The next decade promises to be tumultuous for investors as they deal with accelerating technology changes, an uncertain economy, and mounting financial concerns like education and real estate debt. Financial planners and advisors recognize older Millennials and members of Generation X as a key market: they are in their prime, raising families, and ready to invest in the future. This demographic takes for granted that technology must be quick and intuitive. They expect to see and manage their investment activities in real time.
As their financial lives become more complex, they largely depend on their advisors to monitor, research, and guide them through the labyrinth of financial planning and investing. Advisors know that fees, diversification, appropriate risk tolerances, and returns are paramount for client investments. But can clients be expected to confront the arcana of the tax implications of their investments on their own? As tax liabilities constitute real costs, they must factor into sound investment advice. That’s where tax-loss harvesting comes into play.
Tax-loss harvesting is a method of reducing near-term tax burden by selling assets that have lost value in the past year. These losses can be used to offset capital gains in other investments, or to reduce taxable income. While using losses to offset income is capped at $3,000 per year, losses in one year can be carried forward indefinitely to offset income in future years. Taxes need to be paid eventually, but in the meantime the deferred money can be invested to generate returns.
There’s just one problem: for many advisors, tax-loss harvesting has been a tortuous process requiring reams of data tables for every security and every client, followed by checking and rechecking endless computations. When harvesting tax losses, an advisor needs to keep in mind two pertinent aspects of the tax laws. One is to differentiate between long-term vs short-term capital gains and losses. Short-term capital gains are subject to a higher marginal tax rate than long-term capital gains–so, in case of a loss, as much of the tax liability as possible should be applied to short-term capital gains to get the most benefit from tax-loss harvesting.
Then there is the wash-sale rule. The advisor must ensure that the client, once he sells a particular security at a loss, does not buy the same or “substantially identical” security within thirty days before or after that sale. Otherwise, the tax-loss benefit would be disallowed.
With all this to juggle, it can be hard for an advisor to justify when the benefit to the client may be small, and when time away from building her practice is so precious.
Thankfully, this once-tedious manual practice can now be automated, turning this relatively expensive exercise into a quick, value-added client benefit. Software can do the heavy lifting more precisely and accurately than most people, at a fraction of the cost in both time and money. In an environment of slimming margins and exceedingly high productivity expectations, outsourcing makes sense. Not only does automation alleviate the advisor’s workload, it also opens up new business opportunities.
First, since the service is low-cost to the advisor, she can offer it by default to all of her clients, providing every one of them the benefit of smart tax management. Next, since the software is doing the heavy lifting, the advisor can bank that time for more productive uses, fostering client relationships, training her staff, and growing her business.
Contact us to learn about how OpenInvest can help with automated tax-loss harvesting for all of your clients.
Dislcaimer: Investment in securities involves the risk of loss. Past performance is no guarantee of future returns. Any opinions, estimates and forecasts offered in this document constitute judgment as of the date of the materials and are subject to change without notice, as are statements of current tax-loss harvesting conditions. We believe the information contained in this document to be reliable but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only and it is not intended to provide and should not be relied on for investment, accounting, legal or tax advice.