Given the high cost of medical school and multiple years of training required, physicians often have less time to build wealth than other investors – sometimes by as much as 10 years. This compressed savings period results in fewer years to compound wealth than investors who can start saving in their early 20s. Accordingly, it is imperative for doctors to maximize how they invest.
We believe tax-smart investing is one of the best ways to optimize a physician’s long-term wealth. This proven strategy allows physicians to keep more of what they earn, helping to offset the limitation of shorter investment time horizons.
Research studies have validated the benefits of tax-smart investing. For example, in “An Empirical Evaluation of Tax-Loss Harvesting Alpha”, authors Shomesh Chaudhuri, Terence Burnham, and Andrew Lo found that tax-loss harvesting, a strategy of selling of securities at loss to offset capital gains tax, improved after-tax performance by 1.10% per year from 1926 to 2018.
In another research paper titled “Loss Harvesting: What’s It Worth to the Taxable Investor”, authors Robert Arnott, Andrew Berkin, and Jia Ye found that by rigorously harvesting losses, investors realized a median benefit of 27% (over a 25-year period) compared to a pure buy and hold passive strategy. For a 60-year-old doctor near retirement, this could result in approximately $1 million more in assets than a similar doctor with a net worth of $3.5 million who didn’t deploy a tax-smart investment strategy.
Forme has partnered with Orion Advisor Solutions, a wealth technology provider servicing more than $2 trillion in assets, to deliver an industry-leading tax managed solution. Unlike an exchange traded fund (ETF) or mutual fund which pool investors’ money into a basket of securities, this tax managed solution leverages separate accounts (SMAs) to build personalized portfolios. Separate accounts, whereby you own the individual securities, allow for much greater customization, more control over tax management, charitable gifting, as well as sector, social, and security restrictions. For instance, one common complaint of mutual funds is that investors inherit the embedded gains of the fund at the time of purchase. The IRS requires mutual funds to distribute 98% of their calendar year income to shareholders, which can mean a tax hit even if the fund generates an investment loss. In contrast, SMAs allow investors and their advisors to be in control of when gains and losses are recognized, creating options for better tax management.
Transferring accounts from one advisory firm to another may create significant tax liability for physicians, as many advisors require investors to liquidate their existing holdings or limit them to only what’s in the advisor’s model. At Forme, we use state-of-the-art technology to optimize your portfolio based on what you already own. As illustrated below, this tech-driven process incorporates your existing holdings, portfolio preferences, and tax considerations in constructing your portfolio – enabling us to be as tax efficient as possible and avoid realizing unnecessary capital gains.
Although holding legacy positions may be tax efficient, this approach can result in portfolio drift from the investor’s target objective over time. To help manage this risk without incurring a large, initial tax bill, Forme can leverage smart technology to automatically transition a portfolio over multiple calendar years to defer tax liabilities into future years. Below is a sample of our proposal that illustrates several tax transition scenarios, helping investors determine the best approach for them.
Most advisory practices that claim to be tax efficient only harvest losses for clients at year end. However, Forme uses advanced technology to continuously review portfolios to identify securities trading at a taxable loss throughout the year. For example, in 2020 the market fell signifiantly in April and May, but ended the year up by double digits. By harvesting losses proactively throughout the year, we are able to capitalize on events like 2020’s midyear decline. Moreover, as illustrated in the graph below, during years when the market is up more than 10%, on average, 32% of stocks finish negative for the year. This example highlights the additional opportunities to harvest losses that exist at the security level even when an SMA portfolio generates double-digit gains.
Physicians do not like tax surprises. To limit such outcomes, Forme can set a customized capital gains budget for each client within the tax-smart trading technology. By establishing a specific capital gains budget unique to a client’s circumstances and goals, greater predictability around taxes can be achieved.
Short-term capital gains are taxed as ordinary income, which is typically a much higher tax rate for physicians than the rate on long-term capital gains. We proactively minimize the realization of short-term gains through a tech-driven process that carefully selects which positions and what tax lots to sell.
The information provided herein was prepared for educational purposes only and is not a solicitation to buy or sell any security or insurance product, nor an offer to provide investment advice. All examples are hypothetical and for illustrative purposes only. Nothing contained herein should be construed as legal or tax advice and is not intended to replace the advice of a qualified tax advisor or legal professional. The information contained herein may have been compiled from third-party sources we believe to be reliable but cannot guarantee its accuracy or completeness.
Forme Financial is an SEC-registered investment adviser. Additional information about Forme Financial, including its services and fees, is available online at http://adviserinfo.sec.gov/.
This communication contains past specific securities recommendations for illustrative purpose only. Forme Financial makes no assurances, nor should it be assumed, that recommendations made in the future will be profitable or will equal the performance of the securities included in this presentation. Due to various factors including changing market conditions, such recommendations may no longer be appropriate; nor should any past recommendation be taken as personalized investment advice. You may request from us free of charge a list of all securities recommendation made within the immediately preceding period of at least one year accompanied by the following disclosures: (1) the name of each security recommended; (2) the date and nature of each recommendation; (3) the market price of the security recommended at the time; (4) the price at which the recommendation was to be acted upon; (5) the market price of each such security as of the most recent practicable date. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Any presentation of the performance of such past specific securities recommendation does not reflect the deduction of an investment management fee, or any transaction costs or custodial charges, the incurrence of which would have the effect of decreasing indicated historical performance results. It should not be assumed that your account performance of the volatility of securities held in your account will of will correspond directly to the referenced past securities recommendations.
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