To Succeed, Advisors Must Manage Portfolios, Not Accounts
When it comes to tax management, direct indexing has value but only applies to a slice of an investor portfolio. What about the typical client who has an array of taxable and tax-advantaged accounts—brokerage, IRAs, Roth, 401(k)—and often annuities or cash-value life insurance?

If you’re advising clients whose portfolios are supposed to fund their retirements, you must help them manage all accounts held by their households. And studies show that of all the variables affecting investor outcomes, taxes matter most—by far.

Today, many embrace tax alpha as a critical factor in creating better client outcomes (2019 whitepaper by Envestnet PMC. Industry leaders are putting tax efficiency at the center of their technology planning and platform development.

My colleague Paul Samuelson has written about how to deliver tax alpha and produce tax-efficient decumulation plans for retiring clients. Tax-efficient practices include multi-account tax harvesting powered by advanced technology that scans an investor’s entire portfolio (including a taxable account tied to an index) to identify opportunities and outline step-by-step trades.

After gain-and-loss harvesting, this technology evaluates a readjusted portfolio to ensure it remains true to the investor’s risk tolerance, timeline, and tax bracket. And it can accomplish this analysis across an advisor and firm’s book of business, uncovering hidden opportunities.

In other words, an account built on direct indexing, however attractive, is another part of the landscape financial advisors design for their clients, not the whole forest.

So, when investors want to test the aerodynamics of direct indexing, it’s up to you to tether their expectations and return to the tried-and-true approach of multi-account, tax-efficient portfolio management at the household level.

Steve Zuschin is EVP, technology adoption at LifeYield. He works closely with wealth and asset management firms to increase advisor adoption and client engagement that results in better financial outcomes for all.

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