Robo platforms, digital innovation and artificial intelligence dominate fintech coverage in wealth management. But tax optimization is a lower-profile capability with equal potential to revolutionize the industry — not just in customer service, but in terms of the industry’s very topography. This two-part series examines first the need for and current scope of tax optimization, then tracks progress toward related innovations in household financial management.

Most financial advisors understand “tax optimization” as tax-loss harvesting. This involves offsetting tax payments on portfolio securities that have gained in value by selling those that have lost value, and then replacing what’s been sold with similar holdings to preserve asset allocations and overall return expectations.

Tax-loss considerations are part of the tax-optimization equation, Laura Varas of the consulting firm Hearts & Wallets tells FA-IQ. But she says the concept also permeates overall goals-based retirement and legacy management — as distinct from, in her view, goals-based planning and investing.

“Tax optimization is just what it sounds like: not paying more in taxes than you have to,” says Rye, N.Y.-based Varas. “But,” she adds, “it’s part of a bigger picture” that includes taxable and tax-deferred asset location as it applies to entire households (not just individuals) and the means for clients to see where and how their money is made, spent and earmarked for long-, medium- and short-term use.

Advisor Ben Gurwitz of Financial Life Advisors is steeped in this approach.

“As part of any comprehensive financial plan we prepare, we put together a 20-year tax projection,” says San Antonio, Texas-based Gurwitz, whose firm manages $165 million.

By forecasting cash-flow needs for a given plan including expected returns and other sources, Gurwitz “can simulate a baseline projection of future income tax situations following the typical rule of thumb of taxable, IRA then Roth distributions,” he tells FA-IQ.

Ben Gurwitz

“By seeing what the future is expected to be, we can make key decisions now to lower lifetime taxation, not just current-year taxation,” adds Gurwitz.

Roger Ma of the New York wealth advice firm lifelaidout says tax smart asset location — making sure appropriate holdings are in taxed or tax-deferred accounts — stands with asset allocation and controlling fees as the “main factors that contribute to a client’s net investment return.”

Ma explains: “An advisor taking into account asset location may put the taxable bonds into the client’s tax-advantaged accounts and put more efficient equity index funds into the client’s taxable account.” In this example, most income from equity fund accounts “would be qualified dividends, subject to the more advantageous long-term capital gains rates rather than short-term capital gains rates,” he says.

Strategic asset location can help clients save on fees as well. For instance, “Vanguard generally charges higher expense ratios for investments in funds under $10,000 versus investments in funds above $10,000,” says Ma. “Grouping investments together” can mean lower overall expense ratios.

But FAs say monitoring and implementing efficiencies across an individual’s holdings — to say nothing of doing so across households — is a daunting task, made even more so when adding the need for coherent reporting.

For example, Oakland, Calif.-based Ginsburg Advisors, which manages $200 million, has been aggregating all its clients’ accounts under family portfolio reports “and making smart tax-related decisions to minimize tax on portfolio adjustments” for the past two decades, founder Larry Ginsburg says in an email exchange with FA-IQ.

But he describes the internal processes for doing this and reports the results are “very labor-intensive and not efficient.” In practice, he adds, it spans “Excel, MS Word, dbCAMS+ portfolio management software and Morningstar.”

The technological hurdle is one reason holistic tax optimization and householding remain the preserve of big-name wealth firms and high-touch boutiques, according to Varas of Hearts & Wallets.

In the four service segments of financial advice — robos, discount brokers, hybrid human-and-robo platforms and full service — only the full-service segment addresses tax optimization in both the accumulation and withdrawal phases, says Varas. Hybrids provide some tax-efficient withdrawal strategies. Pure-play robos and discounters don’t even come close, claims Hearts & Wallets.

In this light, tax optimization and householding give traditional wealth managers an advantage over upstarts. “It equips them to provide a tangible value-add and a differentiator” in the face of margin pressures from those very quarters, says Varas.

Equally, she says, a sharpening focus on householding as a means to richer retirements may help traditional firms keep robos and discounters away from the mass-affluent and high net worth customers they’ve been serving for decades.

Read Part Two tomorrow, when FA-IQ examines how rigorous tax efficiency across household accounts gives traditional financial advisors a potential advantage over no-frills rivals.