So, let’s put it all together. Well-executed gains deferral means prudently holding onto overweighted positions with unrealized gains, and then minimizing the risk and return impact by carefully counterbalancing. It is an optimization problem. And, unlike loss harvesting, your work isn’t done in 30 days. You have to keep monitoring the overweighted positions and evaluating how to counterbalance the overweight for as long as you own the security.
And that’s why gains deferral is hard. Done well, it requires sophisticated optimization analytics. It is exceedingly difficult to do well manually. And it’s an open-ended commitment—maybe even a lifelong commitment if you hold overweighted positions till death.
Why don’t we hear more about gains deferral?
Given gains deferral status as the core of efficient tax management, why don’t we hear more about it?
One reason seems clear: implementing gains deferral manually requires a level of attention and care that is only economical for high-net-worth — or perhaps ultra-high-net-worth portfolios. The good news is that modern automation tools are changing this. Sophisticated gains deferral, like sophisticated loss harvesting, can now be implemented inexpensively and at scale.
But there may be another reason why gains deferral doesn’t get the attention it deserves; namely, clients may value it less. It appears to be doing nothing. What client wants to pay their advisor for doing nothing? This applies double for legacy holdings that the client transferred in to be managed by the advisor. Why should the client pay an advisor for holding a security that the client bought? The reasoning isn’t sound. Risk-managed gains deferral is really valuable. And hard. But it may not be highly valued by clients.
Having conjectured on why gains deferral doesn’t get the credit it deserves, we’re still a bit puzzled and have asked customers and others for their input on this point. In a future post, we’ll share what we learn.
As president of wealthtech firm Smartleaf, Inc., Gerard (Jerry) Michael is focused on bringing portfolio rebalancing automation to a new level, one that supports unprecedentedly high levels of customization and tax optimization at scale.