As investor demand for customization and investment tax management increases, financial advisors are increasingly relying on tax planning as a service they can offer to differentiate from or remain competitive with their peers. Indeed, approximately 80% of affluent investors feel that it is important that their accounts are customized to meet their specific situations, while nearly 70% agree that it is important their provider helps them reduce their tax bill. Cerulli’s latest white paper, Customized at Scale: A Framework for Next-Generation Advisory, in partnership with Parametric, suggests that a truly holistic approach to optimal portfolio management, including tax management, will be a critical component to the future of advice delivery.

Today, nearly half (47%) of financial advisors currently offer tax planning services to their clients. In turn, wealth managers, asset managers, and technology providers are working to improve the investment tax management capabilities available to financial advisors. According to the paper, the process begins even before an account is funded and continues through to transitions to the next generation of clients’ inheritors. “This process is incredibly complex with thousands of competing variables to consider, and few advisors have access to a full suite of platform tools to assist them in designing and implementing an investment strategy that provides optimal household portfolio outcomes,” says Scott Smith, senior director. To address this gap, Cerulli finds that 82% of managed account sponsors consider improving tax management capabilities (e.g., transition, loss harvesting) to be a top-three priority for their firm moving forward.

The white paper outlines a roadmap, including a taxonomy of process and product solutions that wealth managers should consider as they expand their tax management capabilities.

Process solutions begin with portfolio onboarding transformation (e.g., incoming portfolio assessment, tax budgeting), transition to active tax management (e.g., tax-loss management, tax savings documentation), and conclude with distribution optimization (e.g., tax-smart withdrawals).

Product solutions include capabilities such as direct indexing, custom bond SMAs, tax-managed equity long/short SMAs, and option overlay strategies. “Implemented together, these process and product solutions combine to create portfolio strategies optimized at the household level and designed to provide the greatest possible net benefits to clients and their successors,” continues Smith.

Not all wealth managers will have the same approach to constructing an optimal set of process and product solutions, and many will need to decide which capabilities are right for their firm and how to access them. For most wealth managers, outside of the largest few that have the scale to build or acquire these capabilities, there will be a need to identify and integrate partners’ (e.g., asset managers, technology providers) capabilities with their own—a process that carries its own challenges in order to deliver the right benefits. The paper highlights the critical role that asset managers and technology providers can play, often innovating faster than some wealth managers that are encumbered by legacy technology stacks. “Proper implementation is a two-way street and requires extensive preparation and development from firms’ home offices to set the foundation upon which outside solutions can rest and work. Notably, this includes potential data sharing (e.g., tax lot information) that can help their partners provide better customization,” says Chayce Horton, associate director.

Parametric Co-President and Chief Investment Officer Thomas Lee highlighted the value of thoughtful, independent research as part of Parametric’s continuous focus on innovation as the industry leader in direct indexing. “For more than 30 years, Parametric has heralded the importance of customization within the investment management process because we believe it creates better, more successful client outcomes,” said Mr. Lee. “We rely on data, research, and analysis to help us refine our offerings and develop new ways to design portfolios that address evolving investor needs in the current marketplace that can also adapt over time to meet investors’ changing life goals.”

Above all, the white paper notes, is advisor adoption. In order for this to occur, process and product solutions should work to provide a true path of least resistance to advisor adoption. “Solutions must be intuitive to use, products must be integrated, and it all should ideally exist on a unified platform prioritizing the advisor experience. Furthermore, reporting, documentation, and other information must be readily available to help advisors and their clients understand the benefits to them,” Horton concludes.