Technology to Optimize the Tax-Loss Harvesting Experience: A Win-Win for Portfolio Managers & Clients

Tax-loss harvesting, traditionally seen as a year-end ritual, should not be a seasonal event that requires attention only when it’s time for Thanksgiving menu-planning or holiday shopping. Investors should rely on their wealth managers to turn positions that have declined in value into “winners” for tax purposes whenever it makes sense to do so. With tax-loss harvesting, investors can sell holdings whose prices have declined, use the realized losses to offset investment income for tax purposes, and replace the exited positions with reasonably similar securities. That reduce tax obligations while retaining the allocations and exposures that suit the client’s needs.

During the years when the Federal Reserve’s monetary policy was highly accommodating, low interest rates and tight spreads meant most clients had few losses to harvest from their bond holdings. As interest rates have risen, tax-loss harvesting is now likely to offer significant tax savings to many, and wealth managers will want to make sure they capture them, without waiting until everyone is ready for trick-or-treaters.

Technology: Making tax-loss harvesting faster and easier

Regardless of the magnitude of a client’s tax saving opportunities, tax-loss harvesting is a priority for wealth managers. It’s not only considered a fiduciary responsibility, it’s a good way to build strong client relationships by showing the manager leaves no stone unturned in maximizing risk-adjusted after-tax returns.

Discussions about tax-loss harvesting give wealth managers an opportunity to contact clients, which both the managers and their clients value. But leaving this to November or December creates intense pressure to complete the analysis and do the related trades quickly. Market liquidity may not support a fast turnaround, and liquidity often dries up year-end approaches. Current processes (often spreadsheet-based) and limited capacity often make it nearly impossible to be thoughtful and careful about every account when pushed to do so over a short time-frame.

Still, many managers pay little if any attention to tax-loss harvesting until the last two months of the year. And, it is far from a festive occasion when dealing with a large number of individual accounts, which have become increasingly popular among investors seeking customization. Postponing tax-loss harvesting to year-end makes it a stressful, time-consuming burden. Portfolio managers must look at each account, find securities carried at a loss based on acquisition date and cost information (incorporating often tricky de minimis rules for municipal bonds), identify sufficiently similar bonds with attractive yields to buy when selling the loss-generating positions, and actually execute the trades – all while maintaining desired market exposure across each account.

And pushing tax-loss harvesting to year-end means portfolio managers have to take time away from important tasks such as developing their outlook and strategy for the coming year, or supporting business development efforts to bring in new clients. And without an automated and scalable tax-loss harvesting solution, enjoying time with family and friends during the holidays often becomes an unimaginable luxury.

Now, more wealth managers are realizing that tax-loss harvesting can be done throughout the year, crystallizing the benefits to allow for more effective tax planning. And fixed income investment management technology is transforming the tax-loss harvesting process in ways that benefit both portfolio managers and their clients. Modern tools allow managers to filter a list of hundreds, or even thousands of accounts to find those with unrealized losses, compare those unrealized losses to unrealized gains, and identify optimal swap candidates that keep all of the accounts in compliance.

Automated tax loss harvesting with IMTC enhances the experience

IMTC’s innovative platform automates tax-loss processing at scale so that portfolio managers can analyze hundreds of accounts in minutes, rather than hours or days – enabling them to approach tax-loss harvesting proactively.

The platform’s rules-based decision-support tool allows fixed income wealth managers to optimize tax-loss swap trades in real time by identifying securities held at either a short-term or long-term loss and recommending other bonds with similar characteristics to buy, from live offerings currently available from dealer inventory other sources of liquidity.

IMTC’s investment management software enables you to:

• Filter accounts to target for tax-loss harvesting based on the total size of the account, sector weightings, positions in issuers with deteriorating credit, size of unrealized losses, and more
• Generate tax-loss swap ideas across multiple portfolios at once, and when finalized send multiple trades to a trade blotter for execution, or perhaps construct a single portfolio trade
• Optimize portfolios, accounting for compliance rules and targets, and provide an audit trail about why trades were recommended.

Portfolio managers can quickly identify accounts with tax-loss harvesting opportunities and optimize portfolios, accounting for compliance targets, for proactive wealth management with IMTC’s investment management software.

The Win-Win for Portfolio Managers and Clients

Automation empowers portfolio managers to make better decisions for their wealth management clients, proactively ensuring their portfolios are optimized for tax advantages and positioned for future returns –in a timely manner that minimizes liquidity risk.

And recognizing tax-loss harvesting as a year-round opportunity takes the stress off of December’s already crowded calendar, helping wealth managers to:

• Avoid the fatigue and risk of error that arises from manually harvesting tax losses across many accounts
• Recapture hours of time that can be devoted to year-end market analysis, business development, and other value-added tasks
• Enjoy a holiday vacation with friends and family!

Why wait? Talk to IMTC about how technology can optimize the tax loss harvesting experience for you and your clients.

This paper is intended for information and discussion purposes only. The information contained in this publication is derived from data obtained from sources believed by IMTC to be reliable and is given in good faith, but no guarantees are made by IMTC with regard to the accuracy, completeness, or suitability of the information presented. Nothing within this paper should be relied upon as investment advice, and nothing within shall confer rights or remedies upon, you or any of your employees, creditors, holders of securities or other equity holders or any other person. Any opinions expressed reflect the current judgment of the authors of this paper and do not necessarily represent the opinion of IMTC. IMTC expressly disclaims all representations and warranties, express, implied, statutory or otherwise, whatsoever, including, but not limited to: (i) warranties of merchantability, fitness for a particular purpose, suitability, usage, title, or noninfringement; (ii) that the contents of this white paper are free from error; and (iii) that such contents will not infringe third-party rights. The information contained within this paper is the intellectual property of IMTC and any further dissemination of this paper should attribute rights to IMTC and include this disclaimer.