Amp up tax-loss harvesting with direct indexing
November 17, 2023
November 17, 2023
Tax-loss harvesting is a key strategy for optimizing returns, especially for your high-net-worth clients whose portfolios and business interests spin off significant capital gains. It 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 scrambling for touchdowns only at the family Turkey Bowl when what you need is daily exercise.
Vanguard Personalized Indexing (VPI) can transform your tax-loss harvesting efforts and make it easier than ever. It automates tax-loss harvesting year-round to help enhance client returns and free up time to build your practice. You can also use direct indexing to fund charitable gifts and potentially magnify their tax benefits.
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.
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. 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, however, can be significant.
With our advanced, tax-loss harvesting technology, you can:
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.
Gerry Goldberg: It's worked like a charm. Where you really see the difference is when you're in a very volatile market, when there's massive swings happening. When you have those massive swings, that's where you could really end up seeing some pretty dramatic outcomes in terms of not measuring alpha—tax alpha generation—in basis points, but in a few hundred basis points.
Harvesting tax losses year-round isn’t the only way that VPI can help you lower clients’ tax bills over time. 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 and instead 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.
Dave Murdock: We have one client, I think their portfolio size is $40 million, and they regularly give between $5 and $10 million a year to charity. And so, we can go to Vanguard and say, "Give us $5 million of securities that you want to get rid of. We’ll give you $5 million of cash to replenish it". And they love that. It creates new opportunity to generate more losses. We love it because we can get rid of the gains and the client obviously can fulfill their charitable intent. So, knowing that we can do that every year, the product makes an immense success for harvesting losses and keeping their portfolio in check. So again, knowing where you have charitable intent and clients that are philanthropically inclined, that’s a terrific opportunity.
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 preferences and values, apply factor tilts, and diversify around concentrated positions. All that adds up to the potential for stronger client returns and clear examples that you can share with clients to help them see how your work helps them build wealth.
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.
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