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09 April 2024

Tax-Loss Harvesting: Maximizing Returns and Personalization

With the investment management industry becoming increasingly competitive, managers are exploring new ways to differentiate their offerings and provide more value to their clients. Our discussions with various firms and the coverage we've seen in industry media indicate that tax optimization strategies are gaining attention from managers and investors alike. As the investment landscape evolves, managers must stay informed about the latest personalization trends and strategies to maintain clients and gain new ones.  

It’s not what you make, it’s what you keep 

In our 2024 Market Outlook article, It’s Not What You Make, It’s What You Keep, we discussed the concept of tax-loss harvesting and different approaches firms employ to implement it: direct indexing and portfolio personalization. So, what is the difference between these two approaches, and when is one more appropriate? In our webinar, Tax-Loss Harvesting Strategies, we delved more deeply into these two methods with the help of a couple of experts. 

What are the best approaches to tax loss harvesting?  

According to Ashley Longabaugh, a Principal Analyst in Celent's wealth management practice, direct indexing provides personalized, active portfolio management to mass affluent investors, previously only available to ultra-high net worth clients. With direct indexing, an investor owns the individual stocks that mirror the composition of a particular index. Still, the advisor can swap different stocks to align with investor preferences – for example, stocks that better suit the client’s ESG goals. Tax-loss harvesting is an application of direct indexing, where one stock is sold at a loss to offset gains, and then replaced with a comparable stock to maintain broader market exposure. 

David Vaughan Investments, a $4.5 billion wealth and asset manager, serves high-net-worth clients with assets in the $3 to $5 million range. Steve Hinrichs, VP of Research and Portfolio Manager, said the topic of tax optimization figures prominently in client conversations. The firm works with clients to allocate assets thoughtfully among taxable and tax-deferred accounts and seeks to stay invested in individual securities for the long term. When gains are realized, the firm identifies long-term loss positions to sell to offset them.  

The search for scalable growth 

According to a study SS&C Advent conducted with Institutional Investor, The Search for Scalable Growth, some 70% of investment managers surveyed said they planned to expand their tax optimization capabilities. In comparison, around 40% said their clients would be willing to pay a premium for strategies to offset capital gains. 

Watch the webinar as Steve and Ashley address such questions as: 

  • What are some of the limitations of direct indexing?  
  • Is direct indexing likely to displace passive ETFs? 
  • In what circumstances might direct indexing or tax-loss harvesting not make sense for a client? 

If your firm sees this as an opportunity to strengthen client relationships and account profitability, watch our webinar for a deeper understanding of how to implement tax-loss harvesting efficiently and at scale.