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.