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:
- $1,000,000 — Dale Rottschafer, CIO, Metamorphosis Money Management (M3)
- $200,000 — Joseph Mrak III, President & CEO, FolioDynamix
- $0 (No minimum) — John Bearce, SVP, Business Development, Natixis
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.
