Given the current economic climate, investment managers are navigating complex headwinds, including heightened interest rates, increased pressure on fees, and growing client and investor demands for strategy diversification. Managers are now tasked with making near-term and long-term strategic decisions; they must determine which accounts and segments to pursue, what financial products and services to offer, and how to leverage technology to support business development. To remain competitive and deliver returns for their end investors, managers are exploring and implementing several strategies to address these challenges, including tax optimization.
Mitigating tax impacts for clients
The Search for Scalable Growth report found nearly 40% of respondents say their clients are willing to pay for tax optimization and harvesting strategies. Additionally, tax optimization was among the top-rated responses for how a firm will expand its offerings, with nearly 70% of participants planning on increasing their tax optimization capabilities. Minimizing tax impacts requires a more personalized and active approach from portfolio managers seeking to build portfolios closely aligned to client requirements.
Exploring tax optimization strategies
Tax-loss harvesting is a popular strategy for mitigating tax impacts. This practice allows a portfolio manager to offset taxable gains from a prior sale by selling a security at a loss and then using the proceeds to buy a comparable security. Incurring the loss minimizes the overall year-end tax impact on the investor’s portfolio while replacing the stock to maintain the desired exposure. There are various components and implementation of tax-loss harvesting, including direct indexing, asset location, and wash sale compliance.
Regardless of the approach, these tax considerations and personalization introduce complexity in business operations. This could mean data integrity at the tax lot level, complicated multi-account households, or additional relationships and communication with third-party providers.
While tax-efficient investing is not a new topic, there are several advances in technology that advisors can leverage to provide more bespoke services to investors at scale. At SS&C Advent, we are excited about the future of investment management technology and are committed to empowering our clients in this dynamic market.