Improving Clients’ After–Tax Returns

Adhesion’s Tax Sensitive Overlay Management is an optional service for advisors wishing to mitigate the impact of taxes on clients’ portfolios. Simply stated, the Tax Sensitive Overlay Management seeks to reduce tax exposure, especially short–term gains, with the goal of improving the client’s after–tax returns.

Although never desired, losses on investments in taxable accounts can offer a silver lining: They can be used to help offset taxes. Tax–loss harvesting is considered by many investment professionals to be one of the most effective active portfolio management strategies available.

This is all enabled through the combination of a sophisticated Unified Managed Account (UMA) platform, a centralized Overlay Portfolio Manager (OPM), and model portfolios from separate account managers (SAMs).

Effective Tax Sensitive Management Requires Centralized Overlay

As centralized OPM for your client accounts, Adhesion has the responsibility for coordinating with all asset managers providing model portfolios, for implementing the model portfolios you have selected for your clients, and making client– and account–specific trade decisions. Additionally, for client accounts receiving Tax Sensitive Overlay Management the Adhesion OPM team weighs the return risk of not complying with the model provider’s sell recommendation against the potential benefit to after–tax return from:

  • Regular loss harvesting;
  • Gain/loss matching;
  • Avoiding wash sale violations;
  • Delaying a trade until a short–term position goes long–term if there is no offset.

Powering this service is Adhesion’s integrated investment platform enabling the OPM team to make custom trade decisions at an individual tax lot level.

Effective Tax Sensitive Overlay Requires Pro–Active Management

Historically, the strategy of tax–loss harvesting has been most frequently implemented by advisors at year–end, when investors are up against the calendar. In stark contrast, Adhesion’s proactive and opportunistic approach employs tax–loss harvesting year–round to realize losses when market conditions warrant, not just when the calendar says to. Numerous studies have shown material enhancement to long term performance from pro–active and tax–sensitive rebalancing methodologies.

Effective Tax Sensitive Overlay Includes Client–Specific Customization

Since no two clients have the exact same tax situation, the Adhesion overlay management service facilitates customized delivery at the client level. With regard to tax sensitive overlay, advisors can establish “carve outs”– typically protected holdings of low cost–basis – and tax mandates which establish specific gain/ loss budgets.