high-net-worth clients, the income ceiling caps may make them ineligible to contribute. However, if your clients have a year in which they experience a lower income level than usual, they may be able to take advantage of these benefits.
Tax-advantaged accounts, like 401(k)s or Roth IRAs, may be more appropriate places for investments with potentially high tax liabilities or more susceptible to volatility than other tax-efficient investments.
Be strategic when realizing gains
Your clients want their portfolios to grow, but growth creates gains — which often come with an unwanted tax liability.
When you have the technology at your fingertips to rebalance and trade to keep your high-net-worth clients’ portfolios aligned with their goals, you must be strategic in how you and your clients are addressing capital gains.
For example, suppose your client is experiencing a lower-than-usual income year (perhaps they took a sabbatical or donated a substantial amount to charity). In that case, it may make sense to realize capital gains during that year instead of in a year where their income is typical or higher than usual.
Or they may wish to spread the sale of an investment with substantial gains over two or three years. Doing so may incur additional risks (which should be discussed with their tax professional). Still, it can also help reduce the tax liability your client experiences in a singular year.
Tax-loss harvesting is a common strategy for offsetting gains. Investors opt to sell off securities at a loss while selling profitable securities for a gain in the same year. When the investment with a loss is sold, investors can claim a credit that offsets the gain realized by another investment. In doing so, they can significantly reduce (or even eliminate) their capital gains tax liability.
It’s worth noting that tax-loss harvesting prioritizes like-investments first. For example, the credit for a short-term loss is used first to offset the tax liability of a short-term gain. The same goes for long-term losses and gains, though any remaining losses go towards the other type of gain.
Again, when you’re taking advantage of rebalancing and monitoring technology to analyze your clients’ portfolio performance, strategies like tax-loss harvesting are integral to preserving your clients’ wealth and minimizing tax liability.
Integration, implementation, and service: intelliflo redblack in action
When Balentine, an established wealth management firm with nearly $7 billion in assets under advisement (AUA), sought to combine its institutional and high-net-worth operations under one best-in-class rebalancing and trading platform, intelliflo redblack was a clear choice. Combining rich functionality with the ability to integrate with and operate alongside other platforms in its tech stack, intelliflo has had a reputation as a profitable and stable partner and demonstrated commitment to continual improvement.
In this case study, learn how Balentine’s advisors can have the flexibility to trade household accounts for family tax planning purposes while efficiently managing cash transactions, concentrated securities, and separately managed accounts (SMAs).
More effectively minimize liabilities with intelliflo redblack
intelliflo redblack is a digital tool that helps you easily manage your client’s portfolio and make tax-focused adjustments on one simplified platform. Intuitive and scalable, redblack is built to adapt to your business’s growth goals while empowering you to quickly and efficiently rebalance, harvest losses, and make incremental (yet impactful) adjustments to client portfolios. With total visibility into your clients’ complex financial landscape, you have everything you need to guide them toward more tax-efficient investment decisions all year round.
1Cerulli, State of US Wealth Management Technology 2022