The Best Investment Tools Investors & Advisors Don’t Have

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If you work in the financial services industry, ask yourself these two questions about your clients:

  • If they could pay half as much tax on a large gain, would they care?
  • If the US Government offered to give them an interest-free loan to invest for a year, would they take advantage of it?

Those may seem like stupid questions, but if the answers appear to be obvious the question is why investors don’t take advantage of these opportunities.

By managing the timing and lot selection of their investment activity, investors (and their advisors) can frequently find opportunities to take a gain long-term, which is taxed at 0-20% (depending on the tax bracket), instead of a short-term gain, which is taxed at higher rates of between 10-39.6%. And while tax management won’t convince the US Government to make loans to investors, delaying a large tax payment to the IRS from one tax year to the next is effectively the same thing, allowing an investor to reinvest that future payment, interest-free, for a full year.

As I mentioned in a post last week, cost basis is sexy. Most of you probably know that already (if you’re wondering, that’s dry humor). For those of you who don’t, the reason is simple. Knowing the cost basis of their investments at all times allows investors to make decisions that can minimize taxes or delay payment of liabilities, in such a way that can dramatically increase after-tax performance. And this is what really matters to an investor. It’s not always the size of the gains, it’s how much money is left after paying Uncle Sam that investors should be focused on.

Let’s start with the basics. The most well-known tax management tactic is Tax Loss Harvesting (TLH). An investor who has net gains on the year might want to sell some open positions to capture embedded losses. These losses can be used to offset gains, thereby reducing, or possibly eliminating, tax liabilities from gains. (Key concept: investment gains are desirable, but when it comes to tax management, losses are very attractive). Reducing tax liabilities means better after-tax performance and, thanks to compounding, significantly greater portfolio values over time.

Other tax management tactics include, delaying large gains in December, taking gains long-term and losses short-term, avoiding wash sales, pre-trade tax analysis, and careful lot selection during gifting or event funding activities.

Sounds great, right? So, why isn’t this standard practice for investors and financial advisors alike? The trick to increasing after-tax returns –and therefore portfolio values- is to have the tools necessary to comb through large amounts of trading and cost basis data to identify opportunities. This can be time-consuming, a little bit confusing and, honestly, pretty monotonous. Investors and advisors demand better.

That’s why we build Sqope Tax. It takes investment portfolio data and presents it to an investor or advisor in a series of clear and comprehensible tools, each with action steps that can result in real, and significant, protection to portfolio values.

Scivantage is a leading provider of cost basis platforms. Being in this business for so long has taught us a lot about the investment value of cost basis, as well as a good understanding of where investors make mistakes. Of all the investment tools your investors and advisors have at their disposal, tax management may be the one that ultimately has the most beneficial impact.

Scivantage hosted a webinar last month to provide insight into the Sqope Tax solution and the value of active tax management.  If you’re interested in valuable additions to your firm’s investment platform, please click here to view the webinar.

As Chief Commercial Officer, Tax & Analytics, Cameron Routh is responsible for the overall vision, leadership and management of Scivantage Maxit®, Sqope Tax and analytics products. Under his direction, Scivantage has developed the next generation of investment management applications, including pre-trade decision tools.

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