Model Portfolio & SMA Strategists Showcase - Flipbook - Page 38
SMAs & MODEL PORTFOLIOS
costly, a specialist transition manager
brings quantitative tools and dedicated
attention that a generalist portfolio
manager, juggling many accounts,
may not be able to match. Worth
asking a prospective manager
directly whether they offer this as a
distinct service or fold it into standard
onboarding.
TAX-SMART DECUMULATION
Everything discussed in this chapter
so far addresses the transition into
a strategy. A related but distinct
problem shows up on the other end
of the relationship, for clients already
retired and drawing income from a
taxable account: how to raise cash for
a distribution without generating an
avoidable tax bill in the process.
The mechanics mirror the transitionplanning logic already covered, applied
to withdrawals instead of initial funding.
Rather than simply selling whatever’s
needed to meet a distribution request,
tax-smart withdrawal technology
evaluates which specific positions to
sell by pairing security-level losses
against gains, first within the account
generating the distribution, then, where
the technology supports it, across a
client’s broader household of accounts,
to minimize the net tax impact of
raising that cash.
WHEN TO REACH
FOR THIS
Timeline vs. TaxBudget, fast
Large concentrated position, urgency to
reduce risk outweighs near-term tax cost:
Timeline approach. Diversified starting
portfolio, annual tax bill control matters
more than transition speed: Tax-Budget
approach. Either way, market conditions
during the window change the math. A
drawdown-heavy period transitions more
efficiently than a steady bull run.
accounts move further into the
retirement-income phase of a client’s
life, not just the accumulation phase
most of this guide has focused on.
A client drawing down a directindexed account for retirement income
deserves the same tax-management
discipline in reverse that they received
while the account was accumulating,
and it’s worth asking any provider
serving retirement-income clients
directly whether their tax optimization
technology actually extends to the
Transition Tax Cost
Under Different Market
Conditions (Illustrative)
Relative tax cost (illustrative index,
lower = better )
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Drawdown-heavy
period (e.g.,
2001–2010 style)
Steady growth
period (e.g.,
2009–2018 style)
Illustrative realized tax cost (relative index)
withdrawal phase, or whether it was
built primarily for accumulation and
treats distributions as an afterthought.
Two Transition Frameworks: Fixed Time vs. Fixed Tax
TIMELINE APPROACH
TAX-BUDGET APPROACH
A client needing $50,000 for an
annual distribution might have that
amount raised entirely from positions
at a loss, entirely from positions at a
gain, or some blend, depending on
what’s actually held in the account
at the time. Systematic, tax-aware
withdrawal logic evaluates that mix
explicitly rather than selling pro-rata
across the portfolio by default, which
is the naive approach most platforms
defaulted to for years.
Fixed number of years.
Tax consequences float
with embedded gains and
market conditions.
Fixed annual dollar cap
on realized gains.
Timeline floats based on
how fast the budget allows
movement to target.
This matters increasingly as taxmanaged SMAs and direct-indexed
CHOOSE TIMELINE when:
concentration risk is urgent (e.g.,
large single-stock position)
Investor controls: TIME
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Investor controls: TAX
CHOOSE TAX-BUDGET when:
annual tax bill control matters
more than transition speed
