Topic · Updated
Tax management
Direct indexing, tax-loss harvesting and the growing role of tax advice in wealth management.
Taxes are one of the few costs advisors can measurably reduce for clients, and tax work has moved to the center of many firms’ offers. Some build in-house tax practices or partner with accounting firms; others rely on investment tools that manage taxes automatically.
The best known of those tools is direct indexing: owning the individual stocks in an index through a separately managed account rather than a fund, which lets an advisor sell losing positions to realize losses that offset gains elsewhere. Rules such as the wash-sale rule limit how those losses can be used.
Financial ADVSR covers the firms, products and strategies behind tax-managed investing and tax planning in wealth management.
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Questions
What is direct indexing?
Owning the individual securities in an index in a separately managed account instead of buying an index fund. Because each stock is held directly, losses on individual positions can be harvested for tax purposes and the portfolio can be customized.
What is tax-loss harvesting?
Selling an investment at a loss to realize a capital loss that can offset capital gains, and up to a limited amount of ordinary income each year, while keeping the portfolio’s overall exposure similar.
What is the wash-sale rule?
An IRS rule that disallows a loss if substantially identical securities are bought within 30 days before or after the sale. The disallowed loss is added to the cost basis of the replacement shares.
Why are advisory firms adding tax services?
Tax planning and preparation give clients a concrete, recurring benefit, help firms justify their fees as investment management alone becomes cheaper, and connect naturally to retirement, estate and business planning.