To reduce client tax burdens, advisors look to harvest losses before the end of the tax year. But do they need to wait until December to begin harvesting those tax losses? The good news is that they don’t!
By using the Envestnet platform with help from LibertyFi, advisors can realize losses at any time during the year, not just at year end. By doing so, they may be able to deliver additional client value.
According to 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.
Harvesting Tax Losses When They Occur
Many advisors spend the first three quarters of the year managing portfolios to achieve specific outcomes without regard for tax. In the fourth quarter, they examine the tax consequences of their portfolio strategy and create plans to mitigate the taxes due on any gains. But this doesn’t have to be the case.
For example, in the first quarter of 2022, advisors that work with LibertyFi used market volatility to offset gains their clients might have realized elsewhere in their portfolios. As a result, our team received over 360 tax-service requests to harvest losses on Envestnet-traded accounts.
Effectively Realizing Tax Losses
To help advisors effectively identify and harvest tax losses, Envestnet provides gain/loss reports. These are available at the account 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 capabilities that help advisors identify and manage realized and unrealized losses.
Using Envestnet’s robust PM Tools, advisors can review losses, perhaps for a single security purchased across several accounts. If the security has performed poorly, the advisor can harvest losses across all accounts that hold it.
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.
Bulk Harvesting Third-party-traded Accounts
Additionally, advisors can realize losses in bulk for accounts traded by third-party managers like unified managed accounts (UMA) and separately managed accounts (SMA). This powerful solution slashes the time it takes to sell out of multiple positions and buy similar securities so that clients don’t miss out on market movement during the 30-day hold period required by the SEC.
Without this capability, managers have to submit an individual service request for each individual account, a time-consuming process. Using this new feature, advisors can harvest tax losses when they happen and do it in a matter of minutes instead of days. If needed, they can also override or update the replacement securities in bulk during the harvesting period.
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 aims to reduce short-term capital gains for a tax management fee. The tradeoff increases the tracking error between the client portfolio and the benchmark.
The Envestnet Tax Overlay team can also help identify realized gains year to date and then harvest losses in the portfolio to help manage client tax burdens.
Summary
Envestnet offers reports to help advisors understand clients’ gains and losses; both realized and unrealized. The platform is fully configurable to support advisors, helping to protect 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 configure it to create repeatable processes.
For help with tax loss harvesting, contact Alli Jordan.
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