In an era of free trading and index-based investing, helping clients with taxes is an increasingly important service for advisors to demonstrate their value to investors.
And to do it, firms are now arming advisors with new technology to manage portfolios with greater tax efficiency. The latest example: J.P. Morgan Asset Management has partnered with 55ip, a fintech that uses algorithms to offer tax-smart investment strategies, asset transfers, withdrawals and portfolio management.
The firm is using the technology to offer RIAs a new way to transition assets to a model portfolio in a manner that will save time and be more tax-efficient, according to Ted Dimig, head of U.S. advisory and core beta solutions at J.P. Morgan Asset Management. Advisors can also use the co-branded product to offer clients ongoing automated tax management, trading, rebalancing and reporting.
“One of the biggest costs of moving from one advisor to another is the tax bill,” Dimig says.
Advisors who already use 55ip have doubled the assets in taxable accounts, says the fintech’s CEO, Paul Gamble.
“The growth of investment models is one of the key drivers of ‘money-in-motion’ in our industry, but tax considerations are a major barrier preventing advisors from driving better outcomes for clients," Gamble said in a statement.
55ip also partners with BlackRock and integrates with several major custodians, including Fidelity, Charles Schwab, LPL Financial and Raymond James.
The product is initially only available to RIAs. J.P. Morgan Asset Management plans to expand it to other channels in 2021, but Dimig declined to comment on which advisors the firm has in mind.
Of course, J.P. Morgan isn’t the only firm looking to deploy more tax automation technology. LifeYield, another fintech focused on tax efficiency, integrates with Morgan Stanley,
With more investors accepting that no one can consistently beat the market, advisors are left with three primary levers — cost, risk and tax — to improve clients’ financial outcomes, says LifeYield executive vice president Harry Bartle. Risk remains a key concern, especially in present volatility, but the race towards zero in costs leaves taxes as the only factor advisors can influence, Bartles says.
“Studies show that taxes are the biggest concern of investors, and this concern increases as investors have more assets,” Bartle says. “If an advisor can help clients effectively manage risk and tax, and you can quantify the benefit, cost is no longer an issue.”
Dimig echoed this sentiment, adding, “If you ask a room of 100 people what direction the S&P 500 goes in the next 12 to 24 months, you’re going to get a mix of answers.”
Just about everyone agrees that taxes will go up over the long term, but until innovations such as 55ip and LifeYield, there hasn't been much in the way of technology to help advisors manage portfolios accordingly, Dimig says.
“There’s been a clear gap in terms of the types of tools that platforms can use to solve for this problem, which has led to a significant emergence of fintech players in this space trying to solve it in different ways,” he says.
