Financial planning, tax management, and investment management. At Brinton Eaton Wealth Advisors, a fee-only firm in Morristown, New Jersey, says Jerry Miccolis, a senior financial advisor with the firm, “We feel strongly–and we’re organized this way–that you can’t do an adequate job in any one of those three areas without your arms around the other two.” The firm’s investment philosophy involves building portfolios on a foundation of ETFs, partly because they constitute a more efficient way of performing asset allocation, partly because they’re a more efficient way of rebalancing a portfolio, and partly because they’re a more efficient way to tax loss harvest.
Miccolis, who in addition to being a CFA and CFP is a Fellow of the Casualty Actuarial Society (FCAS) and a Member of the American Academy of Actuaries (MAAA), spoke to editor Jamie Green in late August about the benefits of tax loss harvesting in general, why ETFs are particularly helpful when doing so, and why tax loss harvesting is something that ideally should be done year-round, not just in the fourth quarter.
To put our conversation into context, tell me how your firm is set up.
Everthing is done on a team basis; there’s a dozen of us in total [at Brinton Eaton], nine of us are professionals. We tend to work pretty closely together, so it’s not like one of us does financial planning, another does taxes, another does investment management–we all are experienced in all three, though we have varied strengths–mine are more in the investment side.
Talk about your actuarial experience.
It’s a great background to have. Much of investment is really risk management, and my prior career was 25 years with Towers Perrin, the consulting firm, where I ran their risk management practice, so a lot of those techniques are pretty transportable into the investment world. We’ve got a lot of scientific improvements in the way we approach investments for our clients that I was able to bring with me from the risk management side–modeling.
This is a good year for harvesting, because of the way the markets have behaved?
It’s gone violently sideways, which is an ideal situation for tax loss harvesting. It’s not a situation we’d desire or ask for at the beginning of the year, but now that we find ourselves in it, we need to make what we can out of it.
It presents opportunities for tax loss harvesting, at least the way we do it.
What about tax loss harvesting in the traditional sense?
It’s typically done near the end of a year, when you have a position in a certain stock and it’s at a loss–you take the loss and then try to find something comparable, either another stock or an index fund or a sector fund, and/or wait 31 days and then buy back into that stock and hope it hasn’t had a runup since.
What we do is more throughout the year, and it’s primarily through ETFs, in fact, almost exclusively through ETFs (see “About That Floor” sidebar at end of this article).
Let’s back up and tell you why we have ETFs in the portfolio. Regardless of the portfolio’s size, we will start each portfolio out with a floor or working layer of ETFs across all our major asset classes and sectors. So if you look at fixed income, you look at different maturities. If you look at equities, you look at small cap, mid cap, and then within large cap, the different industry sectors. We also have a third category which we call alternatives, in which we have real estate and commodities. So if you look at all those asset classes/sectors, there may be 20 of them.
We want a floor, a working layer, across all 20 of those categories, that we fill with ETFs. If an ETF doesn’t yet exist, then we’ll use a mutual fund. Then we’ll top off each of those sectors with individual securities, portfolio size permitting.
So we find ourselves with a working layer of ETFs and a market that’s violently sideways, where the ETF is at a loss. One thing about ETFs is that there’s a lot of competition, so there’s more than one ETF in a subsector. So let’s take the finance sector: there’s an iShare and a SPDR, among others. If you happen to be in the iShare finance sector ETF, and it’s at a tax loss for the year, it could be February. There’s nothing to prevent you from selling it and buying the SPDR finance sector ETF the same day, because technically they don’t follow the same index: the iShare follows the Dow Jones finance sector, and the SPDR follows the S&P finance sector. It’s not the same security, and it’s not tracking the same index. There’s nothing to prevent you from replacing one with the other on the same day. It’s not like selling Bank of America and buying it back the same day; you have to wait 31 days.