Financial professionals and their clients can consult with a tax advisor to create a road map for moving out of unwanted positions and creating a portfolio that is in full alignment with the client’s investment objectives and risk profile. Transitioning a portfolio into a new investment strategy involves asset allocation and security selection, but can also entail selling currently held positions. Selling positions outright can result in a large tax bill, which can have negative implications for a client’s broader financial plan.

Exit planning
Here are two potential strategies for dealing with embedded positions that could result in large capital gains bills:

1. Transition portfolios over a finite period of time
Working with a tax professional to craft a definitive schedule for selling positions over a certain period of time can help establish stability for clients. The ideal duration of that time period will vary from client to client, depending on their willingness to miss a desired asset allocation target instead of paying a substantial tax bill.

Retaining old positions for any period of time slows down the transition between the old asset allocation and the new asset allocation. As the old positions are sold, the portfolio moves closer to the new asset allocation strategy.

A potential benefit of following this path is the ability to provide clients with information about how much of an old position will be sold at what time. That can help tax advisors estimate the tax bill clients can expect to pay in a given year.

Some clients may be more willing to pay a larger tax bill to move into the new asset allocation more quickly, while others will want to take more time to more closely manage tax responsibilities.

As a result, the time period for this strategy may range from just a few days to many years – but the transition takes precedence over the tax deferral.

It is important for tax professionals, financial professionals, and their clients to provide themselves enough time to manage the tax consequences of selling holdings, while avoiding excessive delays in implementing any new strategies. As long as the old positions remain in the portfolio, the new asset allocation can’t be completely implemented, which could cause the portfolio to continue to remain out of alignment with the client’s objectives and risk profile.

2. Utilize a no-deadline transition period
A no-deadline approach can allow the financial professional, client, and tax professional to sell portfolio holdings over an extended period of time. Using this approach, the financial professional and client can assess the overall tax picture annually while working towards the client’s financial objective. Generally speaking, this approach favors tax management over aligning the existing portfolio with a target allocation.

Frequently, clients who take this position have complex finances and are trying to manage taxes in other parts of their financial lives. They may not be willing to commit to recognizing capital gains on a schedule in their portfolios because they don’t want to sacrifice overall financial flexibility. The use of a no-deadline approach may mean their asset allocation will remain out of alignment with their goals and risk tolerance – potentially for a long period of time.

Under a no-deadline approach, the client can work with their financial professional and a tax professional to determine a budget for realizing capital gains in their portfolio based on other external taxable events.

For example, if a client takes significant capital gains in a single year – from the sale of a business or real estate – it might be a year where no additional capital gains would be taken from their investment portfolio. On the other hand, if there are significant tax losses that can be harvested from the portfolio, that could be a year when more progress can be made towards the overall portfolio transition goal by using these tax losses to offset taxes associated with portfolio gains. By using tax losses to offset portfolio gains, the tax advisor can help minimize the client’s tax bill and continue to move their portfolio closer to the desired asset allocation.

Teamwork as a value add
Financial professionals have an opportunity to add significant value for clients through collaborating with a tax professional and embracing tax-sensitive portfolio management approaches. Not only can these strategies help clients save money on their taxes, they can also help to reinforce the client-financial professional relationship.


Natixis Investment Managers does not provide tax or legal advice. Please consult with a tax or legal professional prior to making any investment decisions.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.