Defining Tax Management

In the most recent edition of my Managed Accounts Newsletter (MA Monitor, Feb 2009), I compared different recommendations of the minimum value for a managed account that is required in order for tax management to be effective. The values ranged from $0 (no minimum) up to $1,000,000:

I have since received a few updates, including one from Joe Mrak who wanted to amend his comments:

I actually agree with Dale from M3 that an account should be at least $1 MM for “tax optimization” vs what I was think for the $200K account “tax treatment”.

This raises a semantic issue since there is no standard definit0n of tax management as well as a lot of overlap between the many terms currently in use.  Here are a few tax management terms that I have found:

  • tax optimization
  • tax treatment
  • tax aware
  • tax sensitive
  • tax efficient
  • tax managed
  • tax centric

Joe’s update includes a good definition of tax optimization in his clarification of a minimum account value:

Just to clarify that point…my thought has always been that most accounts can benefit from some tax rules (don’t allow a ST gain etc.), but the more involved tax optimization of an account where you are doing much more algorithmic logic to determine the trade-offs of alpha, risk and tax only makes sense on accounts with $1 MM or more. No sense in working that hard on a $200K account that will see little to no benefit to that extra effort.

He also added:

I want to be more tax aware than tax optimized. I believe that only a handful of advisors can understand the value proposition of all-out tax optimization.

As a follow-up, I asked Joe if he could also provide his definitions for tax aware versus tax treatment:

Tax Aware – The system is constantly seeking to offset gains and losses at any time of the year and all investment decision takes into account tax.

Tactical Tax Treatment – Tactical gain/loss management based on a request or done on an annual basis.  So tax is considered, but only ad-hoc by request or specific action.

IMO, this definition of tax treatment sounds a lot like tax harvesting, which is a feature of some Separately Managed Account (SMA) programs.  Although, there is also a difference between manual and automated tax harvesting.

Now that I’ve opened a can of worms related to the many definitions of tax management, I’ll be continuing to delve into more detail on the many different terms in future posts.

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The Wealth Tech Today blog is published by Craig Iskowitz, founder and CEO of Ezra Group, a boutique consulting firm that caters to banks, broker-dealers, RIA’s, asset managers and the leading vendors in the surrounding #fintech space. He can be reached at craig@ezragroupllc.com

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