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Meaningful tax alpha starts with year-round portfolio rebalancing

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Managing the tax implications of your clients’ investments is one of the most compelling ways you can prove your value while helping them improve investment outcomes. And portfolio rebalancing plays a crucial role to ensure their investment policies and tax efficiency goals are consistently met.

That’s precisely why tax planning should be a year-round activity, not just an annual tax season event.

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With continued stock market volatility and potential bear market conditions emerging, showing your clients tax-smart approaches to asset location, transitions between portfolios, household-level management and rebalancing, and tax-loss harvesting is a great way to add value.

Here are three key ways you can make sure your portfolio rebalancing and trading stay in sync with your clients’ tax requirements and objectives.

 

1. Tax-aware portfolio rebalancing

Tax-aware rebalancing can help you to reduce or eliminate your client’s tax consequences. Asset location optimization, tax-loss harvesting at the position or tax lot level, and capital gains budgeting are powerful methods to achieve specific goals.

By establishing capital gains rules across taxable portfolios, you can actually help your clients get control of their annual tax burdens. Applying unlimited sets of tax rules, custom thresholds, target overrides, and location preferences are other key rebalancing features you can use to help clients maximize tax efficiencies.

 

2. Gaining tax efficiencies with householding

Householding structures can help you meet your clients’ increasing demand for tax efficiencies. Reviewing a client’s risk profile holistically across all accounts within a household lets you assess the proper alignment between risk tolerances, preferences and capital gains budgets. A portfolio rebalancing system should offer wash sales logic across the household to maximize tax efficiencies.

Optimizing the location of assets in various types of accounts can significantly reduce the tax impact of the portfolio. Therefore, rebalancing should also enable you to define location preferences across taxable, tax deferred and tax-exempt statuses.

Many financial advisors are leveraging what-if scenarios on model allocation changes or tax-loss harvesting events. With the right portfolio rebalancing tool, you can test different types of scenarios across your entire client base or a subset of clients.

3. Harvesting tax losses or gains

With ongoing market volatility, your clients may find themselves sitting on losses that can be harvested to offset capital gains and reposition asset allocation, while maintaining their desired portfolio allocations.

Portfolio rebalancing should allow you to easily harvest tax gains or losses and utilize substitute securities to maintain market exposure, while avoiding potential wash sales. It should also provide capabilities for:

  • Realizing gains or losses at the position or classification level, and holistically across investment portfolios
  • Factoring in restrictions, minimum trade size, and loss or gain thresholds to influence trade recommendations
  • Offering different methods of harvesting gains and losses including closing the position, selling lots based on cost basis method, and selling specific lots

 

Lower taxes: It’s what your clients want

Today’s wealthy clients want more transparency, reduced tax burdens, wealth and asset preservation. With a greater focus on tax efficiency, and the help of powerful tax-aware portfolio rebalancing software, you can have deeper conversations with your clients, help them preserve or increase wealth, and grow your practice.