Use Case Scenarios in Direct Indexing and Tax Loss Harvesting

Case Study 1: Tax-Aware Transition

– Client Profile

The first scenario involves an investor with a highly concentrated position in a technology stock worth $5 million. The client falls within a high tax bracket, facing 37% federal tax and 13.3% state tax, and expressed a need for diversification to mitigate risk.

– Solution & Outcome

The solution involved a multi-year transition strategy using direct indexing, which allowed for the gradual diversification of assets. In the first year, the strategy facilitated the harvesting of $300,000 in losses, which were used to offset the gains from liquidating the concentrated position. As a result, the client achieved the desired diversification, saving approximately $150,000 in taxes, all while maintaining market exposure throughout the transition.

– Real-World Relevance

Investors with large holdings in a single stock can benefit significantly from such transitions. This approach not only aids in risk management but also optimizes tax liabilities, making it a financially savvy move for high-net-worth individuals.

Case Study 2: ESG Integration

– Client Profile

The second case concerns a $2 million foundation portfolio with specific faith-based restrictions. The foundation required market-like returns without compromising its ethical values.

– Results

By employing direct indexing, the portfolio excluded 42 companies that contradicted their values. The strategy maintained a tracking error below 1%, ensuring the portfolio’s alignment with target benchmark returns. Furthermore, the portfolio’s full proxy voting was aligned with the foundation’s mission, enhancing donor satisfaction and maintaining transparency and accountability.

– Real-World Relevance

This case underscores the power of direct indexing in integrating Environmental, Social, and Governance (ESG) criteria into investment decisions. For stakeholders prioritizing ethical investments, such strategy ensures adherence to values without sacrificing financial performance.

Case Study 3: Tax Alpha Generation

– Client Profile

For a client with a $10 million taxable portfolio previously invested in Exchange Traded Funds (ETFs) and classified as a high-income professional, maximizing after-tax returns was a critical objective.

– Achievement

The implementation of tax loss harvesting techniques led to a 2.1% tax alpha in the first year. By strategically harvesting losses during downturns, the client saved $180,000 in taxes, effectively reducing future tax liabilities while maintaining market exposure and optimizing portfolio growth.

– Real-World Relevance

For high-income professionals or taxpayers, generating an additional tax alpha can vastly enhance investment returns. This approach is particularly effective in volatile markets where strategic tax loss harvesting can create significant tax savings.

Case Study 4: Multi-Goal Implementation

– Client Profile

A $3 million family portfolio presented a complex scenario involving ESG preferences, income needs, and an intricate tax situation requiring a tailor-fit solution.

– Outcome

This case effectively combined tax-loss harvesting strategies with ESG criteria to yield an additional 1.8%. The portfolio successfully achieved all exclusion criteria and maintained a tracking error of just 0.95%. More importantly, after-tax returns were enhanced by 1.4%.

– Key Success Factors

• Clear Objective Setting: Identifying and understanding the unique needs and constraints of the investor is pivotal.
• Systematic Implementation: Employing sophisticated models and technology ensures the diligent application of strategies.
• Regular Monitoring: Continuous assessment and rebalancing safeguard against deviation from set objectives.
• Client Communication: Transparent communication fosters trust and aligns investment goals with client expectations.
• Technology Utilization: Leveraging advanced tech solutions in direct indexing and tax loss harvesting optimizes efficiency and effectiveness.

– Real-World Relevance

A multi-goal approach showcases the flexibility of these strategies in serving diverse investor objectives, further demonstrating the comprehensive benefits of leveraging modern investing methodologies.