If you could invest for retirement with the potential to pay lower taxes while gaining more control over what goes into your portfolio, would you be interested?
Thanks to a combination of technological advances and trading tools available in the market, a financial advisor who specializes in building personal index portfolios can save you money on taxes at a lower cost than mutual funds and ETFs, plus greater flexibility in choosing the stocks and bonds in your account.
While the process may sound complicated and expensive, the reality is otherwise when you find the right financial advisor who specializes in personalized indexing and offers their services at a reasonable price.
If you are preparing to hire a financial advisor, should you hire an advisor who can build a personal index portfolio for you? Let’s learn more about this investment approach to help you decide if hiring an advisor who specializes in personalized indexing is right for you.
đź“ŠMeet Financial Advisors Creating Personal Index Portfolios
This page is divided into sections to help you quickly find the information you need and get answers to your questions:
Q&A with financial advisors specializing in personal indexingGet answers to your questions about personal indexingBrowse related articles
– Financial advisors specializing in personal indexing –
Three Questions with Todd Smurl, CFA
We asked Todd Smurl, the Houston-based financial advisor and personal indexing specialist, to answer four questions to help us better understand the potential benefits of personal indexing for its clients.
Q: While many people are familiar with investing in stocks, mutual funds, and ETFs, you specialize in creating and customizing “personal index portfolios” for your clients. Can you explain how this form of investing works?
Todd: Our premise is to implement client portfolios using low-cost, broadly diversified index ETFs. This works well for many investors; however, the fund structure of ETFs poses a problem for clients who may benefit from personalization. In fact, it is impossible for ETFs to personalize their positions.
Personal indexing is a form of indexing that allows us to ‘develop’ the fund structure of an ETF and invest directly in the underlying stocks. This “unpacking” allows a wide variety of customization choices to be implemented for customers while staying true to the spirit of indexing.
Personal indexing is the process of tracking the performance of an index by purchasing a sample of individual stocks rather than an index ETF and using optimization techniques to manage risk exposures. By owning individual stocks instead of an ETF, our clients benefit from greater control, autonomy and tax benefits.
The individual stock portfolios we use are designed to track the performance of the stock market, typically the US large-cap market. We use these stock portfolios instead of an ETF when implementing personalized portfolios to take advantage of customization options for tax management, environmental, social and faith-based screens.
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Q: In addition to the mechanisms of creating personal index portfolios, can you describe the types of people who can benefit most from this way of investing?
Todd: There are three broad categories in which personal index portfolios add a lot of value:
1. Tax Alpha
One is that personal indexing can yield tax alpha. A core part of our advisory service is active tax management, which is the combination of tax loss harvesting, profit reaping, profit deferral, retention period management, tax lot identification, charitable donation identification and monitoring IRS rules in context of the unique fiscal budget and asset allocation.
It’s a lot of work, but it pays off by improving the tax efficiency of portfolios. Many studies have shown that this process can improve after-tax returns by an average of 1% per year or more.
2. Transition Wallets
The second is portfolio transition – the process of building an index-like portfolio around a client’s existing interests with built-in capital gains and then fully transitioning over several tax years with the benefit of active tax management.
A special case is when a customer has a highly valued single inventory, usually acquired as an executive or through the sale of a company. Personal indexing is a great process to build an index-like portfolio around a low base position of stocks and then use tax loss harvesting techniques to efficiently offset gains as we systematically reduce concentration. Over time, this technique can diversify a concentrated holding into an index-like portfolio while retaining full control over net realized capital gains.
3. Customer Preferences
The third category is for clients with unique personal preferences or environmental, social, or faith-based values ​​that they would like to display in their portfolio. Owning a personal index portfolio of individual stocks allows us to manage these constraints in a tax and risk-driven process.
It will be fun when we are able to perform a “portfolio rescue”, helping a client transition from a large broker-dealer type of business where they have multiple separately managed accounts, mutual funds, built-in profits, etc. without clear direction or fiscal oversight. We can combine their assets into one account, making paperwork as simple as possible, providing comprehensive tax management while also implementing social or faith-based screens. Often this also drastically reduces their overall cost structure.
Q: How does the cost of building and maintaining a personal index portfolio for a typical client compare to an investment portfolio traditionally offered by many financial advisors?
Todd: Our premise in building portfolios is to use low-cost index ETFs as building blocks. In that scenario, an entire ETF portfolio with a 70/30 allocation has an internal expense ratio of just under 5 basis points.
When we trade in the US large-cap ETF for an individual stock tracking portfolio, the internal expense ratio of the entire portfolio drops to about 3.5 basis points, since the portfolio of individual stocks has no expense ratio.
We offer personal index portfolios, active tax management, environmental investing, social investing and faith-based investing at no additional cost beyond our investment advisory fee.
Q: For people interested in hiring you to create a personal index portfolio already invested in mutual funds and/or ETFs, what does the transition process look like and are there any tax implications to consider?
Todd: For each new client, we analyze multiple scenarios describing the tradeoffs between portfolio drift and realized capital gains when transferring a client’s existing holdings. Those scenarios represent a range of possible decisions, from high power gains and low drift to low power gains and high drift.
The result of this scenario analysis is a written transition plan and an annual tax budget with which we steer the process within our active tax management framework. This gives the client control over the annual net realized gains, while understanding the risk and return trade-offs.
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About the author
Brian Thorp
Founder and CEO, Wealthtender
Brian and his wife live in Texas and enjoy the diversity of Houston and the vibrancy of Austin.
With over 25 years of experience in the financial services industry, Brian applies his experience and passion at Wealthtender to help more people enjoy life with less money stress.
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This post Looking for a financial advisor who specializes in personal indexing?
was original published at “https://wealthtender.com/insights/financial-planning/personal-index-portfolios/”
