Industry executives discussed some of the current techniques being used in wealth management for maximizing after-tax portfolio returns, as well as associated issues, at the Family Wealth Report Summit in New York last month. Here is a summary of some of the key points raised.
Chaired by Stephen Lee, RVP and investment consultant at Columbia Threadneedle Investments, the panel consisted of: Dale Rottschafer, SVP and senior portfolio manager at Envestnet Asset Management; Thomas Riggs, managing director of financial services and family wealth tax at O'Connor Davies; Aaron Ronald Shemesh, senior portfolio manager at Columbia Threadneedle Investments; and Iain Silverthorne, partner and wealth strategist at Evercore Wealth Management.
Lee kicked off the session by outlining a cliché he sees in the wealth management business: that “it's not what you make, but what you keep.” In his experience working with high net worth investors, “a lot of times they segregate in their minds tax efficiency from investment management efficiency,” he said. “That is a big mistake; I think you need to think about it holistically.”
Lee's first question to the panel was aimed at Silverthorne of Evercore, who was asked to highlight current techniques being used in the industry for maximizing after-tax portfolio returns.
“The whole subject of taxes and investing...is a good example in my mind of our industry in terms of cognitive dissonance,” Silverthorne said. “A lot of us know we should pay attention to it, but what actually happens seems to be dramatically different.” He noted several reasons for this: the subject itself is complicated, portfolio manager incentive plans are all based on pre-tax returns, and the modeling analytics used in the industry are based on pre-tax assumptions.
Besides municipal bonds (which are exempt from federal taxes and most state and local taxes), prevalent techniques include passive strategies such as exchanged-traded funds (which have indeed ballooned in popularity), mutual funds and passive tax lost harvesting strategies, as well as asset location (how investors distribute investments across savings vehicles, with a focus on placing tax-inefficient investment strategies in tax deferred accounts).
Another concept, “core and explore,” might involve setting up a passive tax loss harvesting core strategy, and surrounding that with other active strategies, he said. “Or with a multi-manager approach, these days we have the technology available to put many different active SMA managers into an omnibus account and implement a tax loss harvesting overlay.”