It is important to make the distinction between tax-efficiency and tax-management. Tax-efficiency is seeking to minimize the damage from taxes. It’s a good thing to do and you’ll find mutual funds and ETFs spend a lot of time focusing on it. They do it by avoiding the realization of gains, or if they must realize a gain, trying to offset it with a matching loss. If they can’t find a matching loss, they try to age the gain so that it is taxed at long term rates rather than short term rates. What they’re trying to do is pour as much of their pre-tax return over into their after-tax return. A fund can discourage capital gains to the clients, but it can’t give the client a realized loss. So at best, a co-mingled vehicle would deliver all of its pre-tax return as after-tax return.

However, with an SMA you can get active tax-management. With tax-management, you undertake everything that you undertook in tax-efficiency. avoiding the realization of gains, matching gains with losses, or aging gains to long term. but on top of that, you can realize and pass through losses that the client can use to offset gains elsewhere in their financial life, and to a limited extent income. When you take into account the tax savings earned through the realization of net losses in the separately managed account, it’s like capturing added performance.

For a tax-managed portfolio, the after-tax return can be as high as, or higher, than its pre-tax return. In terms of quantifying how much higher, it’s going to have a lot to do with each client’s situation. For example, the higher the client’s marginal tax rate, the more benefit these losses have.

The amount of losses realized in a given year has to do with when and how a portfolio is funded. Funding with cash typically gives you the most loss harvesting opportunities. Funding with existing basis tends to restrict your ability to realize future losses unless you have large unrealized losses in the portfolio at inception.

More volatile stock markets are better for loss harvesting than less volatile stock markets. Finally, loss harvesting is dependent on the chosen portfolio benchmark. Including more volatile small cap stocks, for example, will typically mean more loss harvesting opportunities than a more narrow large cap S&P 500 portfolio.

Q: Do you think that minimum account size that you have is too small to provide customized services?

A: We enjoy a smaller number of high quality relationships with wealth managers and family offices. With a single point of contact we may efficiently accommodate as many as 30 or 40 clients with $1 million each, with a single relationship interface.

Q: Do you generally have an overlay of a fee on top of the other fees that you charge?

A: By virtue of our being a passive manager, our fee is lower than an active manager’s fee. Many of our relationships hire us without the use of a investment platform or overlay manager charging their fee. The advisor or the family office can hire us directly through one of the major open custodian platforms, as opposed to working with multiple money managers at smaller dollar amounts through advisory platforms.