Displaying items by tag: tax efficiency

Taxes shouldn’t dictate your investment decisions, but they should definitely inform them,  especially if you’re holding assets in taxable accounts where after-tax returns matter most. Smart investors know that choosing the right account type such as Roth IRAs, traditional 401(k)s, or HSAs can make a big difference in long-term performance by deferring or avoiding taxes altogether. 

Tax-deferred accounts often outperform taxable ones over time, especially when you're in a high tax bracket or expect to drop into a lower one in retirement. A diversified mix of taxable, tax-deferred, and tax-free accounts can give you more control over your income strategy and tax liability in retirement. 

Beyond account choice, selecting tax-efficient investments like municipal bonds or low-turnover ETFs can reduce the drag of taxes on earnings, especially when every percentage point counts. 

Finsum: In the end, tax-savvy investing isn't about dodging the IRS, it's about maximizing what you keep and using tax rules to your advantage.

Tax-efficient investing is gaining momentum, with separately managed accounts (SMAs) emerging as a preferred tool for personalization and tax savings. Unlike mutual funds or ETFs, SMAs allow investors to directly own securities, enabling tailored strategies like tax-loss harvesting. 

Assets in tax-managed SMAs have surged past $500 billion, a 67% increase since 2022, with direct indexing leading the way due to its scalability and precision. Asset managers are now extending tax overlays to active equity strategies, though the process is more complex due to potential conflicts with managers’ top stock picks. 

Meanwhile, model portfolios are incorporating tax-aware transition tools to help advisors move clients into new strategies with minimal tax impact, further expanding the reach of tax management across investor segments.

Finsum: Fixed-income SMAs offer fewer tax opportunities but can still provide benefits during periods of rate volatility or credit stress.

Cerulli Research highlights how the growing wealth of retail investors is pushing advisors to prioritize tax efficiency, with ETFs becoming an increasingly attractive structure. ETFs offer significant tax advantages, such as low turnover and minimized capital gains distributions, making them particularly appealing in today’s uncertain economic climate. 

As a result, Cerulli expects more separately managed account (SMA) assets to shift into ETFs, driven by both tax benefits and operational efficiencies. High net worth advisors are also focusing more heavily on tax planning, with the percentage offering tax guidance rising sharply in recent years. 

Despite the $2.7 trillion currently held in SMAs, advisors are steadily increasing their ETF allocations, especially at larger practices. However, barriers like the high cost of launching ETFs mean wealth management firms will need scale — and may increasingly turn to white-label providers for help — to fully capitalize on this shift.

Finsum: Separately managed accounts could definitely see a spike in popularity in the coming years given technological ease. 

Deeper tax planning integration in wealth management can enhance advisors’ ability to deliver proactive tax strategies that go beyond traditional investment management. Tax planning has become a crucial differentiator in modern wealth management, with more investors seeking advisors who can optimize after-tax returns and long-term financial outcomes. 

Strategies like Roth conversions, tax-loss harvesting, and asset location are now essential tools for high-net-worth clients navigating an increasingly complex tax landscape. With concerns about rising tax rates and policy risks, forward-looking tax planning is becoming indispensable for preserving and growing client wealth. 

Advisors who incorporate these strategies can build deeper client relationships, attract more assets, and position themselves competitively in an evolving industry.

Finsum: Tax strategies help give advisors an edge when dealing with clients and helping them allocate to efficient portfolios. 

Direct indexing has emerged as a popular strategy for investors looking to enhance tax efficiency by owning individual stocks rather than traditional ETFs or mutual funds. Its growing adoption is driven by the rise of passive investing and advancements in fractional share technology, making it more accessible to a broader range of investors.

By selectively selling underperforming stocks and replacing them with others in the index, investors can realize capital losses to offset future gains—a key advantage of this approach.

However, tax benefits are generally front-loaded, meaning that over time, opportunities for tax-loss harvesting diminish as portfolio gains accumulate. To sustain tax efficiency, investors can reinvest funds, donate appreciated stocks, or explore strategies like transitioning holdings into ETFs through in-kind transfers.

Finsum: As direct indexing expands beyond passive strategies, advisors are also exploring actively managed SMAs with built-in tax management features, offering more tailored solutions.