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Exclusions and Tax-Loss Harvesting

FinTech Revolutionizing Managed Accounts – Part 4

Advisory clients can be an eccentric bunch, with varied demands and unconventional reasons behind them.  Whether your client has taken a firm stance against the perils of tobacco, the side effects of petroleum, or simply doesn’t want to invest in a specific state because that is where their ex-spouse is from, advisors are beholden to their client requests.  Fortunately advances in fintech make it easier to accommodate client requests, and take advantage of functionality to increase the net return.

Exclusions and tax-loss harvesting have shown to be effective means of managing a client’s portfolio and producing a higher after-tax return over non-active portfolio management.  Exclusion tools offered through SMArtXChange enable advisors to exclude certain equity positions, which is particularly relevant when your client has certain SRI/ESG interests or other restrictions in place.  This application can also be expanded to sectors, industry, and geographic areas.  This same exclusionary tool will lock in a long-term position to prevent the buying and selling of that specific security to maintain a low cost basis and automatically manage a client’s exposure. Finally, substitutions can be implemented through the same interface to further maximize your client’s return.

Dovetailing into exclusions comes tax-loss harvesting.  Used to increase after-tax returns, advances in fintech have enabled automated tax-loss harvesting to help advisors maximize their client’s portfolio value.  However, its use can have some limits due to the expansion of ETF products, and the inability to utilize the underlying securities as the offset. This can be particularly relevant when buying broad market index ETFs.  SMArtXChange addresses this by offering index products that actually purchase each of the underlying securities in a given index.  This gives advisors the flexibility to use some of those 500 positions [for example] to offset tax liabilities in other investments.  Some of these index products are even available free of manager fees.