As year-end planning begins and tax season approaches, financial advisors have a powerful opportunity to provide clients with proactive tax planning strategies. For clients with large gains from the equity markets, tax season can feel daunting, but with the right approach, advisors can help their clients manage the potential impact to their taxes while adding value through strategic portfolio adjustments. Decision intelligence technology offers advisors the ability to anticipate and manage capital gains, allowing for proactive adjustments that help align with each client’s tax goals. By harnessing data-driven insights, advisors can minimize tax exposure more effectively and stay ahead of potential tax events.
This blog outlines two proactive strategies for managing capital gains taxes: direct indexing and leveraging technology like Envestnet’s Mutual Fund Capital Gains Monitor. Together, they equip advisors with the tools to offer tax-efficient solutions tailored to each client’s specific needs.
Understanding the impact of proactive, year-round tax management
For financial advisors, recognizing the impact of unrealized capital gains is crucial. Proactive tax management allows advisors to address potential gains before they escalate into larger, disruptive tax events. But it’s about more than just tax obligations—year-round tax planning enables advisors to build stronger client relationships by providing consistent, personalized strategies. Leveraging technology, advisors can monitor and manage portfolios in real time to uncover potential tax-saving opportunities, such as gain offsets and trade optimization. This proactive approach not only helps clients manage tax liabilities but also aligns with their unique preferences, fostering trust and loyalty.
In a competitive market, embracing year-round tax management enhances advisors' value. With 92% of investors expecting their advisor to provide tax planning advice, but only 25% report receiving it,1 tax planning presents an opportunity to deepen relationships and drive business growth.
Year-round strategies for managing capital gains
“Always-on” technology: Insights-driven tax efficiency
Another powerful strategy for managing capital gains is leveraging “always-on” monitoring technology like Envestnet’s Mutual Fund Capital Gains Monitor, a tool designed to help advisors track and mitigate mutual fund capital gains distributions within client portfolios. This tool provides a comprehensive view of a client’s projected capital gains distributions, helping advisors anticipate and respond to potential tax impacts.
Envestnet’s Mutual Fund Capital Gains Monitor has identified 2.2M mutual fund capital gains related insights. Acting on the Insights could save clients an estimated $2.6B in taxes.
Envestnet Insights Engine as of December 31, 2023
The Mutual Fund Capital Gains Monitor offers actionable insights through several key features:
- Positions and funds to watch: Advisors receive projections on capital gains distributions across funds, allowing them to identify positions at risk of triggering tax events. This foresight helps prevent clients from experiencing unexpected tax impacts.
- Warning system for harmful tax events: The tool includes a warning feature that flags when specific client holdings may lead to significant taxable events. This can be particularly useful for clients holding high-turnover mutual funds, which tend to distribute capital gains more frequently.
- Actionable Insights Engine: The Insights Engine narrows down the list of clients and accounts most impacted by mutual funds capital gains distributions. The tool will incorporate estimated distributions, tax rates, and gain/losses in a taxable position to enable the advisor to make an informed decision. With categories like “Large Absolute Distributions, Large Relative Distributions, and Monitor Losing Position for Mutual Fund Distributions” advisors can quickly target and prioritize the most at-risk portfolios.
Leveraging decision intelligence within the Capital Gains Monitor offers an “always-on” capability, alerting advisors to high-risk tax situations. This foresight helps advisors manage clients’ capital gain distributions more strategically, helping with unexpected tax liabilities and enhancing client trust. Decision intelligence also empowers advisors to provide this tailored, proactive service at scale. By integrating decision intelligence tools, advisors can efficiently deliver value-added tax management to all clients, which supports business growth and elevates client satisfaction through consistently personalized service.
Direct indexing: A personalized approach to tax management
Direct indexing has become a favored tool for managing capital gains, and for good reason. Decision intelligence transforms how advisors use tools like direct indexing by enabling data-backed decisions that cater to individual client profiles. Advisors can pinpoint specific tax-saving opportunities, ensuring that each portfolio is uniquely optimized for tax efficiency without sacrificing investment objectives.
Direct indexing also enables advisors to maintain better control over which assets to hold or sell based on each client’s specific tax profile. For instance, if an advisor identifies a client with a portfolio heavy in unrealized gains, they can strategically harvest losses in other parts of the portfolio, reducing the overall tax burden. This personalized approach allows for tax savings without deviating from the client’s overall investment goals.
Combining direct indexing and capital gains monitoring
The combined use of direct indexing and Envestnet’s Mutual Fund Capital Gains Monitor provides a comprehensive solution to managing capital gains efficiently. Direct indexing allows for hands-on tax-loss harvesting within a portfolio, while the Capital Gains Monitor offers granular insights into distributions across multiple mutual funds.
For instance, an advisor could use the Capital Gains Monitor to identify a client’s mutual funds with the highest projected capital gains distributions. They could then utilize direct indexing to offset those gains by strategically harvesting losses elsewhere in the portfolio. This two-fold approach not only helps manage tax liabilities but also keeps the client’s investments aligned with their long-term strategy, as the advisor can maintain control over specific holdings.
In essence, combining these tools enables advisors to offer a sophisticated tax strategy that goes beyond traditional portfolio management. This synergy highlights a commitment to both tax efficiency and personalized client service.
Adding value through proactive tax planning
The end of the year approach, advisors have an invaluable opportunity to showcase their commitment to client service and proactive tax management. By leveraging decision intelligence-enhanced tools like Envestnet’s Capital Gains Monitor and solutions like direct indexing, you’re not only helping clients navigate complex capital gains challenges but also helping to add tangible value to their financial lives. These strategies enable you to move beyond traditional portfolio management, offering clients a personalized, proactive approach to tax efficiency that can help to strengthen relationships and drive growth.
This year, let proactive, data-driven tax solutions set you apart and reinforce your role as a trusted partner in your clients' financial journeys.
Envestnet is transforming the future of advice. Learn how we’re leveraging decision intelligence and machine learning at https://www.envestnet.com/data-intelligence
