Content Provided by Case Eichenberger, CIMA – Senior Client Portfolio Manager
Tax Management is a Strong Pick
As a senior client portfolio manager at CLS Investments and a self-proclaimed investment strategist, I get asked every day how best to build a portfolio to fit an investor’s unique needs. It is a task I enjoy, but it is often difficult. CLS frequently works with high net worth (HNW) investors who seek custom portfolio designs. These investors typically have taxable accounts, and they need different solutions than their current, off-the-shelf portfolio provides.
These investors are most often looking for risk-managed portfolios, but they also need to take income from their accounts, and they require tax management.
- Instead of asking this: “Which is more important: income or tax management?”
- Consider saying this: “Great. We can aim to get you the above while taking your unique tax situation into consideration.”
Asset location is the first step for these investors. The chart below, which utilizes information from Fidelity Investments, offers a good reminder. Quite simply, anything marked as ‘Less Appropriate’ that is used in these HNW can accounts lower their after-tax returns, meaning it can lower their take-home gains.
We believe tax-managed portfolios truly are the best-of-breed strategy for any HNW taxable account. They can be almost anything – high after-tax income, aggressive accumulation, portfolio optimization around a concentrated position, and much more. CLS offers portfolios that seek to help these clients keep more of their hard-earned money.
CLS recently launched five direct-indexed, tax-managed portfolio strategies.
- CLS S&P 500 Market Beta Portfolio
- CLS US Large Cap Market Beta Portfolio
- CLS US Small Cap Market Beta Portfolio
- CLS US High Dividend Yield Target Strategy Portfolio
- CLS US Quality Value Target Strategy Portfolio
These new strategies are available at FTJ FundChoice. For more information, please contact FTJ FundChoice Regional Sales at 800.319.2513 or by emailing email@example.com.
We also invite you to view our recent webinar, where we discussed direct indexing and the possible benefits of these strategies. You can watch the recording here.
Explain the “Why”
Earlier this week, I had the privilege of listening to former CLS CEO and NorthStar Managing Director Todd Clarke discuss how to create influence in the workplace. He gave the audience a quick dive into five attributes regarding influence that he teaches in a Creighton University entrepreneurship class:
- Helping hand: Always be willing to help your team and others out.
- Never appeal to title: Don’t “pull rank” and use your title to get influence.
- Explain the “why”: Be transparent and let others “into your head” about why something works.
- Consistent behavior: Everyone is watching, whether you realize it or not.
- Surrender control: Learn to trust others around you and delegate.
The point that really got me thinking is “explain the why.” I thought about transparency in the investment management industry and how some want it and others don’t. I won’t get into active versus passive here; that is a topic for another post.
To Todd’s point, the more transparent you make the process and philosophy of how you manage money, build portfolios, calculate performance, etc., the better your client, investor, or principal will understand the goal and be satisfied in the process. The more like a “black box” we appear, the less credible we are.
Consider this Wall Street Journal article on ETF models. An investor can get a portfolio from the likes of CLS, a robo advisor, brokerage firms, and the ETF issuer, but few standards exist on how to report returns. This seems crazy to me.
Transparency is increasingly becoming a requirement more than a feature. The more open we are to our investors, the better the relationship will be.
Diversifying in All Aspects: ETF Issuers
Recently, Barron’s published an article that discussed the ETF industry’s domination by three mega-issuers and how the ‘little guy’ finds it very difficult to gain market share.
These mega-issuers have more than 80% of the share, as shown below by this CLS data, as of March 31st, 2019.
However, CLS, which manages close to $3.5 billion in ETFs, thinks a little different from the market on many things. We’re frequently looking to new up-and-coming issuers to help diversify our investors’ ETF holdings.
Diversification, in all senses of the word, is vital.
The chart below shows CLS’s market share among ETF issuers. CLS is effectively underweight the “big three.” BlackRock is still our No. 1, and State Street has similar market-cap to the industry. But notice the chart is much closer to equal distribution.
At CLS, we thoroughly research individual ETFs to give investors resources they need to help achieve their goals. Just because an ETF has a longer track record, or is cheaper or larger, doesn’t mean it is always the best for an investor’s custom goals. Yes, those aspects absolutely matter, but so does exposure, tracking error to net asset value, and construction. All of these, and more, are factors that go into our decision-making.
For another look at how CLS differs from the pack and how this helps our investors, please read this article by Rusty Vanneman, CLS’s President and CIO, in ETF Trends.
Thank you for reading.