Author: Jesse Mackey

Today’s blogticle concludes our 3 part series on tax efficient investment opportunities. Please see the two previous days coverage for the full story.

Tax Loss Harvesting- A fundamental technique for tax-efficient investment portfolio management that can be used with mutual funds, individual securities, or any other asset that can generate capital gains, is Tax Loss Harvesting – the active realization of capital losses for tax purposes, without incurring an actual loss for the investor’s portfolio. In its simplest form this is accomplished by selling a security that has experienced a loss, waiting thirty days (to avoid the IRS’s “Wash Sale Rule”), and purchasing the same security back in order to regain exposure. The tax loss that is generated as a result can be applied on the investor’s tax return to offset any gains created elsewhere and to claim a loss up to a maximum of $3000 per year, with the balance of the loss to be carried forward for use in future years. In addition to this most basic use of the method, more sophisticated techniques may be used with both mutual funds and individual securities to further minimize/offset taxation and maintain constant market exposure, permitting appreciation that may occur during the 30 days that the investor would otherwise be un-invested.

Mixed Account Type Portfolio Construction – One common technique utilized amongst comprehensive financial planners and investment planners for their clients is appropriate if the investor has multiple accounts with different registration types that are meant for the same investment objective. An example is when an investor has a joint taxable account and an IRA that are both intended to accumulate assets for retirement. In this instance, a single fully diversified portfolio may be constructed with the assets from both of the two accounts. Since some of the assets in this diversified portfolio will be more tax-efficient than others, the planner will purchase the assets that generate the greatest tax liabilities in the tax-deferred IRA account, and the assets that generate the least tax liabilities in the currently taxable joint account. The overall tax bill to the investor will thus be minimized every year.

Tax Transitioning- Tax transitioning is a technique best used when implementing a new portfolio by transferring existing securities holdings from an old portfolio manager to a new portfolio manager. The objective of the technique is to minimize the capital gains tax burden in a single year that might result from the liquidation of low cost basis stock holdings. When an investor owns stock that was originally purchased at a low price and has experienced significant appreciation, the capital gains tax liability associated with selling the entire holding at once may be too much to come up with in that year, especially if the investor has other significant tax liabilities. Therefore, when transferring assets to a new portfolio manager, the investor, in discussion with his/her new manager may decide that it is better to sell only a portion of the highly appreciated stock in the first year, using the proceeds to begin construction of the new portfolio, and then sell the remaining portion in the second tax year (or maybe even again in the third). While this is not optimal from the standpoint of initial portfolio diversification and volatility minimization, it will allow the investor to spread out his/her tax bill for the sale over the course of two or even three years. This technique is most useful if the new portfolio will be initially implemented at the end of the fiscal year, because by waiting only a few weeks until January for the second sale, the second tax bill will not be due until more than a year later, and the entire portfolio may be implemented very quickly.

For additional information contact our panel of experts or the author of this series.

Jesse Mackey is a partner and Investment Officer of 4Thought Financial Group Inc. 4Thought was created with the base vision of advancing individual freedoms and the human quality of life through economic means. This vision is pursued by applying the firm’s four specialties – Economic Theory and Research; Multi-Contingency Investment Management; Financial Planning for Business Owners and Individuals; and Support for Partner Firms and Advisors.

Contact:

Jesse Mackey

4Thought Financial Group Inc.

www.4TFG.com

jmackey@4TFG.com

Author: Jesse Mackey [1]

Why is this Topic Important to Wealth Managers? This blogticle represents part two a special series regarding advanced investing with ETFs. Recently there has been much discussion in the marketplace on the use of these tools and thus we present this topic for wealth managers who may consider these investment vehicles for their clients.

The existence of numerous disparate portfolio management methodologies in the institutional investment management world has not slowed the growth in popularity of Exchange Traded Funds (ETFs) and other Exchange Traded Products (ETPs) in the last several years. In fact, possibly the most convincing reason for the enormous popularity and success of ETFs is that they are so versatile. They are not designed for any one philosophy of investment, but can play a role in many different investment methodologies. Presented below are a few examples:

Passive Management Strategic Asset Allocation- For wealth managers and clients that use strategic asset allocation and adhere to a strict “Efficient Markets” view of the financial world, an entire diversified portfolio allocation may be built using ETFs, thereby minimizing costs/expenses to the investor, optimizing the transparency of the investment, and reducing risks associated with specific managers.

Active Management Strategic Asset Allocation- For wealth managers and clients that prefer to use actively managed components for the majority of the strategically allocated portfolio, they may also use ETFs to gain exposures to specific sectors that are not otherwise present in order to “round out” the allocation. They may also choose to use an ETF for the part of the portfolio devoted to the “efficient” markets, while the “inefficient” markets would be covered by an actively managed fund or separately managed account.

Tactical Asset Allocation and Absolute Return- ETFs have gained a great deal of popularity amongst wealth managers and clients that prefer to tactically shift the portfolio in anticipation or reaction to market events or other factors in an attempt to outperform the market. These investors are seeking to outperform (to the downside or the upside) not by selecting individual stocks or bonds, but by having an awareness and specialization in the qualitative/quantitative relationships between different areas of the market. ETFs allow them to have this specialization because they do not need to spend their time in finding stocks/bonds to fill out their allocation and can instead focus on inter-market relationship analysis.

Liability Driven Investing- The highly specific mandates/indexes associated with many ETFs mean that they are an excellent tool for Liability-Driven Investing (LDI). Passive Bond ETFs, industry-specific funds, leveraged ETFs, short ETFs, and the ability to buy/sell options on some ETFs make particularly attractive tools for this philosophy of investment, which focuses on hedging and insuring against risks as opposed to seeking risk-adjusted market returns.

Next week’s blogticles will present a discussion on wealth management and investing in tough economic conditions.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Jesse Mackey is the Chief Investment Officer of 4Thought Financial Group Inc. 4Thought is a boutique think tank created with the base vision of advancing individual freedoms and the human quality of life through economic means. This vision is pursued by applying the firm’s four specialties – Economic Theory and Research; Multi-Contingency Investment Management; Financial Planning for Business Owners and Individuals; and Support for Partner Firms and Advisors. You may contact Mr. Mackey at jmackey@4TFG.com or visit www.4TFG.com.

A growing number of consumers are opting for pre-packaged, low-cost portfolio managers. Portfolio-to-go companies can, at least nominally, provide many of the same services as full-service brokerage firms, since the companies are registered as either investment advisors or broker-dealers. And minimal overhead and services allow them to offer those services without the “high” price tag at brick-and-mortar institutions. Portfolios-to-go have exploded in popularity recently, bringing in over $3 billion in assets over the past three years. In a world where post-recession fears have almost everyone bargain shopping, are online portfolios-to-go the Walmart of investing, set to dominate the market and phase out traditional wealth managers? Or are these pre-packaged portfolios an opportunity in disguise?

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber)

For previous coverage of wealth management in Advisor’s Journal, see Estate Planning for Persons With Less Than $5 Million (CC 07-10), How Many Basis Points Is the Competition Charging for Advisory Services? (CC 11-71)