SMAs give clients access to a range of tax-efficient strategies that investing through a pooled fund can’t provide
Since clients own each security in the SMA, they can strategically sell investments in a loss position to match against realized gains.Separately managed accounts allow clients to harvest losses throughout the year and decide when to realize gains, providing an opportunity for tax deferral and boosting investment growth, according to firms that offer the platforms.
“A careful program of evaluating your portfolio throughout the year – not just at year-end – to look for opportunities to harvest losses, and meanwhile slowing down rebalances that would involve realizing gains, could be worth 100 to 200 basis points of annualized tax value,” says Ray Carroll, chief investment officer with Neuberger Berman Breton Hill in Toronto.
That means someone could invest in a fund and have a taxable distribution a few months later, he says. If that client also invests through an SMA, they may ask the asset manager, via their advisor, to trigger a certain amount of losses within the account every year that can be used to offset gains from selling a portion of the appreciated security.
Still, the key tax advantage SMAs offer most clients is tax-loss harvesting, particularly if executed throughout the year rather than just at year-end, says Don Wishart, president of Seamark Asset Management Ltd. in Halifax. Clients who execute tax-loss harvesting at the end of the year are “leaving a ton on the table,” Mr. Carroll adds, especially if they just end up parking their cash while waiting 30 days to avoid the superficial loss rules in the Income Tax Act.
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