Michael O. AdairManaging Director, Senior Investment Consultant | 2018

Designing a Personalized Portfolio: Three Principles to Unlocking Client Alpha

Active tax management is a key element of any wealth management plan.

Principle 2: Active Tax Management

Active tax management is a key element of any wealth management plan. While it is difficult to pinpoint what percentage of after-tax return is added through tax alpha, our in-house study shows that it may be up to 121 basis points.1 Over time, this can have a significant impact. Furthermore, the lack of tax management can cost an investor as much as 25% of returns.2

At City National Rochdale, we take a methodical three-step approach that is a function of open communication among the client, financial advisor, tax professional, and portfolio manager:

STEP 1: Planning and Tax Budget

One key element of the Investment Policy Statement is tax. We formulate a tax budget for each client which defines the annual budget for ordinary income, short-term gains, and long-term capital gains.

We work closely with the client’s financial advisor and tax professional (CPA) to develop and manage the tax budget.

From the very start of the relationship, when we transition assets to City National Rochdale, we proactively manage to the tax budget. That budget then becomes an ongoing part of the portfolio’s active management at City National Rochdale.

STEP 2: Asset Location and Implementation

As we begin building a client’s portfolio, the first consideration of active tax management is the concept of “asset location”—in other words, putting the right securities in the right accounts to create tax efficiency and maximize the client’s after-tax returns.

See below for a numerical example of our asset location strategy.

Asset location also applies to the mutual fund space. We typically prefer to minimize mutual fund holdings in high-net worth client portfolios, opting to own individual stocks and bonds as core holdings. However, we understand that there are situations in which mutual funds may be appropriate (particularly with regard to specific market niches). Mutual funds distribute their capital gains annually, which can provide a tax management challenge. Nevertheless, we strive to implement appropriate strategies to minimize the tax burden.

STEP 3: Tax Budget Management

Our portfolio managers take active steps toward managing to the client’s tax budget and finding efficiencies where possible through strategies such as:

-Long-Term Capital Gains
-Realizing Losses
-Offsetting Gains with Losses
-Tax Lot Management

The key to tax management is ensuring that the financial advisor, the accountant, and the portfolio manager are all on the same page. We take pride in our work helping clients create and implement their own customized tax plans.

To learn more about these individual steps and strategies, please see our in-depth white paper, Tax Alpha: Enhancing Returns Through Active Tax Management, or talk to your local City National Rochdale senior investment consultant.

Sources and Disclosures

1Average tax alpha generated between 2008 and 2017 from five randomly selected real client accounts (from five separate senior portfolio managers) used in a City National Rochdale internal study. For more information, see our white paper, Tax Alpha: Enhancing Returns Through Active Tax Management.

2Weinberg, Ari I (2012, October 16). A magical tax-loss harvesting machine? Forbes. Retrieved from https://www.forbes.com/sites/ariweinberg/2012/10/16/a-magical-tax-loss-harvesting-machine/#6f09b0f47a5e

Important Disclosures City National Bank provides investment management services through its wholly owned subsidiary City National Rochdale, LLC, a registered investment advisor.

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Returns include the reinvestment of interest and dividends. Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk.

Past performance is no guarantee of future performance.

Put our insights to work for you.

If you have a client with more than $1 million in investable assets and want to find out about the benefits of our intelligently personalized portfolio management, speak with an investment consultant near you today.

If you’re a high-net-worth client who’s interested in adding an experienced investment manager to your financial team, learn more about working with us here.