The playbook of strategic moves that can be made in a down market may be short, but advisors should use these options to show clients that professional advisors earn their keep even in the worst of times, says Adam Grealish of investment platform Altruist.
“Obviously we’d rather have markets up [rather] than down but there are some unique opportunities that present themselves, and a bias toward action is something that most people innately have,” said Grealish, head of investments and general manager of advisory services at Altruist, a Culver City, Calif.-based provider of software and custodial solutions to financial advisors.
He was speaking in a presentation entitled “The Down-Market Playbook for Savvy Advisors” at today’s Investing in Inflationary Times virtual expo of MoneyShow.
“Being able to have a playbook to run and do some things that make clients better off to me is pretty exciting when we see prices depressed like we’re seeing off their highs this year,” he said. “With lower prices, we’re getting closer to original tax basis, which lowers taxable gains or converts gains into losses.”
Not surprisingly, then, tax-loss harvesting (TLH) topped Grealish’s action points.
Tax Moves
Grealish defined TLH as selling securities that are at a loss in order to realize that loss, and then taking those proceeds and reinvesting them in the market so the client maintains same desired market exposure.
“Those losses are valuable in a couple of ways,” he said. “They can offset capital gains, and after you’ve exhausted all capital gains they can offset up to $3,000 of ordinary income, and anything left over after that can be rolled over to subsequent tax years to be used in the same way.”
Grealish quoted a Vanguard study that found that, depending on the frequency of harvesting and the client’s tax bracket, advisors can add between 40 basis points and 1% or even 2% to the portfolio’s return with such a strategy.
“It’s pretty valuable to tack on an extra 1% in return that is after-tax, after-fee, take-home returns,” he said.
There are “better” and “worse” ways to tax-loss harvest, he said, with the easiest being to wait until the end of the year and then net it all out.
“That’ll get you somewhere, but there are improvements on top of that,” Grealish said, such as moving from mutual funds to individual stocks in a replicated index, which can unlock client-specific opportunities, and increasing the frequency of the tax-loss harvest.
However, moving a harvesting schedule from annually to quarterly, monthly or daily can seem daunting. Once an advisor starts working in these more granular timeframes it’s usually helpful to be aided by technology in some way, Grealish said, as it becomes increasingly complicated to monitor a number of positions across multiple accounts..
For example, for a high-net-worth investor using a replicated, or direct, index and loss harvesting annually will add 0.38% to an annual return, whereas investing in a mutual fund will yield 0.04%, he said. Bump the loss harvesting up to quarterly, and 1.07% is added to the return. Do it monthly, and 1.23% is added; daily, 1.36% is added, he said, quoting the Vanguard report.
For the ultra-high-net-worth client, the numbers are bigger, with the direct indexing adding 1.64% to the portfolio if done annually, compared with 0.84% for a mutual fund. Quarterly loss harvesting increases that to 2.64%, monthly to 2.84%, and daily to 3.10%.