Tax efficiency technology offered by fintech firms can be handy tools for advisors to use with their clients amid the tremendous volatility we are seeing these days in the stock market, according to executives from Orion Advisor Services, LifeYield and MyVest interviewed by ThinkAdvisor this week.
A bear market like we’re in now, with extreme volatility, is where tax management strategies and tools “should really shine — this is where they really prove their value,” said Chris Romano, quantitative portfolio risk manager at Orion.
For example, Orion has been deploying its Astro “tax-aware” portfolio optimizer during this brutal market as a way to capture tax alpha for client portfolios, he said. After two weeks, the tool had helped earn 100 basis points of upside, he noted.
“Looking at the accounts that we run internally on our platform, from the beginning of the downturn” about three weeks ago, “we’ve been able to realize about three-and-a-half percent of tax alpha,” he said, referring to the ability to add after-tax returns to a client’s portfolio.
Since the start of the year, Orion’s accounts have been able to realize nearly 4.5% tax alpha, he said, adding that, in a normal market, the industry average is typically only about 1.5% tax alpha. That is all “economic value that can be utilized for the client,” he noted.
Orion’s risk-based platform looks at a portfolio and automatically figures out what needs to be bought to keep its strategy in line, he explained.
Since launching the optimization tool more than a year ago, he said, Orion has seen two times where interest in usage spiked: “the first was when the custodians dropped transaction costs” and the second was amid the volatility of the current bear market, he said.
“During the beginning of this bear market, we’ve seen utilization spike over 100%” among advisors using it, he pointed out, comparing the period 2-3 weeks prior to the volatility to the week after it started.
The Importance of Asset Location Planning, Tax-Loss Harvesting
Asset location planning and asset allocation are both important, Romano said, noting “asset allocation obviously is the primary driver” of one’s plan and you really want to get that right because that serves pretty much as “your baseline.” Asset location, however, is “what allows you to kind of get the opportunity to … get above that base,” he explained.
As clients are seeing losses in their accounts, “this is the time where advisors should accelerate movement of asset location and really adjust that,” he said.
One of Orion’s integration partners, LifeYield, has worked to equip advisors with tools that help them to identify the best asset location strategies to optimize the best after-tax returns.
LifeYield’s offerings for advisors include Portfolio Advantage, which looks across all of a client’s accounts and holdings, identifying the most tax-smart location for each asset, according to the company.
A market like the current one is where asset location planning can matter as much as asset allocation, according to Steven Zuschin, LifeYield executive vice president-advisor success. This is a “long-term tax efficiency play” and one that his firm focuses on, he told ThinkAdvisor.
Meanwhile, “some advisors have clients that are harvesting longer-term gains accrued since 2009 and pairing those decisions with tax-loss harvesting,” according to Zuschin, referring to the strategy of selling certain investments at a loss to reduce their tax liability.
Tax-loss harvesting is “extremely relevant right now” also, he said, calling that a “short-term tax efficiency play.”
The company’s “smart householding approach” gives advisors “the insight to make these calls at a moment’s notice,” he said, adding: “At the same time, advisors that are trying to produce portfolio income for clients can use our technology to produce the best cash flow scenario for current needs while mitigating any longer-term portfolio damage that can be incurred when selling assets during a market slump.”
Discussing tax optimization strategies with clients during a time like this, when those close to retirement may be “pulling their hair out,” also provides an “awesome talking point to have right now” because it allows an advisor to “bring something positive into the conversation” amid all the doom and gloom, he said.
MyVest portfolio management solutions, meanwhile, were “built to help enterprise-level firms deliver personalized portfolios at scale,” according to Anton Honikman, its CEO. “This includes automating the daily monitoring, rebalancing, trading, and reporting on holistic multi-account portfolios that the advisor can customize for each client,” he explained.
The current volatility has created “opportunities” from unrealized tax losses, especially with portfolios that need to now be rebalanced, he told ThinkAdvisor.
MyVest offers a “comprehensive approach to tax management,” as well as asset location and “smart” short-term gain deferral, he said. The “scalable technology part” of what MyVest and the other firms are offering is “really valuable in today’s highly volatile market,” he noted, explaining: “The ability to scale portfolio management best practices through automation helps advisors stay on top of all their portfolios, plus avoid overlooking things like wash sales and deferring short-term gains.”
Asked whether he was seeing more tax-loss harvesting activity since the start of this bear market, he replied: “It’s still early days in learning from our customers what’s driving their higher trading activity. Drivers can be a combination of rebalancing portfolios back to target, model portfolio and investment strategy changes, tax management and investors’ liquidity demands,” he noted.