Page 15 - Investment Advisor December 2022/January 2023

Portfolio Associates, offers some timely “Under its wash-sale rules, the IRS dis- tion from the client was rarely what I
insights for advisors looking to learn allows a tax loss if the investor purchases expected. It was often confusing, with
more about this important technique. the same or equivalent security within 30 the most common question being: Why
As Miller points out, bear markets are days before or after the sale date,” Miller are we selling when you always tell me
stressful for investors, but tax loss har- reiterates. “As a result, it is typically most to hold for the long term?”
vesting is something positive advisors efficient to trade accounts when there To answer this question, Rubin tries
can do at this moment for the long-term are no outstanding wash-sale restrictions. to explain in simple and logical sce-
financial health of their clients. She says This is one reason SMA investors may see nario A or scenario B choices. Choice
tax loss harvesting is particularly useful, unharvested losses in their portfolios. It A is to have negative performance in
but also potentially more complex from usually means the SMA manager is trying line with the negative performance of
a wash sale avoidance perspective, when to navigate the wash sale trade restric- the markets, while choice B is to have
clients are being served via separately tions and avoid the risk of nullifying the negative performance in line with the
managed accounts. loss-harvesting benefit.” negative performance of the markets
According to Miller, it is a complemented by a “tax asset”
sad but sure fact that losses are “After an initial loss-harvesting that will save money on taxes
plentiful in many investors’ trade,the market may fall in the future.
portfolios at this moment, but As Rubin writes, this logic
that doesn’t mean the long- further, and investors may notice may be clear to an experienced
term portfolio strategy should additional losses in their portfolio, financial advisor, but it is not
change. Rather than abandon- guaranteed to resonate with
ing well-crafted, long-term or they may believe that if a loss clients. In fact, in Rubin’s expe-
investment plans, Miller says, isn’t harvested immediately, rience, advisors have often so
advisors are probably better successfully trained their cli-
off viewing market down- they’ll miss the opportunity.” ents to not sell in down mar-
turns as an opportunity to kets that the topic of tax loss
collect additional tax losses —Natalie Miller. harvesting causes substantial
and reinvest the proceeds to confusion and concern.
maintain market exposure. In the end, Miller says, success comes In such situations, Rubin recommends
Miller says advisors should not wait from a careful balancing act between more technical language that explains
to conduct loss harvesting actions mere- risk, taxes and costs, and in the end, lim- how a portfolio can be sold to take losses
ly because they suspect the markets ited trading within a wash sale period and still stay invested in a consistent
could drop further. However, short of may in fact be necessary during periods long-term strategic allocation.
engaging in market timing, it could be of heightened volatility, to bring the “You can teach that while no two
beneficial to take a step back and con- portfolio closer to risk targets and real- funds are exactly alike, mutual funds
sider the broad direction the markets ize deep losses. and ETFs invested in a specific sec-
are heading. tor or industry can be very similar,”
“After an initial loss-harvesting trade, THE COMMUNICATIONS FACTOR Rubin writes. “Often, we can identify
the market may fall further, and inves- In a recent column for ThinkAdvisor, two funds with marginal differences in
tors may notice additional losses in their Noah Rubin, managing director and the underlying holdings. … While they
portfolio, or they may believe that if a financial advisor at the Rubin Wealth are not the exact same investment, you
loss isn’t harvested immediately, they’ll Management Group of Wells Fargo can comfortably educate your client that
miss the opportunity,” Miller writes. Advisors, warns that client communica- their overall allocation and strategy has
“Portfolio losses could reduce or contin- tion around tax loss harvesting is not a effectively remained intact.”
ue to deepen on any given day. A method simple matter. The result, Rubin says, is harvested
to avoid trading too soon is using a “As a formerly practicing certified losses that can offset future taxes while
trigger-based approach to harvest losses public account, I confidently harvested keeping the client invested in the long-
when they become meaningful.” losses on behalf of clients this year,” term strategic plan.
Miller says the reinvestment part of Rubin writes. “I then called clients to
the tax loss harvesting equation must be update them, excited to inform them of John Manganaro is a senior retirement reporter
tackled carefully. this positive proactive move. The reac- and can be reached at [email protected].

DECEMBER 2022/JANUARY 2023 INVESTMENT ADVISOR 13