It's not difficult to unwittingly harm clients' money-making possibilities in retirement assets: Neglect investing in tax-efficient securities or fail to learn tax-smart — perhaps little-known — strategies.
"A poorly tax-managed portfolio is the No. 1 reason that retirement portfolios are robbed of their potential value," Barrett Ayers, president, CEO and co-founder of Adhesion Wealth Advisor Solutions, maintains in an interview with ThinkAdvisor.
Adhesion, a subsidiary of AssetMark Financial Holdings that serves RIAs and other fiduciaries exclusively, focuses on generating income during retirement and passing on wealth to heirs. Its technology platform has a variety of tools, including managed account solutions.
In the interview, Ayers discusses the benefits of losses — "They create capital value," he says — and explains why "unwrapping" mutual funds and exchange-traded funds enables active tax-harvesting, among other tax-efficient approaches.
Ayers, previously with Wachovia and Fidelity Investments, highlights a process for advisors and clients who are moving from one firm, or investment strategy, to another: a tax-transition account combined with a tax budget to gradually move assets to a new target portfolio.
Here are excerpts from our conversation:
THINKADVISOR: Why is tax awareness for retirement income critical?
BARRETT AYERS: A poorly tax-managed portfolio is the No. 1 reason that retirement portfolios are robbed of their potential value.
Few forces are as potentially corrosive to investment returns and retirement preparedness.
What's tax alpha?
Tax alpha is simply how much should I save you from paying the IRS. If you were going to pay $10,000 and I reduced your taxes to $5,000, I've saved you 50% to 60% tax alpha.
You strongly believe in the value of investment losses. Tell me why.
The losses you're creating today can be used as a capital asset in the future when your tax brackets are lower and you can start taking distributions at a lower rate.
Banking losses, looking for losses, actively harvesting losses are always good things to do because they create capital asset value.
We can do active harvesting — regularly harvesting opportunistically by looking for losses.
Another strategy is direct indexing, a passive investment strategy that allows a host of opportunities to do tax-loss harvesting, for example.
Combined with tax overlay services, it [helps] navigate volatility and maximizes after-tax returns.
When would you apply tax-gain harvesting?
If you believe that tax rates are going up, it makes sense to do tax-gain harvesting [immediately].
The other reason is when you're relocating your portfolio and have had losses.
If it's time to rebalance your portfolio and, say, you move from aggressive to moderate and have built up a sufficient amount of losses, it could be time to look for the gains to offset your previously banked losses.
You've built up the losses, and now it's time to take some of those gains because you want to move the portfolio to a different place. That's the reason we banked all those losses.
What else is an effective tax strategy?
[Monitoring] wash sales [because gains are taxable.] They happen so frequently, but many advisors aren't watching [for them] because they're happening outside their purview, [perhaps] in multiple accounts [with different managers]. Keeping everything inside a single account is a secret to making sure all of that is mitigated.
How can smart tax strategies help when an advisor and their clients move to a different firm?
Here's a tool that allows them to not have to sell and repurchase and go through all that tax churn.
[You can also use it when] you want to move the client from conservative to aggressive or vice versa.
The old way of doing a transition used to be selling everything and buying everything, which is highly tax inefficient.
Tax transition is a process that holds a certain amount of assets off to the side in a tax-transition account. We put together a budget with the end investor, who may say, "I have an appetite to pay only $25,000 in taxes this year."
Then what happens?
