There is a tangible benefit to allowing your financial advisor to manage your complete portfolio; including your employer-sponsored retirement plan or other accounts which cannot be directly managed by your advisor.
The Investment Team at Lake Tahoe Wealth Management has considerable experience and expertise with building resilient globally diversified portfolios that we link directly to our client’s goals and objectives. In addition to asset allocation strategy (which always comes first in optimizing portfolio return) along with an active rebalancing strategy; the investment team also has experience and expertise using asset location to enhance after-tax portfolio returns for clients with higher marginal tax rates. Simply put, asset location is placing certain types of investments in accounts with different tax characteristics in order to achieve a better after-tax return with the same asset allocation. Due to the complexity of the tax code, there is a benefit to placing tax-inefficient asset classes (those assets where a portion of the total return is taxed as ordinary income, such as bonds) in a tax-deferred account; and placing tax-efficient assets (those assets where most of the total return comes from qualified dividends and long-term capital gains taxed at a rate less than ordinary income) in taxable accounts; and high risk / high reward investments in tax-free accounts.
There is ample empirical evidence that suggests that there is an annual benefit to having tax-inefficient asset classes in tax-deferred retirement accounts and tax-efficient asset classes in taxable accounts. Multiple research studies place this annual benefit between 20 and 50 basis points, depending on the tax rate and level of interest rates. To capitalize on asset location placement and rebalancing trades, both types of accounts must be under management, since it allows our investment team to use a strategy of placing entire or partial asset classes in different accounts to optimize the tax impact of each asset class and to monitor each asset class for rebalancing trades. Even if a client does not have a tax-deferred account under direct management, many clients have 401(k) or 403(b) qualified plans as their primary tax-deferred account. Our investment in technology has enabled us to monitor the total portfolio for rebalancing on a weekly basis. Lake Tahoe Wealth Management provides easy to follow instructions for connecting any new “held away” account to our system. Granted, engaging in these strategies requires more time and effort from our team; however, the benefits to our clients over time are too great to ignore.
The “held away” qualified plan’s investment choices must be reviewed by the investment team to determine if an asset location strategy would be possible based on the availability of desired asset classes within the investment choices of the plan and the size of the portfolio under direct management. All relevant fund data is used to make a decision on which asset classes to use within the “held away” account. The desired asset classes are then given target percentages, along with the new target percentages in the managed investment account to bring the total portfolio asset classes to the target model portfolio percentages that are outlined in the Investment Policy Statement. As an example, it is likely that the qualified plan does not have international small cap fund choices, so the international small cap growth and value percentages will be higher in the directly managed account to bring the total portfolio to the correct model portfolio percentages.
If the “held away” account is large and has few asset class elections, while the managed account is small, the model IPS may not be achievable and asset location may not be possible. If asset location is not used, the investment team will still provide an asset allocation similar to the model portfolio IPS. Non-discretionary accounts involve trades that the client must complete through their plan’s website. The needed initial and ongoing rebalancing trades are communicated to the client to complete on the plan’s website. The Investment Team at Lake Tahoe Wealth Management then monitors the daily changes to the “held away account(s)” to verify changes are done correctly (and ankle-bites if the trades are not made in a timely fashion).
Asset location strategies enhance returns for households in higher tax brackets. Many conditions must be reviewed by the investment team for the strategy to by implemented to ensure the strategy is achievable and in our client’s best interest; and with the latest improvements in technology for connecting and monitoring a “held away” account, the strategy is available for more clients to take advantage of with the goal of adding additional after-tax portfolio return over time. If you have "held away" accounts that you have not yet enabled our team to review and manage, we encourage you to talk to your Lake Tahoe Wealth Management Advisor to inquire as to whether engaging in asset location would be beneficial to you.