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Implementing Year-end Tax Strategies With LibertyFi


There are several ways that advisors can provide clients with additional value. As stated in the research report, Return on Capital Sigma,[1] a sophisticated portfolio that tracks a benchmark and accommodates tax harvesting, could add approximately 100 basis points of additional value annually.

Do You Need To Wait Until Q4 To Harvest Tax Losses?

Traditionally, advisors used to spend the first three quarters of the year managing portfolios to achieve specific outcomes without regard for tax. In the fourth quarter, they would examine the tax consequences of their portfolio strategy and create plans to mitigate the taxes due on any gains.

Many advisors still wait until the fourth quarter before they start thinking about tax-loss harvesting. But this doesn’t have to be the case. Using the Envestnet platform with help from LibertyFi, advisors can realize losses at any time during the year, not just at year end.

For example, in March 2020, advisors used the Coronacrash market downturn to offset gains their clients might have realized elsewhere in their portfolios. As a result, we received 210 tax-service requests to harvest losses on Envestnet-traded accounts, 30 more than we received in all of 2019.

Effectively Realizing Tax Losses

To help advisors effectively identify and harvest tax losses, Envestnet provides gain/loss reports. These are available for all the accounts at the global and position level across an advisor’s entire book. Advisors can then globally harvest tax losses for a specific position or portfolio if needed.

Envestnet also includes powerful capabilities that allow advisors to identify and manage realized and unrealized losses. For example, advisors running model portfolios can rebalance and harvest losses at the model levels.

We can configure the Envestnet platform to help advisors avoid disallowed losses, which are eliminated from consideration in client tax returns. For Envestnet-traded accounts, we can also set up the system to automatically purchase replacement mutual funds or ETFs during the harvesting period.

Identifying Gains And Losses: An Example

Envestnet provides easy-to-use reports that enable advisors to review a gain/loss or an unrealized gain/loss at different levels.

For example, an advisor can examine losses at the account level and submit a tax-service request to harvest losses of at least $5,000 across all accounts, regardless of which positions created the loss.

Using Envestnet’s robust PM Tools, advisors can review losses at the position level, perhaps for a single security purchased across several accounts. If the security has performed poorly, the advisor can harvest losses on it across all accounts that hold it.

Tax Overlay Services From Envestnet

Tax overlay is a holistic service from Envestnet that enables advisors and investors to address needs around tax management. This service can reduce short-term capital gains for a reasonable tax management fee. The tradeoff is an increase in the tracking error between the client portfolio and the benchmark.

The Envestnet Tax Overlay team can also help identify gains that were realized year to date and then harvest losses in the portfolio to help manage client tax burdens.

Summary

Envestnet offers powerful reports to help advisors understand clients’ gains and losses, both realized and unrealized. The platform is fully configurable to support advisors, including protecting them from disallowed losses. With help from LibertyFi, advisors can apply these capabilities to deliver additional value by helping clients manage their tax burdens.

Next Steps

LibertyFi has the experience and expertise to support your tax-harvesting needs within the Envestnet platform and to configure it to create repeatable processes.

For more information, contact Alli Jordan at LibertyFi: https://libertyfi.com/contact.

 

DISCLOSURE

Neither Envestnet, nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.

LibertyFi and Envestnet are separate and unaffiliated firms, and are not responsible for each other’s services or policies.  This material should not be construed as a recommendation or endorsement of any particular product, service, or firm.

 

 

 

 

[1] “Capital Sigma: The Return on Advice,” Envestnet, 2019, https://www.investpmc.com/sites/default/files/documents/PMC-CAP-SIGMA.pdf