Financial Opinion and Insights

A Tax-Reduction Strategy For Your Investments

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

The Problem:  Lack of customization and efficiency.[i]

Here’s a hypothetical example of a situation worth reviewing.  A client was investing in a separate account program offered by a well-known large wire-house brokerage firm.

As with most traditional separate account programs, each money manager ran a portfolio of securities in a separate and distinct account.  The result was little-to-no coordination between and across accounts, which can result in a certain amount of overlap among holdings.

The client then moved to another major firm, which offered multi-disciplinary accounts (MDAs); but, soon realized the accounts offered primarily proprietary (in-house) or affiliated managers and cookie-cutter asset allocation models.  In addition, the accounts weren’t as `tax efficient’ as was thought since the lack of manager coordination resulted in wash-sale issues that should have been avoided.

The client wanted to move beyond this environment to an independent platform where  non-proprietary, unaffiliated managers could be used and portfolios could be completely customized for stock restriction, tax management, asset allocation, and manager selection.

The Solution:  An Overlay Separate Account Platform (OSAP)[ii]

Here’s how the typical separate account platform to an OSAP solution:

Suppose you have two managers who each hold the same stock now valued at $80 per share.

  • Manager A’s Position:   100 shares with a cost-basis of $30                                                     
  • Manager B’s Position:    200 shares with a cost-basis of  $75

At $80 per share, the price just hit Manager A’s sell target.       The result:  At $50 per share, a $5,000 realized gain.   Meanwhile, Manager B is holding 200 shares with far less gain built-in!

Here’s where the overlay strategy comes in.  The overlay manager works this way:

  • 200 shares held by Mgrs A and B
  • Cost basis A = $30
  • Cost basis B = $75
  • Stock MV = $80
  • Mgr A initiates a `Sell’ ticket on 100 shares
  • Overlay manager sells $75 cost basis shares from Mgr B
  • Result: $5 gain 100 shares = $500 realized gain
  • Realized Gain reduced by $4,500! 

That’s a hypothetical example based on a single transaction.   Do you know how much duplication exists in your holdings?  You might be surprised!

Enjoy your Thanksgiving weekend!



[i] Hypothetical, but a very realistic problem many investors face.

[ii] This solution is appropriate only  for individual accounts valued in excess of $500,000.

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™  now in his 19th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained herein should be regarded as tax or legal advice and the reader is urged to seek competent counsel to address those issues.   The above represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a formal financial and investment plan.   For questions or comments, you can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com.