New Cerulli Study Finds Strong Demand for Portfolio Customization and Tax Planning
According to new research from Cerulli Associates, an international research and consulting firm, produced in partnership with Parametric, part of the asset management division of Morgan Stanley, affluent investors overwhelmingly want their portfolios customized to their personal circumstances, including tax management.
Rising demand for personalization is reshaping wealth management, according to Cerulli and Parametric’s latest report, Customized at Scale: A Framework for Next-Generation Advisory. The paper states that 80% of affluent investors say customization is important to them, while nearly 70% say it’s important that their provider helps reduce their tax bill.
According to the report, 47% of financial advisers currently offer tax planning services to their clients, and 82% of managed account sponsors consider improving tax management capabilities, such as transition and loss harvesting, to be a top-three priority for their firm moving forward. This is a process that begins even before an account is funded and continues through to transitions to the next generation of clients’ inheritors, the report says.
“This process is incredibly complex with thousands of competing variables to consider, and few advisers have access to a full suite of platform tools to assist them in designing and implementing an investment strategy that provides optimal household portfolio outcomes,” said Scott Smith, Cerulli’s senior director.
The paper outlines a roadmap, including a taxonomy of process and product solutions that wealth managers should consider as they expand their tax management capabilities.
The report highlights that process solutions begin with portfolio onboarding transformation, including incoming portfolio assessment and tax budgeting; transition to active tax management, such as tax-loss management and tax savings documentation; and then conclude with distribution optimization, like tax-smart withdrawals. Product solutions include capabilities such as direct indexing, custom bond SMAs, tax-managed equity long/short SMAs, and option overlay strategies.
“Implemented together, these process and product solutions combine to create portfolio strategies optimized at the household level and designed to provide the greatest possible net benefits to clients and their successors,” continued Smith.
Not all wealth managers will have the same approach to constructing an optimal set of process and product solutions, and many will need to decide which capabilities are right for their firm and how to access them. The paper covers the critical role that partners such as asset managers and technology providers can play, often innovating faster than some wealth managers that are encumbered by legacy technology stacks. This is similar to how Cerulli previously reported the importance of partnership between product specialists and asset managers.
“Proper implementation is a two-way street and requires extensive preparation and development from firms’ home offices to set the foundation upon which outside solutions can rest and work. Notably, this includes potential data sharing (e.g., tax lot information) that can help their partners provide better customization,” said Chayce Horton, associate director at Cerulli.
Above all, the paper notes, is adviser adoption. In order for this to occur, process and product solutions should work to provide a true path of least resistance to adviser adoption. “Solutions must be intuitive to use, products must be integrated, and it all should ideally exist on a unified platform prioritizing the adviser experience. Furthermore, reporting, documentation, and other information must be readily available to help advisers and their clients understand the benefits to them,” Horton concluded.
This report from Cerulli and Parametric follows closely on research from Cerulli which explores how model portfolios are emerging as the key to boosting the adoption of alternatives.
Headquartered in Boston, Cerulli Associates is an international research and consulting firm that provides financial institutions with guidance in strategic positioning and new business.
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