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Director of Product Liz Alexander offers a deeper dive into why tax implications don’t have to hold advisors back as they build a values-aligned portfolio.
Director of Product Liz Alexander offers a deeper dive into why tax implications don’t have to hold advisors back as they build a values-aligned portfolio.
by Liz Alexander
Key Takeaways:
Transitions Don’t Have to Be Costly: For clients that have appreciated securities with embedded gains, our platform offers solutions to help transition assets into more diversified solutions smoothly and tax efficiently.
Tailored Transition Strategies: Whether transitioning from an existing SMA, ETFs, mutual funds, or concentrated stock positions, we provide a range of personalized portfolio options and systematic sell-down strategies. We’ve got you covered whether your client wants to prioritize sustainability, tax efficiency, or tracking error preferences.
Technology-Driven Support for Advisors: Our technology and automation were created to support advisors managing complex tax transitions by reducing the need for manual oversight and helping to enable a smoother, more efficient client onboarding experience.
Many clients are a great fit for an SMA, but we’ve heard advisors express concern about messy transitions out of a legacy portfolio. We understand that clients funding with those assets may have appreciated securities with embedded gains and have tax sensitivities that can impact their initial transition.
Today, Liz Alexander covers why transitions don’t have to be costly. Our platform allows us to support clients transitioning assets over to us from a variety of sources—cash, mutual funds, and ETFs to name a few. Let’s dive into the nitty gritty of how we can transition assets from some specific funding sources.
An Existing SMA
If a client is transitioning from an existing SMA that holds multiple equity positions, we can provide a variety of personalized portfolio options that align with their values. For example, a client may choose to prioritize sustainability or a reduction in tracking error. They might also be interested in focusing their portfolio on tax efficiency by minimizing realized gains. Our Prospect Plus experience on the Ethic Platform can help clients understand the trade-offs and implications to their portfolios. And from there, advisors and clients can make an informed decision on the best fit for their needs.
Existing Funds
Whether an ETF or a mutual fund, securities may have embedded gains that would result in a tax bill if sold completely in the transition to an SMA. To support this client, we can leverage our tax management capabilities to harvest losses in the Ethic equity SMA, and then use losses harvested as a tax budget for selling out of the appreciated funds. That way, if the client does not want to sell out of 100% of their fund positions right away, we are able to sell out of these funds systematically, helping the client move more assets into their Ethic equity SMA over time.
Concentrated Positions
There are plenty of investors out there that hold concentrated individual equity positions, whether from a previous employer or a long-held investment. For those folks, we offer the ability to sell down those positions tax-neutrally over time. We set up an SMA for the client and use it to harvest losses, then use the losses to offset any gains that must be realized to sell out of the concentrated position over time.
How Ethic Supports Advisors
Simply put, our tax-smart capabilities are powered by technology and automation. Once an advisor and client have identified what type of portfolio is best for them and have agreed on a solution for transitioning into an equity SMA, we can handle the rest.
A Case Study
Say your client has an equity portfolio made up of several stock holdings. Most of the portfolio is diversified, but as an early investor in Apple, they have accumulated a large concentrated position in AAPL, which represents 50% of their portfolio. However, the client really wants to track the S&P 500 as their benchmark, which only has ~6.5% the weight of AAPL. They also really do NOT want to realize the capital gains associated with selling the entire position right now.
So how can we support this client?
Ethic can take on the management of up to 100% of the client’s assets today, including some or all of their large holding in AAPL. Then we propose a handful of initial transition options to get them into a diversified Ethic equity SMA that fits all their needs: values alignment, risk appetite, and ongoing gains budget, if relevant.
Due to the client’s tax sensitivity in this example, Ethic will continue to hold the AAPL stock position and utilize our active tax capabilities to look for opportunities to harvest losses in the equity SMA and sell down the position over time. The client can make progress towards a portfolio with similar exposure to a diversified stock index while avoiding a big tax bill.
Reach out to our team if you would like to discuss tax transition options for your client!
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Disclosures:
Ethic Inc. is a Registered Investment Adviser located in New York, NY. Registration of an investment adviser does not imply any level of skill or training. Information pertaining to Ethic Inc’s registration or to obtain a copy of Ethic Inc.’s current written disclosure statement discussing Ethic Inc.’s business operations, services and fees is available on the SEC’s Investment Adviser Public Information website – www.adviserinfo.sec.gov or from Ethic Inc. upon written request at support@ethicinvesting.com. Information provided herein is for informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Any subsequent, direct communication by Ethic Inc. with a prospective client shall be conducted by a representative of Ethic Inc. that is either registered or qualifies for an exemption or exclusion from registration in the state where a prospective client resides. Information contained herein may be carefully compiled from third-party sources that Ethic Inc. believes to be reliable, but Ethic Inc. cannot guarantee the accuracy of any third-party information.
Ethic Inc. does not render any legal, accounting, or tax advice. Ethic Inc. recommends all investors seek the services of competent professionals in any of the aforementioned areas. Ethic Inc. cannot provide any assurances that any investment strategies, simulations, etc. will perform as described in our materials. ALL INVESTMENTS INVOLVE RISK, ARE NOT GUARANTEED, AND MAY LOSE VALUE. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGY.