Morningstar Magazine - December 2017/January 2018 - 47

By integrating clients' 401(k)s with their directly
managed accounts, you can provide
ongoing professional management of funds that
were previously largely ignored.
From my experience, clients are more than
happy to pay more management fees just for the
sense of relief!
There is also a huge tax benefit to this:
By managing at the portfolio level,
the advisor has more opportunities for location
optimization-meaning more fixed-income
investments can be allocated to the 401(k), leaving
the directly managed portfolio available for
appreciating investments.
3 Save on Current Taxes

Rebalancing software can prevent unnecessary
tax hits by avoiding short-term gains,
choosing high basis lots on sales, capturing
tax-loss harvesting opportunities, and
avoiding capital gains distributions at year-end.
Although all of these strategies merely postpone
tax, they are likely the strategies clients
will notice because they directly affect current tax
bills. The temporary savings won't necessarily
need to be repaid if 1) the advisor continues
to manage taxes efficiently and 2) the investments
are held until the client is in a lower tax bracket
or passes away.
4 Great Benefits for Charitable Contributions

Using portfolio-accounting or rebalancing software
can identify holdings with long-term appreciation.
Clients who want to make donations can
contribute the most highly appreciated shares
to their favorite charities (or donor-advised
funds) rather than cash. They get the full
deduction at fair market value without paying tax
on the gain.

By setting parameters, the software can:
3 Harvest losses solely in taxable accounts.
3 Harvest losses only when the loss is material
(as defined by the advisor).
3 Avoid transactions when a redemption penalty
would apply.
3 Avoid transactions when a wash sale
would apply.

not a pleasant surprise to clients, yet most
advisors can't or don't want to spend the time
to avoid them.
Once the advisor has identified funds expecting
material distributions, Morningstar Total
Rebalance Expert merely needs the distribution
information entered for the currently held
fund and the replacement position (which should

Using robust investment management
software can help advisors exceed
client expectations by lowering their tax
liabilities and leave their competition-
and the robos-in the dust.

6 Harvesting Gains

At times, it can be advantageous to harvest
capital gains.

be a fund with lower or no expected capital
gains distributions).
The software will create trades:

This would occur when a client is in a low tax
bracket (such as the 10% or 15% brackets)-thus,
subjecting recognized gains to a 0% tax rate.
Because this is a rare freebie in the tax code,
advisors need to ensure that they don't overlook
an opportunity.
Again, portfolio-accounting or rebalancing
software can identify appropriate transactions to
take advantage of this beneficial tax strategy.

3 Solely in taxable accounts.
3 Where the net distribution savings are material
(as defined by the advisor) after considering
potential gains on sale.

Doing a better job for your clients doesn't
have to mean spending more time. Using the right
software can help. K
Sheryl Rowling, CPA/RFS is principal of Rowling & Associates
and head of rebalancing solutions with Morningstar.

7 Avoid Capital Gains Distributions
5 Be Instantly Responsive to Tax-Loss

Harvesting Opportunities

Rebalancing software like Morningstar Total
Rebalance Expert can create tax-loss
harvesting trades across all your clients' accounts
in minutes should a particular fund drop
in value.

Toward the end of each year, mutual funds
distribute internally recognized capital
gains to shareholders.
This phantom income must be reported on the
shareholders' tax returns even though they
received no cash. Capital gains distributions are

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Table of Contents for the Digital Edition of Morningstar Magazine - December 2017/January 2018
