Ideas for the “Bookends” of your advisory business

Executive summary:

  • Just like a teacher tries to serve every child in their classroom, a financial advisor tries to meet the needs of each client
  • This becomes a little more challenging when considering the “bookends” of the advisory business—the smaller clients and the biggest ones
  • They may have vastly different needs, but all of them are likely to want to keep their tax burden to a minimum
  • We look at different strategies to meet those very different needs

As students across the country start to prepare for year-end exams, there are valuable lessons we can take from the classroom. One of the most important is that no two students learn the same way. Teachers face the challenge of creating a curriculum that caters to the entire class while ensuring that each student can reach their potential. But what about the students who fall outside the norm: the ones who may be slightly behind or those who are far ahead of their peers? How can teachers give them the attention they need without holding back the rest of the class?

When you think about it, financial advice is the same way. No two clients are alike. As financial advisors, you craft a strategy that generally addresses the broad needs of your clients. But you also can fine-tune your approach to meet each client’s unique goals, circumstances, and preferences.

This becomes more important when you consider the “bookends” of your advisory business. Just like in a classroom, you will have clients that may not have the same characteristics as the bulk of your business: those who don’t meet the account minimums, for example, and then those who far exceed them—the high net-worth clients who have complex needs and wants.

While your smallest and your biggest clients may have different wealth-management needs, they all typically share one preference: paying the lowest amount of taxes as possible. Taxes can significantly reduce long-term returns. For investors, minimizing this impact increases the likelihood of achieving their financial goals. For advisors, emphasizing tax-managed strategies can help set them apart from the competition. In investing, being tax-smart is simply smart. Given their different wealth levels, though, can you address your largest and your smallest clients’ tax management preference the same way? Like so many questions in finance and economics, I would argue the answer is: It depends.

Tax management for your smaller clients

Many advisors today pride themselves on creating custom portfolios for their clients, meticulously scouring the markets to find the best-performing investment solutions. They take great pride in crafting unique portfolios that align with each client’s risk tolerance, a critical personalized service they provide that helps validate their fees. Today, those advisors—known as rep-as-portfolio manager or rep-as-PM—represent 57% of the advisor universe, managing a staggering $5.5 trillion dollars in assets.1

This is where an important question arises: How are you handling clients who don’t meet account minimums? Typically, rep-as-PM platforms require a minimum of $25,000. Does it even make sense to customize at this level? Would it make sense to create custom tax-managed accounts and perform tax-loss harvesting for smaller accounts, essentially those that are below the $25,000 minimum? Probably not, considering the time and effort required versus the potential return on investment.

An efficient strategy could be to implement model portfolios for accounts that fall within the ideal range—meeting the model minimum, which is often lower than the rep-as-PM platform’s threshold, yet not substantial enough to warrant fully customized portfolios. Tax-managed portfolios allow you to simplify, streamline, and effectively service this segment of your business while also providing tax management. Placing clients’ taxable dollars into tax-managed portfolios may reduce their tax bill for the following year, freeing you from the hassle of dealing with 1099 tax forms with large capital gains, and potentially difficult capital gains discussions. This allows your smaller accounts and clients to benefit from the same sophisticated and thorough tax-managed solutions as the rest of your advisory practice.

Tax management for your biggest clients

On the other side of the spectrum are the large high net worth (HNW) opportunities. These cases can demand your full attention. Often, you need to explore new market areas, leveraging the expertise and resources of your home office to develop tailored solutions. However, two critical questions arise: How are you customizing their portfolio specifically for them and how are you addressing what may be most important to these clients—their tax bill?

PwC reports that 47% of HNW investors prioritize tax planning, and 66% desire increased personalization in their wealth management relationships.2 For these HNW opportunities, consider offering something beyond what a rep-as-PM platform typically provides. Once again, a tax managed model strategy can be a suitable option, but for many with more complex tax management needs, Direct Indexing in a Separately Managed Account (SMA)—and the personalization options such strategies can incorporate – could fit the bill.

Direct indexing is an investment strategy that allows investors to replicate the performance of a selected market index by owning a representative sample of individual securities from that index within an SMA. Unlike traditional index funds, direct indexing offers the flexibility to customize portfolios based on personal preferences, such as tax optimization. This approach gives investors greater control over their holdings, enabling personalized tax strategies, as well as alignment with individual values or objectives.

Direct indexing enables you, the advisor, to tackle complex tax situations head-on. For example, you can take a concentrated stock position and gradually unwind it in a way that manages taxable events. Alternatively, you can help new clients transition into your practice in a tax-efficient manner by specifying a tax budget. This level of customization not only meets but may exceed the expectations of HNW clients and can go a long way to positioning you as a trusted partner in their financial journey.

Additionally, how are you going above and beyond for these clients? What unique services are you offering them that differentiate their experience from that of a mass affluent client? Some HNW clients may want their portfolios to reflect their values, for example, avoiding exposure to industries like alcohol, tobacco, or gambling. Some may desire a holistic approach aligned with specific values, such as Catholic principles. Others might need to avoid certain stocks due to their position with their current employer or because they risk having a heavily concentrated portfolio in those stocks through compensation policies.

When advisors construct portfolios, it's crucial to consider the 'bookends' of their business. How are you managing non-qualified accounts that may not align with your core services? Outsourced, tax-managed models offer an efficient and effective solution for this client segment.

On the other end, your larger clients—your most critical and valuable relationships—likely require a concierge-level approach. For these clients, a white-glove service model and a customized strategy through direct indexing can align with their unique tax situations and strategic beliefs, delivering the personalized service they deserve.

1 Source: Cerulli Associates. The Cerulli Report, U.S. Managed Accounts 2023, Decisions About Discretion

2  Source: PWC. https://www.pwc.com/us/en/industries/financial-services/asset-wealth-management/high-net-worth-investor.html