How to Help Clients See the Benefits of Tax Loss Harvesting

A worried businessman doing paperwork in office

You can teach that while no two funds are exactly alike, mutual funds and ETFs invested in a specific sector or industry can be very similar. Often we can identify two funds with marginal differences in the underlying holdings.

For example, not all U.S. technology funds are the same, but there are surely some whose holdings are similar enough to produce immaterial differences in performance and exposure. Knowing this, “Fund A” can be sold and on the same day “Fund B” can be purchased.

While they are not the exact same investment, you can comfortably educate your client that their overall allocation and strategy has effectively remained intact. The result is harvested losses that can offset future taxes while keeping the client invested in the long-term strategic investment plan.

Calming Clients’ Fears

Back to the dilemma of communication. What seems to be an obvious benefit to our clients may not be a psychological benefit if they don’t understand it. And at the end of the day, much of our job is to function as a therapist, listening to our client’s fears and calming them from making a bad decision — like selling when good investments are down.

This brings us full circle. Harvesting tax losses is the correct, proactive move we should be performing as investment professionals. Explaining this benefit to clients, however, is the more difficult task.

Don’t assume they understand what you are saying. Don’t assume they will be excited and pleased at the action. It is just too conflicting of a concept.

Here are some ideas on how to positively impress your client on this issue:

Take your time, and have more than one conversation about it.
Maintain conviction that in a year when market losses continue to compound, at least you are giving them a future asset.
Going forward in time, make sure your clients have a clear memory of the actions taken.
Starting with the filing of their 2022 tax returns, point out the losses they get to carry forward as shown on Schedule D.
Frame it as a new asset to be added to their balance sheet. This may not change their sentiment yet, as it’s a reminder of the tough year it was.
Going forward, these markets eventually will start to produce growth.

Each time a client has a profit you want to take, or their portfolio requires rebalancing out of equities because of stock appreciation, you can have the conversation. “Hello client, you made good money in your investments, and you are paying no taxes on the gains!”

It is then, finally, that your client will fully understand the benefits of your efforts. It is then they will see the value a financial advisor brings to their balance sheet in down years.

Oh, how I look forward to that time. But for now, in 2022, let’s keep harvesting losses by planting tax asset seeds for the future.

Noah Rubin, CFP, MBA, is a managing director–Investments and financial advisor at the Rubin Wealth Management Group of Wells Fargo Advisors in Boca Raton, Florida.

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