Given recent market volatility, your clients are likely concerned about their finances and worried about the future. Unfortunately, market behavior is far from within your control. However, this can be an ideal time to demonstrate the value of your advice in helping your clients manage the aspects of their portfolios that are within control. Efficient tax management is another tool available to you as a user of Tamarac Trading to demonstrate value and reinforce your focus on the investor’s financial wellness.

A sophisticated portfolio, that can track a benchmark and accommodate a tax management strategy, can add considerable after-tax, annual value for your clients. In fact, our research indicates that the projected value of your tax management advice could be 100 basis points annually.1

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One of the Tax Management strategies that can be useful is Tax Loss Harvesting. Losses on investments can be disappointing – for both you and your clients. However, they offer an opportunity that your clients may not be aware of: helping to offset taxes from other profitable investments within their portfolios. A reactive strategy of harvesting losses can be employed at year-end, in response to the portfolio’s performance over the course of the year, or in response to turbulent market environments like we’re currently experiencing. For many advisors, tax loss harvesting is the single most important tool they have in their arsenal for reducing taxes on behalf of their clients. There are numerous studies that indicate that, next to inflation, taxes remain the biggest drain on a portfolio as taxes can reduce returns by up to one percent per year.

There are several processes you can complete in Tamarac Trading to find client accounts and harvest losses in those accounts. In this blog post we’re going to highlight two strategies you can use for Tax Loss Harvesting:

1. Single Security Tax Loss Harvesting: The Directed Trade functionality within Tamarac Trading can be used as a tax management tool when a single security presents an opportunity to harvest a loss within an account. The Sell Losses directed trade type allows you to find lots with losses and sell that security if it meets the loss thresholds you specify. Then the Directed Trade workflow allows you to select the accounts, via saved search or other mechanisms to perform the trade. Many advisors will save this list of accounts, and evaluate if it is appropriate to buy back the original security after the wash-sale period expires.

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2. Portfolio-Level Tax Loss Harvesting: Portfolio-Level tax loss harvesting allows you to find loss opportunities that meet each account’s thresholds and harvest those losses across many accounts. Tamarac Trading has the following rebalance options specifically designed for tax loss harvesting:

Tax Loss Harvesting – A sell only type of rebalance where securities in accounts that meet the tax loss harvesting thresholds set within the accounts are completely liquidated.

Tax Loss Harvesting & Full Rebalance/Min-Max Rebalance – A buy and sell type of rebalance where securities in accounts that meet the tax loss harvesting thresholds set within the account are sold and the proceeds of those sells, as well as any cash available for trading in the account, are reinvested into the account model.

When using a tax loss harvesting rebalance, equivalent securities support your goals by allowing you to, at the security level, define which securities are similar to the securities in your clients’ models. During a tax loss harvest rebalance, these equivalent securities can help you reinvest back into your models quickly after selling losses.

In summary, Tamarac Trading offers strategies that enable a streamlined process for Tax Loss Harvesting across your clients’ accounts. There are also several benefits to you as the Advisor:

  • Tax loss harvesting can increase the depth of relationships with clients. This strategy can allow you to consider all of the client’s investments rather than just the assets that you are currently managing.
  • Harvesting losses can offset gains generated outside of a client’s portfolio. For example, harvesting losses can offset income such as gains from the sale of real estate.
  • Tax loss harvesting can bring about referrals from custodians, CPAs, attorneys, etc.

When investors’ emotions are high, they’re more likely to need your guidance and support. Drawing their focus to the things you can control can help show your value and ease their concerns.

Learn More

To learn more about how you can leverage the tax loss harvesting tools within Tamarac Trading visit tamaracinc.com or give us a call at 866-525-8811.

 

Sources:
1. “Capital Sigma: The Advisor Advantage,” InvestPMC.com, last modified in 2019, https://www.investpmc.com/sites/default/files/documents/PMC-CAP-SIGMA.pdf.

The information, analysis and opinions expressed herein are for informational purposes only and do not necessarily reflect the views of Envestnet. These views reflect the judgment of the author as of the date of writing and are subject to change at any time without notice. Nothing contained in this piece is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.

Written by Jessica Martin

Jessica Martin has been with Envestnet | Tamarac for over 10 years and is Vice President of Sales Engineering. Jessica is responsible for helping users understand and implement best practices, assist RIAs to experience the greatest benefits from Tamarac’s comprehensive technology platform and to enable firms to run a more profitable practice.