For high net worth clients, wealth managers are coming to realize that basic tax-loss harvesting is no longer enough.
In the race to win this highly coveted group, firms large and small are finding that tax expertise is needed for much more than keeping government hands as far away as possible from capital gains. Taxes touch nearly everything high net worth investors need from advisors, from basic retirement planning, saving for college and charitable giving to the often complex work of building custom-made portfolios and setting up estates and trusts.
Many firms have been busy trying to build the expertise needed for these tasks. Some of the largest, meanwhile, have sought to import it directly by acquiring tax specialist firms. Witness Morgan Stanley’s addition of Parametric in 2021 (through its purchase of Eaton Vance), JPMorgan’s of the fintech company 55ip in 2020 and Cetera’s of Avantax in 2023.
All three firms had been offering clients some tax services before these big deals went through. Like most wealth managers, they offered tax-loss harvesting, or using money lost through sales of stocks, bonds and other assets to offset capital gains taxes owed on investments whose value has risen.
Elitza Christoff, the head of managed solutions at Morgan Stanley Wealth Management, said there are a confluence of reasons for why tax planning is becoming increasingly essential for clients. One is simply their desire to be able to find all the answers they need at a single firm, rather than go to an advisor for investment related questions and then a separate accountant for help with taxes.
“And then it’s changes to the tax code, which is becoming more and more complex,” Christoff said. “And as our clients’ net worth rises, the tax conversation becomes more and more prevalent to ensure they can achieve their financial goals, their philanthropic goals, their estate planning goals. You can’t do that without considering the tax impact.”
Many clients ‘burned by poor advice’
Andy Watts, president of Cetera’s Avantax, said the wealth management industry is becoming commoditized, meaning individual firms are being perceived as less distinct and more interchangeable in the eyes of the investing public. Wealth managers are clearly viewing tax expertise as a way to stand apart from the competition.
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On the other side of that is growing investor demand.
“I think the client base at large is one that has previously been burned by poor advice that failed to consider the tax ramifications,” Watts said. “But two, they’re getting more savvy, right? I think they recognize there’s a real value, because taxes are typically the greatest expense in a client’s life.”
Morgan Stanely’s Parametric sought to gauge the demand for these services with help from the research firm Cerulli. The results, published this month in a paper titled “Customized at Scale: A Framework for Next-Generation Advisory Platforms,” found that nearly 70% of affluent investors think it’s important for financial planners to provide help with their tax bills.
The report — which drew on interviews with 26 industry professionals, as well as Cerulli’s annual surveys of thousands of advisors and investors — also found that nearly half of advisors now offer tax planning of various sorts. Among those who tend to work with clients with $5 million or more in assets, the share increased to 53%.
“While advisors currently view tax management as a potential differentiator, this data suggests that customization and advanced planning capabilities, such as tax management, are increasingly considered baseline capabilities for serving higher-networth households,” according to the report. “Furthermore, these capabilities won’t be reserved for HNW clients for long, as many wealth managers, asset managers, and technology providers are working to migrate them downmarket to mass affluent wealth tiers (i.e., clients with less than $2 million in investable assets).”
Morgan Stanley’s Parametric helps with portfolio rebalancing, avoiding ‘wash sales’
Christoff said Morgan Stanley was already doing advanced tax planning before its acquisition of Parametric. The addition has brought expertise not only in tax management but also in the customized construction of portfolios using methods such as direct indexing. This refers to investing directly in stocks or other assets in a way often meant to mimic the performance of the S&P 500 or other market indexes.
Before Parametric was fully incorporated into Morgan Stanley, its custom-built funds were held in accounts separately from other sorts of investment funds. That led to a number of “headaches,” Christoff said.
For one, it made it difficult to avoid inadvertently running afoul of the Securities and Exchange Commission’s “wash sale” rule, which restricts when losses on asset sales can be used for tax reduction purposes. The rule generally prohibits investors from claiming a loss from the sale of a stock or other investment if they turn around and buy the same or “substantially the same” asset within 30 days.
Morgan Stanley’s solution was to bring tailor-made Parametric index funds into the same sort of unified managed accounts now often used to gather together investment vehicles like mutual funds, exchange traded funds and other custom-built index funds. UMAs typically aim at simplification by collecting a wide variety of assets and charging a percentage fee for their management.
Parametric, which has more than $600 billion under management, offers these services not only to Morgan Stanley brokers but also independent registered advisory firms and institutions like banks, insurance companies and hedge funds.
“When you have it all in one place, it means that we’re able to seamlessly rebalance the portfolio because we’re doing tradeless transfers of shares between manager sleeves,” Christoff said. “We’re able to coordinate the tax-loss harvesting that’s happening within the client’s account. … And we’re ultimately reducing the occurrence of wash sales versus those who may be holding Parametric solutions in a standalone segregated account.”
Morgan Stanley is far from the only firm that has used acquisitions to combine offers of direct-index funds with tax-loss harvesting and similar services. The giant asset manager BlackRock took a similar step when it bought the Parametric rival Aperio in 2021. Vanguard likewise ventured into direct indexing with its acquisition of the fintech firm Just Invest later that same year.
JPMorgan’s 55ip sees asset growth driven by direct indexing
JPMorgan, like Morgan Stanley, already had a great deal of in-house tax expertise before its 55ip deal. The acquisition brought not only more tax planning resources but also a similar ability to assemble direct-index funds.
The offerings have proved popular not only with JPMorgan advisors but also outside firms. 55ip scored one of its biggest outside clients two years ago when the large independent broker-dealer Raymond James enlisted 55ip for its tax management services.
Steve Kaplan, the head of customized solutions for J.P. Morgan Asset Management, said 55ip’s assets under supervision have increased to roughly $100 billion from $2 billion in the five years since JPMorgan completed its purchase. Much of that has been driven by advisors and outside firms seeking expertise on the complicated tax considerations that arise when clients find their portfolios are overly concentrated in a single investment type and are seeking to diversify.
“If you didn’t take tax into consideration and you just sold to go from one thing to another, you’d have a large tax bill,” Kaplan said. “So the transition is: What are you comfortable with paying up-front, tax-wise? And then how do we, on a regular basis, monitor your account to take losses and get you closer to your target portfolio.”
55ip’s technology allows those transitions, and the accompanying tax minimization, to be largely automated. Like Parametric for Morgan Stanley, 55ip has also brought JPMorgan expertise in direct indexing that it didn’t have before.
Kaplan said $44 billion of the $100 billion 55ip has in assets under supervision is now in funds built to mirror outside market indexes. He too believes the ultimate goal is to bring these direct-index funds into one overriding account with exchange-traded funds, mutual funds and other assets.
“That’s the unified managed account concept,” Kaplan said. “That’s where the future is. It’s one account with tax management. And 55ip will help us to enable that in different ways throughout the industry.”
Looking beyond loss harvesting and applying tax management to everything
Watts at Cetera’s Avantax said too many wealth managers still look at tax planning as “this neat little box that stands apart from everything else.” For many firms, tax expertise seems to end at investment management considerations like tax-loss harvesting and deciding what type of bonds — taxable or tax-free — have a place in a given portfolio.
“And we believe at Cetera, that you should apply the lens of tax to everything that is part of financial planning, whether it be insurance, real estate investments, retirement, on and on and on, because all of those things have tax consequences,” Watts said.
Cetera’s proprietary tax-management offerings include its Tax-Intelligent Analyzer, software that scans clients’ tax filings to automatically uncover opportunities for investing and increasing their revenue. The value of the service can be seen in the type of customers Avantax has been able attract.
Watts said roughly 70% of Avantax’s clients have tax expertise either through being a certified public accountant or an enrolled agent, a special type of tax advisor recognized by the IRS. The remainder, he said, are what he deemed the “like-minded.”
“They’re coming to us because they believe we can offer resources and expertise,” Watts said.
Within Cetera, Watts said he and others have been busy making sure the firm’s network of advisors can take advantage of Avantax’s services designed specifically for ultrahigh net worth clients. Watts said it would be a mistake to think that sound tax advice is useful only to the wealthy, but the need for it increases the more money someone has to invest.
Almost anyone with investments can benefit from tax-loss harvesting. Other strategies depend much more on what tax bracket an investor falls into.
Tax free municipal bonds, for instance, tend to be best for clients who pay at the highest rates and are thus eager to hold their taxable income to a minimum. They make less sense for investors falling into lower tax brackets, who would probably be better off paying taxes on the higher yields offered by other types of bonds.
“So are these tax solutions universally available? Sure,” Watts said. “Are they universally applicable? Not necessarily.”
