Amp up tax-loss harvesting and deliver more financial value to your clients with direct indexing

Are you offering your clients every opportunity to realize more value from their portfolios? You’re not if you aren’t using tax-loss harvesting to optimize their returns. And tax-loss harvesting is especially important for your high-net-worth clients, whose portfolios and business interests spin off significant capital gains. But tax-loss harvesting can be challenging to implement and may eat up a lot of your time. It’s also hard to know whether you’ve spotted every opportunity to offset losses against gains, and you must navigate complex regulations like the wash-sale rule. For these reasons, many advisors relegate tax-loss harvesting to the end of the year, when taxes are at the top of clients' minds. But that's a little like trying to get fit by signing up for a Turkey Trot at Thanksgiving when what you really need is regular daily exercise.

Vanguard Personalized Indexing (VPI) offers the solution to your tax-loss harvesting dilemma. VPI can transform your tax-loss harvesting efforts by making the process easier and less time consuming. VPI automates tax-loss harvesting year-round to help enhance client returns and free up your time to build your practice and grow client relationships. You can also use VPI to fund charitable gifts and potentially amplify donor tax benefits. So, what are you waiting for?

Here’s how VPI works

A direct indexing portfolio is a separately managed account where the investor owns individual stocks that represent a chosen benchmark index. Because investors directly own each stock in their portfolios, they gain extra opportunities for tax efficiency that may not be possible with ETFs and mutual funds.

VPI, our direct indexing solution, scans your clients’ portfolios daily for tax-loss harvesting opportunities. Consequently, it helps you boost your clients’ after-tax alpha at scale so they can keep more of what their portfolios earn.

And VPI can help you improve client outcomes in all kinds of markets. When the benchmark index is up, you can still harvest losses. Plus, during periods of volatility, you can harvest losses more aggressively.

Of course, some clients may not have enough recurring capital gains to pair with losses. The benefits to high-net-worth clients, though, can be significant.

Harness the potential of 1% to 2% or more in after-tax alpha

With our advanced, tax-loss harvesting technology, you can:

• Aim to capture up to 1%–2% or more annually in after-tax alpha for certain clients whose portfolios regularly realize large capital gains.¹
• Optimize short- and long-term holding periods to minimize capital gains taxes.
• Quickly identify tax lots for securities to sell to maximize tax efficiency.
• Navigate wash-sale rules.²

During volatile markets, VPI's daily tax-loss harvesting feature has provided significant value to his clients, said Gerry Goldberg, CEO and Co-Founder of GYL Financial Synergies.

Help clients get more out of charitable donations

Harvesting tax losses year-round isn’t the only way that VPI can help you lower clients’ tax bills. Incorporating our direct indexing solution into your clients’ charitable giving plans can reduce taxes now and in the future. The VPI team identifies highly appreciated securities to donate from your clients’ portfolios. You can then transfer those shares to the charity of your client’s choice.

Since charities don’t pay taxes, your clients avoid the capital gains tax they would have paid if they had sold the securities. Plus, they gain a potential deduction.  Your clients can then replenish their VPI accounts with cash to reset the cost basis for the investment, making it more likely you can harvest additional losses down the road.

Listen to Dave Murdock, managing partner of Bordeaux Wealth Advisors, explain how he used this strategy.

Dave Murdock is an advisory client of Vanguard.

Direct indexing helps clients understand the value you provide

The ability to improve your clients’ after-tax alpha is just one of many benefits that VPI can help you provide. You can also customize clients’ portfolios to align with their unique personal preferences and values, apply factor tilts, and diversify concentrated positions. All that adds up to the potential for stronger client returns that are aligned to their investing focus. And it offers clear examples that you can share with clients to show them how your work helps them build wealth.

VPI is an easy win for you and your clients. So don’t miss out on the opportunity to make it a core part of your practice.

Learn more

1 Kevin Khang, Alan Cummings, Thomas Paradise, and Brennan O'Connor, 2022. Personalized indexing: A portfolio construction plan. Valley Forge, Pa.: The Vanguard Group. Simulation as of September 2021.

2 The IRS doesn't allow an investor to sell an investment at a loss and then immediately repurchase it (known as a "wash sale") and still claim the loss. If the investor buys the same investment or any investment the IRS considers "substantially identical" within 30 days before or after the investor sells it at a loss, the loss will be disallowed. If you need guidance on whether an investment would be considered substantially identical, consult a tax advisor.

Notes:

• Vanguard Personalized Indexing Management, LLC (“Vanguard Personalized Indexing Management”), formerly Just Invest, LLC, an SEC-registered investment advisor, is an independently operated wholly-owned subsidiary of The Vanguard Group, Inc. (“Vanguard”). Vanguard Personalized Indexing is an asset management technology that has been developed and is offered solely by Vanguard Personalized Indexing Management.
• For more information on Vanguard Personalized Indexing Management and Vanguard Personalized Indexing, and to access Vanguard Personalized Indexing Management’s Form CRS and Form ADV Part 2A disclosure brochure, please visit the Vanguard Personalized Indexing topic page.
• All investing is subject to risk, including possible loss of principal. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
• Vanguard Personalized Indexing Management cannot guarantee a profit or protect against a loss.
• The TLH Algorithm is designed to assess client accounts (typically on each business day that markets are open for trading, however, we may in our discretion for technical or market infrastructure reasons forgo an assessment on a given day) for tax-loss harvesting opportunities.
• Tax-loss harvesting involves certain risks, including, among others, the risk that the new investment could have higher costs than the original investment and could introduce portfolio tracking error into your accounts. There may also be unintended tax implications.  Prospective investors should consult with their tax or legal advisor prior to engaging in any tax-loss harvesting strategy.  Neither Vanguard Personalized Indexing Management nor Vanguard provide tax or legal advice.
• The information contained herein does not constitute tax advice and cannot be used by any person to avoid tax penalties that may be imposed under the Internal Revenue Code. Each person should consult an independent tax advisor about their individual situation before investing in any security.
• Private investments involve a high degree of risk and, therefore, should be undertaken only by prospective investors capable of evaluating and bearing the risks such an investment represents. Investors in private equity generally must meet certain minimum financial qualifications that may make it unsuitable for specific market participants.