Displaying items by tag: taxes

High net-worth clients may be facing a major issue due to the upcoming expiration of the 2017 tax cuts after 2025. This will mean the expiration of higher federal gift and estate tax exemptions. The exemptions, which encompass tax-free caps on gifts during life or at death, will be $13.6 million per individual or $27.2 million for spouses in 2024 but will be cut by 50% in 2026. 

 

This will mean that many more high net-worth clients will be impacted by the estate tax. And, this is the time to begin planning around this new reality given that many estate tax planning strategies take months or even more than a year to implement. 

 

Some married couples can take advantage of the current higher levels of exemption by removing assets from their estate via lifetime gifts. According to Robert Dietz, the national director of tax research at Bernstein Private Wealth Management in Minneapolis,“The reality is you have to give away more than half to see any benefit from the gift in terms of the exclusion going away.” And for clients uncomfortable making these gifts now, they can keep control of their assets by opening a trust. 


Finsum: The expiration of the 2017 tax bill means that high net-worth clients will have to grapple with much lower exemptions on tax-free giving. 

 

Published in Wealth Management

In an article for Wealth Management, Iraklis Kourtidis discusses how the investment industry needs to evolve in order to reduce risk and improve returns. Essentially, it tends to look at the past to make assumptions about the future, specifically regarding correlations between asset classes. 

He believes that too much time and energy is spent on discussing how investments have performed in the past which doesn’t make sense in a world with efficient markets. Instead, investors and advisors need to pay more attention to the future. And, this is even more important with the advent of direct indexing.

Kourtidis believes there are better questions to ask with direct indexing such as will these investments adhere closely to my values? Another is will this strategy properly weigh the tradeoffs between tracking errors, tax efficiency, and personal values? Finally, investors and advisors need to determine whether the additional cost and effort of direct indexing will yield better results than a traditional approach, specifically in terms of tax benefits?

These are forward-looking questions that do have answers unlike questions about the market’s direction, monetary policy, or portfolio returns. Overall, direct indexing means that investors need to consider a different set of questions. 


Finsum: Direct indexing creates an entirely different set of opportunities and challenges for investors and advisors. Here are some things they need to consider that they wouldn’t with traditional investin 

 

Published in Wealth Management

In an article for Vettafi’s ETFDataBase, James Comtois reviews how direct indexing can solve complex financial problems for clients. The strategy is quite powerful as it blends the best parts of index investing with active management, however it’s only appropriate for a small group of investors.

One is high net-worth investors who are looking to reduce their tax bill. This is because direct indexing can be used to harvest tax losses with regular rebalancing. It also allows investors to capitalize on volatile markets. Frequent rebalancing is estimated to add between 20 and 100 basis points of alpha.

Another benefit is for clients with strong preferences. For instance, some investors may feel strongly about not investing in ‘vice’ stocks, so these stocks can be eliminated, while stocks with similar factors scores can be added. This is because with direct indexing, investors actually own the individual holdings rather than buying an ETF or a mutual fund.

Similarly, direct indexing can allow for diversification that goes beyond the index. For example, someone with a business in the tech industry may want to diversify their investments and holdings away from technology stocks. This level of customization is not possible with traditional index investing. 


Finsum: Direct indexing is quite powerful and growing in popularity. But, it’s only appropriate for a select group of investors with specific needs and goals. 

Published in Wealth Management

While ESG investing has boomed over the past decade, there are some drawbacks. One is the lack of clear definition of ESG, and what qualifies an investment to be sufficiently deemed ESG. For instance, some ESG funds have much wider latitude, while others are much more discriminating. In an article for Vettafi, James Comtois discusses why some investors who believe in ESG investing are nevertheless unsatisfied with many ESG investment options.

Another issue is greenwashing which is when a company is deceptive or gives false information about its products or processes. As an example, some ESG funds will contain fossil fuel companies, or companies with a record of pollution.

This also brings up a broader criticism of ESG that asset managers are forcing their views on investors, markets, and companies. For investors who believe in ESG investing but are wary of greenwashing, direct indexing offers a solution.

With direct indexing, any ESG index can be replicated, and any companies can be excluded that merit concern. With direct indexing, investors can ensure that their values are reflected in their investments, while retaining the benefits of investing in a diversified index with low fees. 


Finsum: Direct indexing solves one of the major concerns about ESG investing which is that it includes many companies with poor environmental records who are engaged in greenwashing. 

 

Published in Wealth Management
Saturday, 10 June 2023 08:03

Profit From Volatility With Direct Indexing

In an article for ETFTrends, James Comtois discusses how investors can capitalize from volatile markets with direct indexing. In recent days, volatility has plunged following the successful resolution of the debt ceiling which avoided a potentially catastrophic default. However, investors should continue to be wary given rising recession risk, geopolitical tensions, and still uncomfortably high inflation.

While volatility is painful for all investors, direct indexing is one way that investors can profit from it unlike with index funds. With direct indexing, an investor owns the actual stocks in the index. Due to this, losing positions in the account can be sold which can be used to offset gains from winning positions to reduce tax liabilities. Subsequently, these losing positions are replaced with similar ones to maintain diversification and faith with the underlying index. 

Notably, this strategy works even in years when the index was up. And, it works even better in conditions like 2023 when we have indexes with healthy gains albeit with considerable volatility. Further, many services now will automatically scan portfolios to identify rebalancing opportunities. And, the more frequent the scans, the more alpha that can be uncovered. 


Finsum: While market volatility has died down in recent days, it’s inevitably going to come back. Find out how direct indexing allows investors to capitalize during volatile markets.

Published in Wealth Management
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