Through the first half of 2022, financial markets have experienced painfully historic drawdowns caused by surging inflation and the Fed’s aggressive response, geopolitical impacts from the Ukraine war, and global supply chain issues. Advisors and their clients’ portfolios are being hit in a similar fashion, with a typical 60% stock, 40% bond portfolio delivering less than favorable returns over the past year as shown below.

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To combat the market’s recent poor performance, advisors might consider tax-loss harvesting as a way to make the best of a bad situation. While the exercise is generally reserved as an end of Q3 or early Q4 task, periods of significant market volatility bring tax-planning initiatives front of mind. For wholesalers, this creates a clear opportunity to engage new prospects and their existing advisor-clients.

For review, tax-loss harvesting is the practice of selling certain securities at a loss with the goal of offsetting a portfolio’s capital gains to limit an investor’s tax liability. The kicker here is that excess losses not utilized during that year can be carried forward indefinitely to further reduce tax liabilities on any gains in future years. For this reason, advisors are incentivized to sell funds that will fetch hefty losses during market downturns. That’s when wholesalers come into play—to provide their advisors with replacement options to fill that holdings gap.

Below, we’ll walk through two tax-loss harvesting workflows that wholesalers can use. Both will highlight the most valuable YCharts features for each step in the process.

Identify Fund Replacement Opportunities

Objective: Identify funds that could potentially be tax-loss harvesting candidates for advisors holding them, while ensuring that any proposed replacement funds will provide exposure coverage for the advisor’s portfolios.

Starting in the Fund Screener, add filters to narrow the universe of funds and create a targeted list of securities you could replace. 

In the example below, filters were applied for Large Growth funds with $2 billion or more in total AUM, and a Brokerage Availability filter (Morgan Stanley Select UMA in this example) for an even more targeted approach. 

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Next, add financial metrics of interest to provide a holistic view of the funds’ historical performance. Here, the Screener utilizes Total Assets Under Management, year-to-date Fund Levels Flows, and Price Returns, which excludes dividends and distributions, for the Year-to-Date, 6-Month, and 1-Year periods. 

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To avoid relying on a single metric when evaluating replacement opportunities, Scoring Models combine any number of quantitative metrics to create a single, numerical ranking as seen below. 

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Based on the Screener results (as of writing), Morgan Stanley Inst Growth I (MSEQX) is primed for replacement due to its significant outflows of over $1.2B as well as poor 6-month, YTD, and 1-year price returns. As a current loss leader, replacing this fund could potentially benefit an advisor’s clients by limiting their tax liabilities down the line.

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After identifying a fund that’s a replacement opportunity, wholesalers will need to compare its exposure to funds in their own family to ensure they are comparable.. To do this, navigate to the “Allocations” tab on any mutual fund’s or ETF’s quote page in YCharts. Here, you can build an understanding of the fund’s asset allocation, plus sector, style and geographic exposures to make a well-informed recommendation.

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Visually Communicate The Tax Loss Harvesting Opportunity to Your Client

Objective: Highlight funds that would be ideal tax-loss harvesting candidates and visually narrate the relationship between total returns and a fund’s net asset value (NAV).

To provide further context, utilize Fundamental Charts to visualize the performance of several funds over various time periods. For instance, add two different metrics such as “Total Return Level” and “Net Asset Value” and a group of comparable funds (PLCPX, PZTRX, TGEIX, MEDIX, and BFWFX in this example), and separate the data into two panels by financial metric. By stripping out dividends and distributions, you can provide an advisor with a more accurate representation of what the tax loss harvesting opportunity could be. 

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Take note of the custom date range in the upper right-hand corner of the chart. If an advisor wants to see the activity of one or more funds based on the date they originally purchased the security, wholesalers can dynamically update the chart during an advisor meeting.

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Provide Advisors a Solution Before They Need It

By leveraging YCharts’ powerful tools and data, wholesalers can make data-driven recommendations that help their advisor-partners protect clients’ investments and limit tax liabilities.

Data, combined with the ability to easily access and analyze it, are vital resources for asset managers who want to position themselves and their funds for success. With YCharts, wholesalers can identify the right funds for the right advisors at the right time, building trust and growing AUM along the way.

Learn more about how you can make better tax-efficient recommendations for your advisors-clients:

Connect with YCharts

To learn more, schedule time to meet with an asset management specialist, call us at (773) 231-5986, or email hello@ycharts.com.

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Disclaimer

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