Client Use Case: Forme’s 360 Diagnostic

The Challenge:

Despite having a high net worth and a comfortable lifestyle, this couple felt their financial life was disorganized.  They had too many advisors who did not speak to each other, there was no coordination, and they felt that the dots were just not connected.  Things were up in the air, left to chance, and there was no cohesive plan.  On top of that, it was clear their advisors did not understand the time pressures and specific financial considerations that go with being a physician.  All this created a sense of unease - despite paying significant fees.

What Forme Did:

A Pro Forme Advisor met with the couple and, given the complexity of their financial picture, recommended Forme’s 360 Diagnostic.  The 360 Diagnostic is a deep dive into a client’s financial picture, essentially a “financial physical.”  Specifically, it looks at the following areas, digging deep on each but also the key connection points across them:

• Investments - tax efficiency, risk, and diversification
• Loans - debt strategies, rates, and other factors
• Banking - the right relationships set up and appropriate fees
• Tax - maximizing deductions and tax optimizing your portfolio
• Trust and Estate - ensuring documents are up to date and accurate
• Career Advice - ensuring your benefits and salary are on par with your peers
• Insurance - adequate coverage and not overpaying

The Findings:

In this case, via the 360 Diagnostic, Forme’s Pro Forme Advisor uncovered opportunities to better align their investments with their financial goals, reduce taxes, decrease investment and tax preparation fees, and optimize insurance coverage. These savings freed up more money to invest, helping to improve the probability of funding all of the client’s lifetime and legacy goals.

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How?

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Investments:

The diagnostic found that the couple had a large percentage of their net worth invested in professionally managed portfolios. However, the couple shared that working with multiple advisors created so much complexity that they did not know how each portfolio impacted their overall financial situation.  Based on the advisor’s review of the couple’s investments and tax return, the portfolios were tax inefficient, generating substantial realized short-term and long-term capital gains. Our advisor proposed a solution to address their portfolio’s complexity and tax inefficiencies by utilizing a tax managed direct indexing strategy. With direct indexing, physicians can directly own all—or a subset of the underlying securities—of an index*, allowing for control when gains and losses are recognized.

The advisor prepared a tax transition proposal for the couple that showed how Forme could move their current equity portfolios to a direct indexing strategy in a tax efficient manner. The proposal illustrated that liquidating the entire portfolio and reinvesting the proceeds into a mutual fund or ETF strategy would generate $385,000 in estimated tax liability.  The client shared that in this first year they are comfortable realizing $100,000 in capital gains to allow for a portfolio transition. By utilizing some of the securities held in the couple’s existing portfolio, deferring critical unrealized gains, and realizing targeted losses, Forme’s proposal showed that a tax-smart transition to a personalized direct indexing portfolio would generate less than $3,000 in estimated tax liability, representing an estimated tax savings of about $382,000! This tax efficient transition represented more than 600 basis points in tax savings versus a full portfolio liquidation.**

The advisor explained that Forme uses tax-smart investing technology that allows for custom capital gains budgets, enabling investors to specify a threshold for how much in capital gains they are willing to realize during the calendar year.  Following the initial portfolio transition, the couple and the advisor discussed keeping the annual capital gains budget low until the husband retires.  Once he retires, and the couple is likely to be in a lower tax bracket, they may increase their capital gains budget.  While setting capital gains budgets creates more predictability around taxes, such budgets may limit trading activity and can create more drift to the underlying index.

Furthermore, the advisor discussed how we continuously review client portfolios to identify securities trading at a taxable loss to help offset existing gains, provide funds for portfolio rebalancing, and bank losses for use in future years. Direct indexing provides more opportunities for tax loss harvesting – a strategy of selling securities at a loss to offset capital gains tax. These opportunities to save on taxes arise because certain underlying stocks of the tracked index may be trading at a loss even if the overall index has posted a gain.  Concurrent to tax loss harvesting, we purchase replacement securities to stay invested in the market and reoptimize the portfolio. Given the client’s $6M allocation to equities, the advisor estimated that ongoing tax loss harvesting powered by advanced technology could translate into average annual tax savings of nearly $65,000***.

After reviewing the tax transition proposal and discussing the full array of advisory services customized for physicians, the couple elected to engage Forme as their advisor and began transferring assets to Forme.

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Tax Savings:

The couple provided the advisor with the prior two years' tax returns. After reviewing these returns, our advisor discovered that the couple was not itemizing deductions and, therefore, could not fully recognize the tax benefits of their many charitable contributions. The advisor proposed a strategy utilizing current assets that would enable the couple to take advantage of the itemized deduction, including their charitable giving and mortgage interest, creating an opportunity for the client to take advantage of allowable tax deductions above the standard deduction amount.

The advisor found another opportunity to reduce taxes for the couple through a strategy known as asset location. This recommendation proposed transitioning their taxable bonds to municipal bonds (changing their taxable income to tax exempt income) and investing in stocks that generate qualified dividends taxed at lower rates rather than stocks with ordinary dividends taxed at the higher ordinary income tax rates. The advisor estimated that optimizing asset location for the couple may save them approximately $13,000 in taxes per year.

Additionally, the advisor explained that if the client chooses to work with Forme’s strategic tax preparation service provider, the tax preparation fees (up to a certain amount) are included in Forme’s advisory fee. This service could potentially save the client tax preparation fees and provide them with a simplified, coordinated experience.

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Trust Accounts:

In discussing the estate plan, the couple shared that the documents had not been updated in many years. Because of external changes (e.g., tax law) and internal changes (e.g., growing family), the advisor recommended that the couple search for a new estate planning attorney.  The couple involved our advisor in selecting the attorney to ensure there was collaboration from the start.  Additionally, the advisor found proceeds from the sale of a property held in their trust had not been invested. The advisor evaluated their overall financial situation and recommended an appropriate investment strategy for this uninvested cash.

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Insurance:

Via the 360 Diagnosis, which includes a comprehensive analysis of the couple’s life insurance policies, our advisor discussed with the couple that their current coverage may be more than necessary at this stage of their career.  The couple and our advisor discussed several options, one being to keep the same coverage on their whole life policies but eliminate the premium payment using the cash value, saving them $64,000 in cash flow per year for 11 years.  While discussing the various options, it was noted that one of the term policies seemed unusually expensive.  Our Forme advisor also was able to find a term life policy with the same coverage, saving 43% in annual premiums representing nearly $8,000 in savings per year for 15 years.

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The Result:

Our advisor, understanding the unique needs to physicians, put together recommendations that fit the couple's career stage and needs.  Through the 360 Diagnosis, a number of opportunities for reducing current costs were identified and the additional funds were allocated towards the couple’s goals. The advisor’s proposals estimated potential tax and cost savings of more than $532,000 in the first year and approximately $150,000 in savings per year thereafter. Additionally, the opportunity to simplify the complexity of their financial lives brought peace of mind, allowing the couple to enjoy the lifestyle they have worked to achieve.

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