Model Portfolio & SMA Strategists Showcase - Flipbook - Page 35
SMAs & MODEL PORTFOLIOS
TAX OPTIMIZATION AT THE
HOUSEHOLD LEVEL
Everything discussed in this chapter
so far treats an account in isolation,
harvesting losses, managing gains,
and rebalancing within the boundaries
of a single account. A more
advanced layer of tax management
coordinates this activity across an
entire household at once, treating a
client’s taxable brokerage account,
their spouse’s account, and their taxadvantaged retirement accounts as
one coordinated tax picture rather than
several separate ones.
The logic follows a clear hierarchy,
worth understanding concretely
because it’s a good illustration of what
“household-level” tax management
actually means in practice rather than
just a marketing phrase. When a
household needs to reduce exposure
to an asset class that’s become
overweighted, the first move is to
look for a loss to harvest in a taxable
account, since that both rebalances
the household and generates a usable
tax benefit at the same time.
If there isn’t a sufficient loss available
in a taxable account, the next move is
to make the same trade inside a taxadvantaged account instead, effectively
using retirement accounts as tax-free
rebalancing tools, since gains and
losses inside them carry no immediate
tax consequence. Only as a last resort,
when neither option is available, does
the household realize a taxable gain,
and even then the specific tax lot
chosen is the one that minimizes the
tax impact.
This kind of coordination is only
possible when a platform can
see and act across a client’s full
household of accounts at once,
which is a meaningfully higher bar
than most standard TAMP or UMA
implementations clear by default.
Direct indexing and
tax-managed SMAs
have historically been
positioned as high-networth tools, and to a
meaningful extent
still are
Many platforms remain built around
optimizing one account at a time, even
when that account happens to sit
inside a larger household relationship.
For a high-net-worth household with
meaningful assets split across a
taxable account, a spouse’s taxable
account, and multiple retirement
accounts, the difference between
account-level and household-level tax
optimization can be substantial, and
it’s a fair, specific question to bring to
any provider managing a client’s full
relationship: Does your tax optimization
technology actually coordinate across
every account in this household, or
only within each account separately?
WHERE THE SLEEVES-VERSUSCOMMINGLED DEBATE STANDS
An earlier chapter flagged that direct
indexing increasingly lives inside
UMA structures using SMA “sleeves”
(p. 13). There’s a genuine industry
debate about whether that sleeved
approach is actually necessary, or
whether a single commingled account
can manage direct indexing just as
well. The argument that SMAs add
unnecessary complexity and cost to
direct indexing doesn’t hold up when
the right platform technology exists to
manage sleeves or subaccounts easily.
With the right UMA technology, an
index doesn’t have to be managed
separately from the rest of the portfolio,
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and advisors can rebalance, taxloss harvest, manage wash sales,
and apply restrictions at the account
level in an automated way. For an
advisor evaluating platforms, this is
less a philosophical question than a
technology-diligence one: Does the
platform under consideration actually
deliver account-level tax optimization
across sleeves, or does each sleeve
get managed in relative isolation?
ACCOUNT MINIMUMS AND
ACCESSIBILITY
Direct indexing and tax-managed
SMAs have historically been positioned
as high-net-worth tools, and to a
meaningful extent still are. SMA
accounts typically require a minimum
investment of around $250,000 for
equity and fixed-income strategies,
though minimums vary by program
and may be waived for certain client
types or existing relationships. But that
threshold has been drifting down as
platform technology has matured and
fractional-share trading has made direct
ownership of a full index economically
viable at smaller account sizes.
