While this year has been a bumpy ride for investors and advisors alike, there may be an upside to all the uncertainty. Indeed, the COVID-19-fueled market volatility of the past few months could actually present a last-minute opportunity for advisors looking to help their clients ease their tax burden through effective tax-loss-harvesting strategies.
For many advisors, tax-loss harvesting, or selling securities at a loss to offset a portfolio’s capital gains exposure, can be a thankless annual task. This year’s topsy-turvy market presents a particularly complex challenge, as many — but not all — markets that initially went down significantly in early spring have rallied back above pre-crisis highs.
The manual process of identifying accounts with unrealized gain or loss positions, determining the best opportunities to reinvest proceeds in replacement securities, placing trades to relieve proper tax lots and keeping on top of wash sale rules may be overwhelming for many advisors, who may have difficulty finding the time to accomplish it all before year’s end. As we move into the final months of this chaotic year, the clock is ticking for advisors who want to give their high-net-worth clients something to look forward to, come April 15.
Facilitating recommendations across client’s whole balance sheet
Especially during periods of market disruption, timely tax strategies are one of the best ways to consistently and tangibly add value to client portfolios by attaining more tax-deferred growth potential.
The question on the mind of many wealth management teams right now is whether it’s possible to reliably scale and manage tax-loss-harvesting strategies considering all the other year-end activity that must be completed on behalf of their clients. Many advisors are utilizing platform technologies that enable them to quickly execute on the complex requirements for tax harvesting. Per Cerulli, 80% of advisors surveyed said they already use client-oriented tax and accounting software, and 52% reported they plan to use this technology within the next three years.
According to the survey: “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.”
Finding efficient ways to execute tax-harvesting trades
Finding the right platform to perform seamless tax-loss harvesting is crucial — especially this year. Advisors should take a hard look at their firm and its processes, and ask themselves these two tough questions: Is my home office overlay team struggling at year-end to scale up and efficiently complete all of our advisors’ tax-harvesting requests in a timely manner? Are our advisors subtracting valuable time from counseling clients to spend their days identifying and executing tax-harvesting trades by hand?
If the answer to either of these questions is “yes,” it’s probably time to revisit the platform or manual process your team is currently using to complete these essential EOY tasks. Not only will transitioning from an error-prone manual procedure to a more reliable automated approach optimize your firm’s cost efficiency, it can also help you more quickly pinpoint loss-harvesting opportunities, replace clunky, human-led trading workflows with automated, streamlined trading and perform tax-advantaged trades of individual securities with ease.
The truth is that if you’re not already using an automated system to help your tax-harvesting strategies, your firm is likely at a disadvantage. If your high-net-worth clients can get better tax-advantaged services from an advisor who uses a hybrid technology model, they don’t have a strong reason to stick with you.
Supporting clients in times of uncertainty
This is especially true for clients who require their strategies to be adjusted and monitored on a semiannual or quarterly basis. For advisors who serve these clients, tax-loss harvesting is not just a year-end task but also a routine process that takes up a lot of time throughout the year. As Cerulli notes, technology platforms 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.”
The benefits of such a platform can be immediate: Instead of managing this critical task by hand, digital tools can enable your team to scale up and complete all requests in a timely manner. Meanwhile, firms that employ a comprehensive platform service can see their advisors’ time freed up significantly, giving them more bandwidth to focus on directly communicating with and supporting clients during this historically tumultuous time. With so much doom and gloom in the world, a little extra assurance, guidance and ongoing advice will go a long way to keeping your clients happy.
Lauren Yeaton Hunt is VP of product marketing at Vestmark, a provider of portfolio management and trading software, and outsourced services.