The primary goal of financial advisors is to create value for clients and guide them toward financial prosperity. One strategy to help achieve this is tax loss harvesting (TLH), a method that can potentially enhance after-tax returns. However, many financial advisors do not know that tax loss harvesting is actually a strategy that can be implemented throughout the year as an ongoing component of portfolio management, rather than simply addressing it at the end of the year.
How can advisors utilize tax loss harvesting in portfolio management to potentially generate more tax efficiency? Let’s take a closer look:
Fundamentals of Tax Loss Harvesting
Tax loss harvesting involves selling investments at a loss to offset capital gains from other investments. This strategic approach can potentially reduce taxable income and, consequently, tax liability. By substituting these sold investments with similar assets, advisors maintain the desired portfolio allocation while actively working toward optimized tax efficiency.
Potential Benefits of Tax Loss Harvesting (TLH)
Tax loss harvesting offers several potential benefits, including:
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Reduction in Taxable Income: TLH offsets capital gains with losses, thus lowering clients' taxable income.
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Tax Deferral: It provides an avenue to defer tax payments, improving clients' cash flow.
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Portfolio Rebalancing: TLH facilitates portfolio rebalancing without incurring high tax liabilities.
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Tax Rate Arbitrage: It allows clients to benefit from differing tax rates between years.
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Carrying Forward Losses: Losses not currently used can be carried forward, providing future tax benefits.
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Year-Round Tax Loss Harvesting: An Enhanced Strategy
Year-round tax loss harvesting can potentially offer consistent tax savings and greater flexibility in adapting to market conditions. This proactive approach underpins continuous portfolio optimization, aiding clients in making disciplined investment decisions even during market volatility.
Effective Implementation of Tax Loss Harvesting
How can independent advisors effectively implement tax loss harvesting year-round? Advisors should engage in:
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Regular Portfolio Monitoring
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Evaluating Tax Implications
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Choosing Appropriate Replacement Assets
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Clear Communication
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Ongoing Review and Adjustment
Together, these elements build a solid foundation for evaluating the possibility of, and actioning, tax loss harvesting as a tax strategy.
FOLLOWING THE WASH SALE RULE
The wash sale rule is pivotal in tax loss harvesting, prohibiting loss claims on securities repurchased within 30 days before or after the sale. Properly navigating this rule is essential for the effective application of TLH.
THE PRECISION OF BASIS POINTS IN FEE MANAGEMENT
Using basis points (BPS) for fee calculations ensures precision, standardization, and clarity in communication. This method measures the impact of fees on investment returns.
DIRECT INDEXING AS A STRATEGY FOR YEAR-ROUND TLH
Direct indexing offers a nuanced approach to year-round tax loss harvesting. This strategy, within a UMA and tax management structure involving the replication of indexes through individual stock ownership, allows for more tailored portfolio management. It's particularly effective in executing TLH strategies throughout the year, providing opportunities to potentially offset gains with losses in a customized manner. This can align closely with clients' specific financial goals and tax situations to help enhance the overall efficiency of TLH.
Tax Loss Harvesting Within a UMA
Adhesion Wealth's approach to year-round tax loss harvesting within a Unified Managed Account (UMA) involves a sophisticated, automated overlay management system. This system is tailored to optimize tax-loss harvesting at both the individual investment sleeve and the overall account level to help create a continuous balance between investment goals and tax efficiency. By incorporating direct indexing and client-specific customization, tax loss harvesting within a UMA can potentially enhance after-tax returns, providing a nuanced approach to tax management. This proactive, year-round focus on tax loss harvesting can be a differentiator for advisors building their independent practice, offering clients a more responsive approach to portfolio management and tax optimization.
TLH Inside a UMA the Adhesion Way
Adhesion Wealth offers a robust solution for year-round tax loss harvesting, providing tax-sensitive management that can help optimize trading by empowering independent advisors in:
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Monitoring High Penalty Trades: Aiming to avoid errors like wash sales.
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Extending Holding Periods: Benefiting from lower long-term capital gains tax rates.
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Customized Portfolio Management: Tailoring strategies to individual client needs.
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Aligned Risk Goals: Ensuring that tax management strategies correspond with investment risk profiles.
Year-round tax loss harvesting is an invaluable tool for financial advisors. It not only has the potential to enhance client wealth but tax loss harvesting can also demonstrate an advisor's expertise while differentiating their service offerings. By collaborating with platforms like Adhesion Wealth, advisors can employ sophisticated strategies to help maximize their clients' after-tax returns. This strategy represents a transformative approach to wealth management, setting the stage for improved financial outcomes for clients.
Learn how Adhesion Wealth can increase your Advisor Alpha by potentially lowering your clients’ tax exposure. Contact us to chat with our team today!
Important Information
This is for informational purposes only, is not a solicitation, and should not be considered investment, legal or tax advice. The information has been drawn from sources believed to be reliable, but its accuracy is not guaranteed, and is subject to change.
Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. UMAs are not suitable for all investors and should be evaluated for suitability by financial professionals prior to investing.
For more complete information about the various investment solutions available, including the investment objectives, risks, and fees, please refer to the Disclosure Brochure. Please read it carefully before investing. For a copy, please contact Adhesion.
Adhesion Wealth Advisor Solutions (“Adhesion”) is an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”). Adhesion and third-party providers are separate and unaffiliated companies. Each party is responsible for their own content and services.
Adhesion is an affiliate of AssetMark, Inc., an investment adviser registered with the SEC. © 2023 Adhesion Wealth Advisor Solutions. All rights reserved.
C24-20863 | EXP 2/28/2026
For financial professional use only.