3 Ways to Help Clients Create Tax-Efficient Portfolios

What You Need to Know

Recent developments have provided advisors with an opportunity to strengthen their relationships with their clients.
Market volatility has enabled advisors to help clients reconsider asset allocation and concentrated positions.
There are ways to help clients position their portfolios to weather market volatility and harness tax efficiencies.

Before 2022, investors had been enjoying a lengthy bull market interspersed with brief equity market downturns. This left many investors sitting on unrealized capital gains — and based on our conversations with financial advisors, the thought of having to pay taxes associated with realizing capital gains they accumulate from their equity investments can often prevent them from taking proactive steps to diversify and mitigate risk in their portfolios.

The severe market volatility that emerged last year caused investors to rethink their asset allocations and revisit concentrated positions they held. And on top of that, the Federal Reserve’s gradual, ongoing increases in interest rates have made forward-looking returns for fixed income and other non-equity asset classes appear more attractive.

These two developments provide advisors with an opportunity to demonstrate their value for clients, by working with them to make decisions on how to best decrease risk in their portfolios. The market volatility and the losses it created enable advisors to help clients reconsider asset allocation and concentrated positions, and make portfolio adjustments in a tax-efficient manner — and the potential generation of tax savings over the long term can further elevate the advisor-client relationship.

Below are three ways for advisors to help clients position their portfolios to weather market volatility and harness tax efficiencies:

1. Make Tax Management Relevant All Year Long

Too often, investors wait until the end of the year to think about taxes. But taxes shouldn’t only be top of mind before and during tax season. Effective tax management has a year-round outlook. One of the best ways to condition clients to think about the tax benefits of asset allocations and financial decisions is for advisors to create a capital gains budget for clients using technology overlay solutions. These tools can show clients what effects potential changes to their investment portfolios could have on their tax bills that year.

Also, by harvesting losses to offset gains that have been realized, advisors can often demonstrate value to clients by ensuring that the overall gains realized in their investments do not exceed their capital gains budgets. This provides clarity to investors as to what their tax bills might be the following year so that they plan accordingly.

2. Show Clients a Holistic View of Their Accounts

Unified managed accounts can be a particularly beneficial account structure to enable advisors to obtain a holistic view of their client’s investments from a tax standpoint. By including all of their investment strategies in one account, advisors are able to see a 360-degree picture of a client’s overall investment portfolio in one place and coordinate gain and loss realization across the various strategies.

They can also deliver urgent, and comprehensive, tax insights that can be presented in discussions and meetings. For example, an advisor can review all of a client’s investment strategies, and come to the client and say: “These were all of the capital gains you realized last year according to the budget you provided us — is this more or less than you would like it to be?” Then, the advisor can show the client what needs to be done, across their accounts, to reduce or increase their total capital-gains realization.