RIA guide: How to explain tax loss harvesting to clients
RIA guide: How to explain tax loss harvesting to clients Tax loss harvesting can be a confusing topic for clients to understand. This guide gives you simple talking points to help explain it to your clients. Clients having trouble grasping the concept of tax loss harvesting? From a simple one-sentence explainer to details on how Betterment’s automated Tax Loss Harvesting+ works, we’ve got you covered. Table of Contents: In one sentence: “What is tax loss harvesting?” Five key concepts: The building blocks of tax loss harvesting How does tax loss harvesting work? How Tax Loss Harvesting+ works with Betterment Advisor Solutions How to answer other tax loss harvesting FAQs Explaining complex financial topics to clients is challenging. You want them to understand but, at the same time, not overwhelm them. This guide can help you explain sophisticated tax strategies to your clients without causing extra stress for them. In one sentence: “What is tax loss harvesting?” So, your client asks: “What is tax loss harvesting?” Rather than delivering a complex answer, start with a single sentence: “Tax loss harvesting aims to lower your tax bill by selling investments at a loss to offset capital gains from other investments.” Now, stop there. Ask your client if they want you to break down the details of how it works. If they say yes, start with the five key concepts below. Five key concepts: The building blocks of tax loss harvesting When talking with clients, you can share that these concepts are the building blocks that make tax loss harvesting possible. You can walk through the table below, providing examples to clients. How does tax loss harvesting work? Now that you have explained what tax loss harvesting is in one sentence and shared the five building blocks, you can explain to your client how the process generally works in three steps. Step 1: Identity your capital losses This involves looking for investments in your portfolio that have declined since they were purchased. It’s important to note that we don’t sell any investment that is down in value. We strategically select which investments to sell to help maintain the proper portfolio allocation. Step 2: Sell at a loss and replace your investment Once investments with capital losses have been identified, they are sold to “harvest” the loss. Making sure not to break the “wash sale” rule, new investments are bought to fit into your overall investment strategy. Step 3: Use loss to offset your capital gains or income on your taxes The losses you “harvested” can offset up to $3,000 of capital gains from investments or income each year. Any remaining losses over $3,000 can be carried forward indefinitely to offset gains or income in future years. How Tax Loss Harvesting+ works with Betterment Advisor Solutions It’s important to let your clients know that this is the general process for implementing. Performed manually, it can be time-consuming and potentially risky if done improperly. However, leveraging modern technology, like the Betterment Advisor Solutions platform, can help you minimize risk. As a Betterment advisor, you can offer your clients Tax Loss Harvesting+ (aka TLH+). Read the full TLH+ white paper. Here’s how to talk to your clients about Betterment’s TLH+ process As an advisor, you can use the following talking points: Fully automated: Instead of manually implementing tax loss harvesting, Betterment uses an automated algorithm that regularly checks for losses that make sense to harvest. No extra costs: There are no extra trading costs to harvest your losses, so you don’t have to worry if extra fees reduce any potential gains. Automatic reinvestments: Without breaking the “wash sale” rule, every harvested dollar is automatically reinvested rather than held as cash, which allows you to keep your money in the market so you don’t miss out on potential gains. Automatic rebalancing: When shares are sold at a loss, the proceeds are automatically reinvested in the asset classes that will bring your portfolio back into balance rather than simply defaulting back to the asset class they came from. No short-term capital gains tax: Some tax loss harvesting methods switch back to the primary ETF after the 30-day wash period has passed. This can create short-term capital gains tax that may dramatically reduce the benefit of harvesting losses and even leave you owing more in taxes. Our algorithm only moves back to the primary ETF when it is appropriate for your account. IRA harvest protection: Selling an ETF for a loss in your taxable account and then buying the same ETF in your IRA can cause a permanent wash sale, destroying the benefit of loss harvesting entirely. We strive to ensure that IRA deposits do not undermine a harvest. How to answer other tax loss harvesting FAQs Below are common questions about tax loss harvesting, along with talking points to help you respond to clients within the context of Betterment’s TLH+. Is tax loss harvesting right for me? Tax loss harvesting might be right for you if you are in a higher tax bracket or have significant capital gains or losses in a taxable account. In both scenarios, tax loss harvesting may offset your capital gains to help reduce your tax bill. Using Betterment’s automated technology, we can help harvest losses in a way that reduces potential risks. What are the risks of tax loss harvesting? Risks can include extra trading fees, holding too much cash after selling at a loss, an unbalanced portfolio, or violating the wash sale rule. But don’t worry — our tech is designed to help avoid these risks so you can enjoy the benefits of tax loss harvesting. What are the benefits of tax loss harvesting? The primary benefit of tax loss harvesting can be reducing your tax bill. When done correctly using our automated technology, Betterment can lower the tax you would have paid on your capital gains. What if I have more than $3,000 in losses? You can carry forward any unused losses into future years. For example, if you have $5,000 in losses and use $3,000 to offset capital gains this year, you can carry forward $2,000 to offset capital gains or income in any future year. Can I wait until tax day to sell at a loss? No, unfortunately, tax loss harvesting transactions must be complete by December 31 each year. Can I use tax loss harvesting with any of my investment accounts? Tax loss harvesting can only be used in taxable accounts. In tax-advantaged accounts, like a 401(k), you can’t deduct the losses, so tax loss harvesting wouldn’t be applicable. It’s important to note that selling an asset at a loss in a taxable account can still trigger the wash-sale rule if you purchase the same or a substantially similar asset within 30 days in a tax-deferred account, such as a Roth IRA. For instance, selling an ETF at a loss in a brokerage account and then buying the identical ETF within 30 days in a Roth IRA could still disallow the loss for tax purposes. See how Betterment automates tax loss harvesting and more From our proprietary Tax Loss Harvesting+ process to tax-smart investing portfolios, the Betterment for Advisors Solutions platform streamlines your firm’s practices while creating value for your clients.
Going independent: 4 key questions before starting your own RIA
Going independent: 4 key questions before starting your own RIA Thinking of breaking away to become an independent RIA? Ask yourself these four key questions first to help set your new firm up for success. The data looks promising if you’re looking to start an independent RIA… In 2024, PlanAdviser reported that the average Millennial who works with a financial advisor started looking for advice at age 29. That’s nine years younger than Generation X and 20 years younger than Baby Boomers. The great wealth transfer is now projected to be $124 trillion, and the population of Millennials in the U.S. hovers over 72 million people. There may have never been a better time to start an independent RIA looking to serve a growing high-net-worth market with demand for financial advice. But starting your own firm is a big undertaking–and a daunting one. Building your confidence starts with thinking through important facets of your plan. First, consider what success would look like for you. Many advisors who go off on their own, do so to gain more freedom and flexibility professionally—and personally. So, it’s important to think about what matters most to you. Below, we’ve laid out four key questions, as well as a business plan, to help you build a solid foundation for your firm. Question 1: Who do you need to support your firm? As you start an independent RIA, establishing strategic professional partnerships can help ensure you have the necessary resources and expertise to navigate the transition smoothly. These partnerships provide critical support in areas like compliance, technology, and operations, enabling you to set up a strong foundation for your practice from day one. You’ll likely need support from some, if not all, of the following professionals: Attorney: Throughout the transition, your legal counsel can offer valuable guidance, like reviewing your existing non-compete agreements with your current employer, helping you establish a business entity, and providing overall protection for your interests. Attorneys are a key resource, who can offer expertise on how to register a new business, for example. Online legal solutions can also be a solution if costs are a concern early on. Tax advisor: Having a tax advisor from the outset of going independent can be beneficial in addressing any tax-related questions or concerns that may arise. Thorough tax planning can help your firm remain in compliance and reduce your tax liability as you start a business. For example, your firm may qualify for tax credits available to new businesses. A tax advisor can help you claim all credits and deductions that you may not have known to be available to you. Compliance consultant: As an independent RIA, you will be required to have a Chief Compliance Officer (CCO) to oversee and ensure the firm's adherence to regulatory requirements. You can take on this role yourself, appoint an employee, or outsource the responsibility to a compliance consultant. Outsourcing the CCO function can be particularly beneficial during the registration phase, as it allows you to leverage the expertise of a seasoned professional, saving you valuable time. For example, a CCO can help with filing Form ADV and related documents, navigating SEC or state registration requirements, drafting tailored compliance policies, transition planning, and setting up necessary systems for recordkeeping and reporting. Marketing agency or freelancer: A polished brand is a key ingredient in ensuring prospective clients view you as a trusted, professional firm. A skilled marketing consultant or agency can help you develop a strong brand identity, create effective marketing strategies, and establish a differentiated brand presence. Services they provide can include website design, social media management, content creation, and lead-generation campaigns. Other RIAs: While you may not want to talk with direct competitors, seeking guidance from fellow RIAs who have successfully navigated the transition to independence can be valuable. By consulting with peers who have started their own RIAs, you can gain valuable insights and advice, which can help increase your confidence and better prepare you for potential challenges. If possible, speaking with RIAs who have made the transition from your current firm can provide particularly relevant and nuanced guidance, as they will have firsthand experience with the unique circumstances and obstacles you may face. We’re here to support you, too. At Betterment Advisor Solutions, we take pride in being a trusted guide for advisors looking to make the leap to become an independent RIA. We provide 1:1 support as you start your firm. Have questions? Talk to us today. Question 2: Where is your time best spent running your firm? When you’re first starting your firm, you’ll quickly find yourself wearing many hats. It’s important to understand your bandwidth and the key actions you need to take to build a successful independent RIA. For example, if you have few clients when you start, then business development, client experience, and business processes will likely require more of your time as you focus on growing your book. As more clients come onboard, your priorities will shift. Once you have a healthy book of clients, you’ll need to evaluate which activities are most valuable to your firm. For example, should you spend your time on investment management and portfolio construction? Or would it be better to outsource these tasks, and devote more time to clients and holistic financial planning? Review the following common activities, and prioritize those you feel are most important for your firm’s success: Business development: Attracting and acquiring new clients to grow your business Client transition and onboarding: Establishing a clear process for account setup and communication, including setting up client households and opening as many different accounts as needed Client experience: Delivering exceptional service and building strong relationships with existing clients and identifying opportunities to offer additional services, like tax or estate planning Business processes: Managing the operational aspects of your firm, such as compliance, marketing, and technology Wealth management: Providing holistic financial guidance tailored to clients' goals, such as retirement, education, and charitable giving Portfolio management: Developing and implementing investment strategies tailored to each client's unique needs and goals In our 2024 Advisor Survey, we found most advisors spend the majority of their time on financial planning. You can use the data below as a benchmark to compare how you spend time, but keep in mind the additional needs of your firm as you start the process of going independent. Question 3: What will your RIA tech stack look like? The term “tech stack” simply refers to the collection of software platforms and tools that you use to do business—and deciding what it looks like is one of the most important decisions for your new firm. Your tech stack can make or break your firm’s efficiency and the quality of service you provide to clients. It will include many different and often integrated software, but at the end of the day, it should be driven by this question: “How do I need to spend my time?” For example, you’ll likely want CRM (customer relationship management) software to track and manage all of your client data and interactions in one place. Without CRM, you’ll spend time manually tracking client engagements in spreadsheets, taking away time from serving clients. The four essential components of an RIA tech stack A comprehensive tech stack for independent RIAs should include the following four essential pieces of software. Custodial solution: Selecting a custodian is one of the most significant decisions for your firm. Your custodian is responsible for the safekeeping of the assets, processing transactions, and providing administrative support. Look for a custodian with strong tech capabilities for you and your clients—and the ability to integrate with your broader tech stack. Portfolio management: These technologies enable you to efficiently and effectively manage your clients' investments. The right portfolio management platform can range from providing simple model marketplaces to full-end-to-end tooling, including tax-optimization technologies, portfolio customization options, and more. Some custodians offer built-in portfolio management software, which can help your firm cut costs and streamline your operations. Financial planning: Financial planning technologies allow you to create comprehensive, customized financial plans to help clients budget, set goals, and plan for taxes. Many financial planning platforms integrate with custody software and customer relationship management (CRM) software, enabling a seamless and holistic approach to client service. CRM: CRM software is essential for managing client communications, collaborating with your team, and building long-term relationships with clients. A good CRM should be able to integrate client data from multiple systems and integrate with marketing automation technologies to track your client information and potentially send, or at least enable, personalized communications. Additional tools to support your firm's operations To run an efficient and effective firm, you may also require other tools, which can range from free platforms to robust solutions. Some of these tools you may wish to consider include: Compliance software: Compliance software covers a range of solutions, from simple archiving of firm communications to advanced cybersecurity strategies. In addition to software, your firm may require compliance consulting services, which can be provided by the software vendor or a separate third party. Accounting software: Manages your firm's finances, tracks expenses, and generates invoices. Billing software: As you sign clients, you’ll want to make sure you have billing software that integrates with your tech stack. Betterment’s fully integrated billing solution lets you set a fee schedule for each household during onboarding and automate collection and reporting. Marketing software: Automates marketing campaigns, manages social media, and tracks lead generation. Scheduling software: Streamlines client meetings, appointments, and communications. Video conferencing software: Facilitates remote meetings and collaborations with clients and team members. File management software: Securely stores and manages client documents, contracts, and other sensitive information. AI notetaking software: Automates note-taking, transcription, and data entry, freeing up more time for high-value tasks. As you review different software solutions, we can’t stress enough the need to look for platforms that integrate with each other. By carefully selecting and integrating these tools, you can build a robust tech stack that supports your firm's growth, efficiency, and ability to deliver exceptional services to clients. With Betterment Advisor Solutions, you’ll get a vertically-integrated product that combines custody with your most critical practice software, including onboarding, trading (or portfolio management), reporting, and billing. We recommend reviewing your tech stack on an annual basis to ensure it remains aligned with your firm's evolving needs and goals. Question 4: How will I transition my current clients to my new firm? Your current clients will be your most valuable ones as you start your independent firm. Client onboarding is a crucial phase of going independent. Although you may not be able to discuss your plans to start your own firm just yet, you can begin laying the groundwork for a successful transition. Talk to an attorney: Consulting with your attorney can be a smart move to ensure you're not violating any existing company policies or agreements. If permissible, start compiling a list of clients you'd like to invite to join your new firm. This may include gathering their contact information, such as names, addresses, phone numbers, email addresses, and account titles. Select your clients strategically: As you consider which clients to bring on board, take a strategic approach. Starting your own firm presents an opportunity to specialize in a specific niche or target market. Think carefully about the types of clients you'd like to serve and the services you want to offer. By defining your ideal client profile and target market ahead of time, you'll be better equipped to develop effective marketing and business development strategies when you launch your firm. This clarity will help you hit the ground running, allowing you to focus on building strong relationships with your new clients and growing your business from day one. Bonus: Building your business plan A business plan is not only helpful for you, as you start and manage your own firm, but it’s helpful for any key employees and partners of your firm. For example, a marketing agency or outsourced Chief Compliance Officer can use the information in your business plan to better serve your needs as they provide tailored advice and strategies to help grow your firm. Below is an outline to follow along with some tips for completing each section. Independent RIA business plan outline Executive summary: A brief overview of your RIA firm, its mission, goals, and objectives. Try to clearly explain why your firm exists in two to three sentences. The information in your executive summary can serve as a guiding light for many important stakeholders. For example, for you and your employees, it explains clearly why your firm exists. And for clients and potential clients, the language in this section can be used on your website and in other client communications focused on highlighting your firm’s mission. Company description: A detailed description of your RIA firm, including your history and details on any key employees, the business entity structure, and ownership structure. Writing this section ahead of starting your firm can help you have a clear understanding of steps you may need to take, such as creating an LLC and planning who will serve in key roles at your firm. For example, this section should detail who (internal employees or outsourced consultants) will oversee investment management, technology operations, compliance, and day-to-day operations. Market analysis: An analysis of your firm’s target market, including demographics, financial needs, and trends, as well as a competitive analysis of other RIAs in your market. You can conduct a market analysis yourself or work with a market research agency to assist with more in-depth analysis. If conducting market research yourself, you can leverage free data from the United States Census Bureau or Data Commons and then add paid data sources as needed. Services and products: A description of the investment services and products offered by your firm, including but not limited to portfolio management, financial planning, and other advisory services. Your services and how you price them should align with the needs of your target market defined in your market analysis. For services like financial planning, list out exactly what that will entail for your clients, including services like cash flow management, tax planning, retirement planning, estate planning, and risk management. Being very detailed in this section will allow you and your clients to understand what they are getting from your services. Marketing and sales strategy: A description of your firm’s marketing and sales strategy, including how it will attract and retain clients. One common approach to outlining a marketing strategy is using the “4 Ps” for your firm. The 4Ps help you document Product, Price, Place, and Promotion to help you build a strategy for promoting and distributing your services to the right audience. See our guide for creating a marketing plan using the 4Ps. If you have larger growth plans, this section can also describe your firm’s growth and expansion plans, including its strategies for increasing revenue, expanding its client base, and entering new markets. Operations and management: A description of your firm’s operational structure, including its management team, staff, and technology infrastructure. This section should cover the hardware, software, and network systems needed to run your firm and clearly explain how you plan to integrate your tech stack to run your firm efficiently. Financial projections: Financial projections, including revenue, expenses, and profit projections, as well as a breakdown of your pricing and fee structure. More formally, these projections should be used to create a three-year income, balance, and cash flow statement forecast to help with planning and goal setting. Also, as you transition from your current job to your independent firm, consider the funds you may need to set aside for personal expenses as you start your firm without much or any income. Compliance and risk management: A description of your firm’s compliance and risk management procedures, including its regulatory requirements and internal controls. Risk assessments should be conducted for regulatory compliance, market volatility risk, cybersecurity risk, and other practice areas such as marketing, advisor compensation, and trade execution. Human resources and staffing: A description of your firm’s human resources and staffing plan, including its staffing needs, training programs, and employee benefits. This section will be more straightforward if you’re a solo advisor, but it's important to clearly define staffing needs and roles if you have additional team members. Betterment Advisor Solutions is your partner for going independent Going independent means wearing a lot of hats as you grow your own firm. With Betterment Advisor Solutions, you get an all-in-one custodial platform that integrates and automates your most essential practice management and portfolio management tasks. From onboarding new clients to performing operational tasks and ongoing portfolio management, our team and technology will help advisors like you get set up with tooling to ensure you can cover many of your bases early on. We support hundreds of RIAs, helping them streamline their practices’ operations and technology. Take Eric, for example… “I run a solo practice — having a solid tech stack is essential to running my business successfully, especially with back office responsibilities. Having a partner like Betterment helps me streamline client onboarding and ongoing investment support so I can focus on other aspects of my business.” —Eric Rodriguez, WealthBuilders We’re here to answer your questions and be your guide as you set out on your independent RIA journey. Ready to talk?
