Separate account managers have seen a rise in tax-loss harvesting activity over the past three years, according to recently published research from the Money Management Institute and Financial Research Corporation.
According to a survey of MMI member firms that are investment managers, 73% have seen a spike in tax-loss harvesting, the practice of selling holdings at a loss to offset gains elsewhere in the portfolio. The purpose of harvesting is to lower an investor's tax liability without altering the risk profile, sector or strategy of the managed account.
The poll showed that among accounts that use tax-loss harvesting trades, clients request the strategy 77% of the time.
"This is a direct result of the consulting process," said Julie Holland, managing director of New York Life Investment Management's MainStay Investments Wealth Strategies group, in a press release. "Advisors educate investors on all the benefits of the managed account including the ability to execute tax-loss trades. As an account grows, there are always tax liabilities, and once introduced to the process, investors are keen to limit the impact of taxes."
In terms of market effects, the survey also found that tax-loss trades were common in both bull and bear markets. Some 43% of investment managers said they saw no significant difference in their tax-loss harvesting activity in positive markets compared to negative markets.
However, many are still reaping benefits from tax-loss trades from the last bear market. According to the poll, 57% of the respondents said there are still embedded losses in portfolios from the last bear market.
The MMI provided an example of a simple tax-loss trade in the release. An investment manager with $10,000 in realized long-term capital gains in a portfolio has an individual position in a pharmaceutical company that has lost $3,000. The manager can sell the stock and invest in another large-cap pharmaceutical company without changing the risk profile of the portfolio.
The trade lowers the long-term capital gains liability to the investor from $10,000 to $7,000. At a tax-rate of 20% for long-term capital gains, this saves the investor $600 in capital gains taxes. Over time, this strategy can have a significant impact on after tax performance.