Unwinding dated portfolios without tax hits or client tears

A client walks into an advisor's office with a portfolio assembled over a period of years — say, an inherited trust account, a patchwork of funds and a concentrated position in a former employer's stock. 

On paper, it's worth a lot, but in practice it may no longer achieve desired objectives across risk, return, values or financial considerations. The client wants more control, greater alignment and a strategy that accounts for where they've been and where they're headed. The advisor agrees. 

But in the discussion that follows, one anxiety surfaces quickly: What about the tax hit? 

It's a situation familiar to many wealth managers. Clients overdue for a portfolio refresh are eager to consolidate accounts or personalize for values or goals. But when tax consequences feel uncertain or too steep, the process stalls. 

READ MORE: Avoiding capital gains taxes with highly appreciated stocks

It's not just about the numbers, either. In addition to real-life constraints these portfolios often carry emotional weight as well, whether it's the founder stock that built the client's wealth or a fund they've held through many market cycles. The stakes are high: If the advisor can't solve for the tax variable effectively, another advisor might. 

Conscious unwinding

Situations like these demand a thoughtful, tax-aware approach that supports the client's next chapter without completely erasing what came before. Here's how various scenarios can unfold thoughtfully.

Clients who hold concentrated positions — often in a company where they once worked or invested in early — are sometimes emotionally invested in the outcome. These stocks may have helped build their wealth and, in many instances, represent a huge part of their identity. 

But over time, these same positions can expose clients to outsize risk and a lack of diversification, especially as their broader goals evolve. However, a full liquidation is likely to be extremely tax-inefficient because it could immediately trigger significant capital gains. 

READ MORE: How to guide clients out of big stock concentrations

Instead, advisors can incorporate the concentrated position into a larger, diversified portfolio. This approach focuses on managing a single, emotionally and financially significant position.

Over time, they can use tax-loss harvesting across the rest of the account to offset gains from carefully unwinding that concentrated stock. This approach allows the client to retain a connection to their legacy while slowly advancing toward a portfolio that's more resilient and better aligned with their present goals.

Parallel track

Likewise, mutual funds and ETFs held over multiple market cycles often carry significant unrealized gains but may no longer align with the client's values, risk tolerance or financial goals. Clients may not realize how out of step these holdings are with their current priorities until they sit down for a comprehensive review. Still, many hesitate to sell due to potential tax consequences or a lack of clarity on what the alternative path looks like.

This is where a staged transition becomes a powerful tool. 

READ MORE: With tax-loss harvesting, you reap what you sow

Rather than abruptly selling everything at once, advisors can begin building a new, customized portfolio that runs alongside the client's existing fund positions. The goal is to continuously identify and capture any available losses. These realized losses can then be used to offset gains from systematically reducing the legacy fund exposure, allowing clients to transition into more suitable strategies in a tax-efficient way.

SMA oversight

Even when clients are invested in an equity-focused separately managed account, they might wish to adjust their exposure to specific sectors, tilt toward certain risk factors or values, or seek to manage tracking error more precisely.

When the goal is to transition a third-party SMA in-house, advisors may use a platform that holds discretionary authority on their behalf to deliver a more personalized, tax-aware and values-aligned strategy for the client.

READ MORE: Shifting investor demands spark explosive growth of SMAs

But even if the SMA is managed by another party, the advisor can help the client define their objectives, review proposed model changes and simulate the expected tax and portfolio impacts. Clients gain clarity on what's changing and why, while the advisor maintains oversight of risk and tax exposure throughout the transition. 

No two portfolio transitions look the same. Each one demands an approach that understands where the client has been, acknowledges what matters to them today and supports where they're headed next.