Edward Jones brings UMA tax expertise in-house with Natixis overlay purchase

In the past, when Edward Jones advisors wanted to know how selling stock in clients' accounts would affect their ultimate tax burden, they'd often turn to experts at the third-party firm Natixis.

Now Edward Jones, with an eye toward better serving coveted high net worth clients, plans to provide that expertise in-house. The St. Louis-based firm announced this week that it will buy Natixis' overlay management services line of business.

The deal, expected to close later this year, will bring to Edward Jones expertise in overseeing investments held across the mutual funds, exchange-traded funds and other vehicles that often go into making what's known as a unified managed account, or a UMA. Russ Tipper, principal and head of products at Edward Jones, said wealth managers are generally capable of managing a single portfolio or a small number of accounts on behalf of clients

But when they're dealing with the array of investments held in something like a UMA, they often have to turn to a firm like Natixis for help with services like mitigating the tax burden caused by stock sales. By purchasing Natixis' overlay business, Tipper said, Edward Jones advisors will gain more room to tailor UMAs to fit individual clients' needs.

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"Clients don't think of themselves as a series of accounts, right?" Tipper said. "They think of themselves as: I've got aspirations, needs, wants, wishes and goals. So how do we take overlay management and move it more towards that household level."

Answers to some rather taxing questions

One big selling point for Natixis and other third-party providers of overlay services is the help they can give wealth managers with lowering clients' taxes. Many industry experts have found that advisors often concentrate on maximizing returns on their clients' portfolios while giving too little consideration to the taxes that are owed when investments are sold for a profit.

But taxes on short-term capital gains — or money made from selling stocks or other securities held for less than a year — can range as high as 37%.  The wealth management firm Avantax has estimated that tax "leakage" from hits to investment portfolio returns lowers potential yields by $600 billion every year. 

Third-party overlay managers like Natixis and AssetMark help advisors avoid these costs using strategies like tax-loss harvesting, which involves offloading some investments at a loss to offset gains made on other sales. They can also keep wealth managers from running afoul of the Securities and Exchange Commission's wash-sale rule, which prevents investors from claiming for tax purposes a loss on a stock they've sold if they turn around and buy the same security or a substantially similar one within 30 days. 

"If someone sells a security for a loss in a different account that's not managed by the overlay, how do we ingest in the future, that type of information that we don't take any actions that could be punitive to the client?" Tipper said.

The advantages of bringing it in-house

Tipper said many of the services offered by third-party overlay managers were built for asset management, which often involves overseeing investments for pension funds, endowments and other large institutions. Edward Jones' purchase of Natixis' overlay services will allow it to direct that business more toward the management of individual clients' wealth.

"This is such a critical capability that outsourcing it really didn't make sense to us," Tipper said. "We want to make sure that we're not just buying cookie-cutter, off-the-shelf kinds of capabilities."

Tim Welsh, the president of consulting firm Nexus Strategy, said Edward Jones' purchase plans follow the examples set by many other wealth managers that have taken similar steps and was a natural move for a firm of its size. By the end of March, Edward Jones had more than 20,000 advisors managing roughly $2.2 trillion on the behalf of 9 million clients.

"They have thousands and thousands of advisors," Welsh said. "Should they be out there selling someone else's management services or are they selling their own? This is a chance at least to sell their own."

The terms of Edward Jones' Natixis purchase aren't being disclosed. Edward Jones has said it is working to offer positions to Natixis employees likely to be affected by the sale of the overlay business.

Edward Jones will also continue turning to Natixis Investment Management for direct indexing, or assembling stocks in a way meant to mimic the S&P 500 or other prominent market indexes. The two firms have been working together since 2011.

"We are excited to transition to a strategic way of working with our long-time client combining our UMA implementation knowledge, industry-leading direct-indexing prowess and investment management expertise with Edward Jones' comprehensive financial planning and investment management capabilities to benefit investors' unique needs and preferences," David Giunta,  the president and CEO for the U.S. at Natixis Investment Management, said in a statement.

Edward Jones' drive to work with more HNW clients

The purchase of Natixis' overlay management business comes amid a general push by Edward Jones to work more with wealthy clients. For decades, Edward Jones has largely built its business with an advisor force dedicated to serving so-called mass affluent clients who typically have between $250,000 and $2 million to invest.

Seth Adam Stuart, the co-founder and head of strategy at the marketing research firm EventIntelligence.AI, said Edward Jones was going to have to do something like the Natixis purchase or risk being left behind by rivals better equipped to work with high net worth clients.  

"If they want to go from clients with $250,000 to ones with $500,000 and then to $1 million and then to $5 million, they really need to do this," Stuart said. "If they don't have something like this, they eventually can't recruit advisors. They are not going to be able to recruit."

Edward Jones has shifted its priorities to high net worth clients in other ways in recent years. In March, for instance, Edward Jones announced a new offering called Generations, which will provide clients who have $10 million or more in investable assets with services like tax planning, estate and business planning, cash-flow analysis and philanthropic guidance, partly in partnership with the accounting giant EY and the law firm Husch & Blackwell. 

In May, Edwar Jones said it had reached a deal with the fintech firm CAIS to give its Generations clients better access to private equity, private credit and other so-called alternative investments. Also that month, Edward Jones announced it would start offering advanced planning services like cash-flow analysis and tax, estate and trust planning to clients falling in the Generations category.

"High net worth clients are looking for a level of personalization," Tipper said. "They are also looking for enhanced tax management. And we can do all that with these capabilities."