Latest news with #taxefficiency
Bloomberg
3 days ago
- Business
- Bloomberg
Wall Street's Rush to Launch Vanguard-Style Funds Draws Warnings
Exchange-traded funds have amassed trillions of dollars by offering investors greater tax efficiency, liquidity and lower costs than mutual funds. Now, a looming regulatory shift is poised to bring the two vehicles closer together — and threatens to complicate the very features that fueled the ETF boom. The US Securities and Exchange Commission is expected to approve applications for dual-share-class structures, perhaps as soon as this summer, allowing managers to add an ETF sleeve to an existing mutual fund. More than 50 firms, including BlackRock Inc. and State Street Corp., are waiting for the regulator's greenlight to deploy the hybrid structure — made possible after Vanguard Group Inc. 's exclusive patent expired two years ago.
Yahoo
22-05-2025
- Business
- Yahoo
Trillions in SMA assets ripe for tax-friendly ETF 'exit valve'
The appreciated assets locked in tax limbo from the capital gains in separately managed accounts amount to a massive opportunity for ETF conversions, a new study said. About $2.7 trillion in SMA holdings, including $1.6 trillion among wirehouse clients and $484 billion with customers of registered investment advisory firms, could use "a rotation into a more tax-efficient solution, given how much advisors' clients dislike paying taxes on investments," according to a report last month by research and consulting firm Cerulli Associates. The increasingly popular Section 351 conversions of assets into ETFs defer capital gains and bring much more efficiency and lower costs for financial advisors, fund companies and wealth management service providers. Consolidation at RIAs is fueling the ETF transfers, too. However, experts caution that the process poses technical challenges and involves strict compliance rules requiring diversification of the holdings. While Section 351 conversions are "not something that every advisor could or should do," the move (named after a provision of the tax code) has generated "so much demand for the service that we don't need salespeople," said Wes Gray, CEO of ETF technology firm ETF Architect and asset management company Alpha Architect. The 351 conversions have become essentially "all we do on a go-forward basis" at the tech firm, noted Gray, whom Bloomberg has described as a "tax-slashing ETF trailblazer." "It's extremely complex, and it's very useful for people who manage money for high net worth, taxable types and deal with hodgepodge portfolios all the time," Gray said. "It's a lot of work, a lot of effort, and it's not easy. It's not like you just press buttons." READ MORE: Using tax-aware long-short vehicles to track down alpha So-called white-labeling services, such as ETF Architect, Tidal Financial Group and other wealth and investment technology firms like SEI and Ultimus Fund Solutions, assist portfolio managers with ETF launches and help advisors and their firms carry out the migration of assets, according to Cerulli. Last March, asset manager Eagle Capital Management "ignited industry interest" with the conversion of $1.8 billion in SMA assets into the EAGL ETF, the report noted. Rockefeller Capital Management and Nicholas Wealth Management have also created ETFs through the conversions of SMAs and other kinds of holdings. The method can act as "an exit valve for some separate accounts that have exhausted tax-loss harvesting or simply become too operationally burdensome for the advisor or asset manager" and "serve as an efficiency tool for the advisor, including as a way to deliver their strategy to clients and charge fees for it," the report said. Direct indexing available through the SMAs "had been considered a competitor to ETFs," but the conversions are getting more attention because of those capabilities, it noted. Besides the assets in SMAs, another pool of client holdings in the form of $9.5 trillion of individual securities could flow into ETFs. "While not all of this can or will be converted, the top-level asset pool is huge," the report said. "Cerulli finds a particularly applicable archetype of advisor who may be running their own SMA strategies for clients. These advisors, classified by Cerulli as insourcers, may believe they have strong investment selection abilities and in functioning as de facto asset managers, at times create separate account portfolios for their clients — a task difficult to scale and one from which wealth management firm owners will seek to shift away." READ MORE: How to unlock tax savings in incoming client portfolios And those scenarios could especially play out in the case of the frequent RIA M&A deals, since the transfers enable acquirers to "combine assets across the firm" into an ETF and "gather scale for the strategy," said Daniil Shapiro, a director with Cerulli's product development unit. The SMA transfers to ETFs represent "an interesting theme to keep an eye on in the medium term," Shapiro said. But the technical constraints will slow the process down at many firms. "You probably have discussions that are happening right now between ETF issuers and scaled RIA firms," he said. "It's important to consider this within the scope of the broader ETF industry. This is going to take a significant amount of time before we see scaled conversions of tens of billions of dollars." SMA conversions to ETFs entail jumping over at least seven logistical hurdles and navigating four types of regulatory factors, according to another report on the process by ETF Architect. For example, the current SMA clients must give their formal permission, and the firms need to keep thorough records on the transaction and coordinate it with one or more custodians. In addition, they'll have to ensure there are sufficient assets to make the process feasible and that the makeup of the new ETF aligns with the fund prospectus and complies with the regulations for investment companies, diversification mandates and formal "control" of the holdings. "It's actually really complicated and takes a lot of work. It's not like we just whip it up," Gray said. "I would say, today, a lot of people still don't know how ETFs operate. A 351, it's even more complicated, more esoteric." READ MORE: Wall Street brokers risk losing billions in fees on SEC shift For SMA investors, the problem lies in the fact that, "Once you've got low basis in these things, you can't do much," and "all 351 does — and the reason it's so disruptive — is it allows capital to flow freely" without any tax hits, Gray continued. The conversions are "going to rip out tons of operational complexity that the RIA is dealing with" as a result of "managing all of these Frankenstein portfolios," he said. Cerulli's $2.7 trillion estimate of the possible amount of SMA assets ripe for conversion sounded correct to Gray. Further transfers are likely, if the Securities and Exchange Commission approves the creation of ETF share classes in mutual funds sought by all of the largest asset managers after the expiration of Vanguard's patent. "What they don't know, because they're not that smart, is that all that's going to do is open them up to massive 351 exposure," Gray said. "It's just not looking good for people who don't have a real value proposition anymore. You can't lean on the sunk tax cost, which is a real problem."
Telegraph
20-05-2025
- Business
- Telegraph
What is a stocks & shares Isa?
A stocks and shares Isa is a valuable tool in an investor's belt. A tax-efficient and flexible way to gain access to the stock market, these accounts have continued to increase in popularity since being launched in 1999. Nearly four million stocks and shares Isas are paid into each tax year, and savers contribute more than £25bn a year. Whatever your investment experience or wealth, a stocks and shares Isa can be the ideal place to grow your savings without needing to worry about paying capital gains tax or dividend tax on your returns. In this article, Telegraph Money explains: What is a stocks and shares Isa? Benefits of a stocks and shares Isa Choosing the best stocks and shares Isa How to open a stocks and shares Isa How to transfer a stocks and shares Isa Stocks and shares Isa FAQs What is a stocks and shares Isa? A stocks and shares Isa is an account that can hold a range of investment products. These could be: Unit trusts Investment trusts Exchange-traded funds Individual stocks and shares Corporate and government bonds Open Ended Investment Companies (OEICs) Essentially, you open the Isa, add money to it and make investments, which over time will hopefully grow with compounding interest and increase your balance. Many banks offer them, as do a host of investment platforms. You might decide to get one that's managed for you, or you can do it yourself. There are three other types of Isas for adults: Cash Isas. These work in a similar way to savings accounts; your money is saved as cash and you'll earn interest on what you save. Innovative finance Isas, which offer 'peer-to-peer' investing. Lifetime Isas, which help you save for your first home or retirement. Each type of Isa comes with its own features, benefits and drawbacks, so it's important to spend time deciding which is the right one for you. The one thing they all have in common is that investment returns or cash interest are all tax-free. Benefits of a stocks and shares Isa This kind of Isa comes with some important benefits. Any money you make is tax-free. Like other Isas, they're often known as 'tax wrappers', because they protect your cash from charges such as dividend, capital gains and income tax. Freedom of choice. What you do with the money in your Isa is up to you. Most providers offer a range of funds, investment trusts or individual shares, as well as ready-made portfolios that do the heavy lifting for you. However, you can just choose your own if you decide to. Flexibility. Once you make an investment, you might make money from dividends on shareholder payouts, or from selling it for more than you paid for it – realising a capital gain. You don't have to invest your whole fund at once either and you might receive interest on the money that sits in your account. However, investment comes with risk, so you can lose money as well as make it. The rate of return also varies significantly because people invest different amounts in different opportunities. This makes it difficult to quantify how much you can make, but the graph below gives an idea of how much stocks and shares Isas have made on average in recent years. Rachel Springall, of said: 'A stocks and shares Isa would traditionally be chosen by investors who are prepared to invest for better returns over the longer term on the basis that performance might fluctuate over shorter timescales. This makes it an essential habit to regularly check the performance of their pot. 'Past fund performance is never guaranteed to be reflected in future returns, so it's crucial investors are comfortable with their attitude to risk. The most suitable Isa for any saver will depend on their own circumstances, but they can always seek advice if they are unsure on what to do with their cash.' How do stocks and shares Isas work? A stocks and shares Isa works in a similar way to a general investment account. There are three main ways to operate your Isa: Self-manage. You use your Isa to buy and sell your own investments, choosing from the ones your provider offers. As long as you have cleared funds, you can do this at any time, and most people manage their accounts online. There's usually a charge for each trade, but some platforms offer free trades. Ready-made. You might decide to pick a portfolio that your provider has put together. In this case, all you need to decide is how much to invest and the level of risk you're comfortable with. Managed by an expert. You can also pick a managed Isa, where you're asked questions about your financial goals and appetite for risk. The decisions are then made for you, though the fees for this are generally higher. You can only deposit up to £20,000 per tax year. You can either deposit the whole amount into one Isa account, or split it among several Isas. When it comes to withdrawals, these are unlimited and you make them whenever you like. However, you must withdraw the money as cash, so if you don't have enough available, you'll need to sell investments (at the current market price) until you do. A withdrawal does not necessarily count against your yearly allowance. It all depends whether your Isa is 'flexible', which your provider should be able to tell you. If it is, you can take out cash and put it back in without reducing your yearly allowance. For example, say you put £10,000 into an Isa then took out £3,000, your remaining allowance would be £13,000. This is the £10,000 you had left of your £20,000 allowance, plus the £3,000 you took out. If it's not flexible, then your allowance would now only be £10,000. Choosing the best stocks and shares Isa This is an important decision and requires careful thought. As with any investment, it's important to spend some time shopping around and choosing the right stocks and shares Isa for you. Considerations will include: Price Service Product features The range of investment options available These will vary significantly, so take your time in choosing and consult a financial adviser if you think you need to. Tom Selby, of investment platform AJ Bell, said: 'Picking a value-for-money provider is crucial to making the most out of your Isa investments. 'While the cheapest provider might not necessarily be the right one for you, keeping your costs as low as possible is critical to maximising your long-term investment returns.' Here are some illustrative rates from major providers for deposits of less than £100,000. How to open a stocks and shares Isa Once you've picked the Isa you want, there are various steps to actually opening it. Begin an application. Some providers will allow you to do this by phone, by post or in person, but most people opt to do it online. You're likely to be asked for name, address, date of birth, mobile number and National Insurance number. Consider your eligibility. You can open a stocks and shares Isa for yourself if you're 18 and resident in the UK. If you're a member of the armed forces, a Crown servant or their spouse or civil partner and live abroad, you should still be eligible, although they can't be held as joint accounts. Decide how to fund your account. You can usually do this by debit card as a one-off payment or make regular contributions via direct debit. You'll need to provide these details when you apply, but you can always change your mind later. Consider some investments. After you've opened and funded your Isa, you can start making decisions on where to invest. Danny Cox, of investment firm Hargreaves Lansdown, said: 'Once your money is in your Isa, investing is very straightforward. A few clicks through your online account and the deal is placed. If you are unsure where to invest, ready-made investment funds are a simple way to get started.' Mr Selby added: 'Setting up an Isa online is easy and should only take you a few minutes. 'Of course, setting up the Isa is only part of the story. You also need to pick a balanced portfolio of investments that's aligned to your appetite for risk and investing goals. If you aren't sure where to start, lots of providers offer ready-made investments targeted at different risk appetites.' Managing your stocks and shares Isa If you've opted to manage your own fund, it's important to monitor its performance to see if it's making progress towards your financial objectives. You'll usually be able to do this online. You'll be charged a fee by your provider for managing your Isa, which is often a percentage of your whole fund, so this can be an important consideration as it grows. Most providers charge a fee for each trade or investment you make, too. Even if your Isa is partly or fully managed, it's still important to check that it's making the progress you need. You can switch your Isa to a different provider if you see another deal you think will deliver more for you. As long as you're outside any fixed term, this will usually be free, but check before you commit. Mr Selby said: 'It is good practice to regularly review both your portfolio and your provider, ideally once a year if you can. You should also do this if your circumstances or investment goals shift. 'This reviewing process won't necessarily result in a shift in provider or approach, however. Only if you feel you are no longer getting value for money from your current provider, or a rival becomes better value, should you need to consider changing.' Risks and considerations Although it's certainly possible to make a good return, there are risks to stocks and shares Isas: Volatility. The value of your investments can go down at any time. You can lose some, or even all, of your money. Cashflow. Investments in stocks and shares Isas are generally not designed to be short term. If you're likely to need the money back quickly, this might not be the right product for you. Panic. It's generally wise to invest for a few years and avoid knee-jerk reactions if there's a downturn. Remember – there is risk attached to stocks and shares Isas, but investments need time. They can recover from a downturn to make a profit. Mr Selby said: 'Keeping track of your portfolio is sensible, but it's important not to get sucked into overtrading or panicking if you experience a short period of investment underperformance. 'Provided you are comfortable with the risks you are taking, and your goals and time horizon haven't shifted, sitting tight is usually the most sensible thing to do. If you overtrade your investments, you risk paying a bucket load of charges and seeing your portfolio drift away from your original intentions. 'One good way to get into the investing habit and smooth out your returns is to set up regular investing, say on a monthly basis, so it's aligned with when you get paid.' Stocks and shares can be complex, and it's important to make sure you have enough time, information and expertise to make decisions. If you're inexperienced but still want to make investments yourself, you might want to take regulated financial advice. How to transfer a stocks and shares Isa Your provider has to allow you to transfer your Isa out, although there's no obligation for any provider to allow a transfer in. You can make the transfer in a few easy steps: Do some research and choose the right Isa for you and your circumstances. Contact your Isa provider. Fill out an Isa transfer form. Wait around 30 calendar days for the transfer to complete. If it takes longer, contact your initial provider. However, there are some crucial things to remember when transferring. If you want to switch to a different provider, you'll need to use your provider's Isa transfer process. If you close it, withdraw the money and put it into another Isa yourself, then this will count towards your £20,000 annual Isa allowance and reduce it. If you use the transfer process, it won't. You can transfer money from a cash Isa to a stocks and shares Isa, or vice versa if you'd like to. You can choose how much you transfer – so you don't have to transfer it all. Fractional shares within your Isa can't be transferred like this. The only way to change providers for these is by selling them and using the money to reinvest once your Isa moves. Any gains will still be free from capital gains tax though, as they will be coming from an Isa. Sarah Coles, of Hargreaves Lansdown, said there were a variety of reasons to consider transferring. She said: 'Think about what's most important to you, and whether your current provider offers it. Do they have the range of investments and tax wrappers that you need – especially if you want everything under one roof? 'Think about the functionality you'll need. Do you want to, for example, be able to manage money for your whole family through linked accounts, and is it offered by your provider? 'Most people want a great online service and someone on the end of the phone if they need them. Some will also want a provider who can offer financial advice if they need it. Consider what you want, and whether your provider is offering it. Check out the research and support that's available online too, and whether you have access to everything you need. 'It's also important to check that your provider doesn't charge large exit fees, which can make transferring a very expensive business.' How long should you keep your money invested in a stocks & shares Isa? This depends on your overall investing goal, but typically, the longer you keep your money invested, the greater the returns. Thanks to the snowball effect of compound interest, your investment can keep growing year on year without any extra effort from you. Most experts recommend waiting for at least three to five years before withdrawing from your Isa, so your investments can weather fluctuations in the market. Many use stocks and shares to boost their retirement funds in the distant future. There are around 4,000 'Isa millionaires' in the UK, who have built up a tax-free seven-figure sum. If you started saving today and the Isa limit remained at £20,000, it would take you 25 years to become an Isa millionaire, assuming an average annual return of 5pc. While longevity tends to be the best option, it isn't always that simple. Make sure to keep track of how your stocks and shares portfolio is performing, and weigh up when you'd like to take out your money. Global shifts, such as the recent US trade war, can send the value of your portfolio plummeting, and it can take time for your investments to recover. Stocks and shares Isa FAQs What happens if I die? When you die, the money in your Isa will go to your beneficiaries. However, they generally form part of your estate, meaning inheritance tax could be due if you're particularly well off. If your spouse or civil partner dies, there's a tax-saving mechanism that means you can inherit their savings tax-free – but they'll need to follow the rules, and these can be complex. What if my provider goes bust? Some or all of your money will be safe as long as your provider is protected by the Financial Services Compensation Scheme (FSCS). If it is, up to £85,000 of your money will be reimbursed if that provider goes out of business – but you can't call on it to replace money lost as a result of poor investment performance. There is no limit to how many Isas you can have and as long as they're with providers protected by the FSCS, each one will be protected up to the £85,000 limit. However, anything over this threshold is not protected and it £85,000 is per provider, not per account. If you have more than this, you might want to consider spreading your money across different providers and banking institutions, rather than having all your eggs in one basket. How much should I put into my Isa? This depends on your circumstances, but the one rule that's the same for everyone is making sure you only deposit up to £20,000 across all Isas in the same tax year. As a general rule of thumb, experts suggest you have three to six months' worth of outgoings in 'rainy day' savings. After that, you can begin to invest in the stock market through an Isa. However, everyone's financial circumstances are different. You can always withdraw money from the account, but if you don't have enough cash in there, you might have to sell some of your investments. This risks not leaving them enough time to grow and you could miss out on your fund increasing, or even have to sell at a loss.
Forbes
13-05-2025
- Business
- Forbes
Tax-Efficient Wealth Strategies For High-Income Investors
Tax-efficient wealth strategies can help you align your financial goals with smart structures and investment vehicles that legally minimize your tax burden. getty For high-income earners and ultra-high-net-worth individuals, one of the most pressing concerns isn't just how to grow wealth. There are also questions regarding ways to keep it. As income rises, so does the complexity of the tax landscape. Tax-efficient wealth strategies can help you align your financial goals with smart structures and investment vehicles that legally minimize your tax burden. In this article, we'll take a high-level look at three powerful strategies: private equity investments, municipal bonds, and Opportunity Zones. Each offers unique advantages for those looking to preserve capital and grow wealth over the long term. Unlike public market investments, private equity deals often delay taxation until a liquidity event occurs. This could take the form of a sale or IPO. The deferral of capital gains allows more of your money to stay invested longer. In addition, many private equity structures qualify for long-term capital gains treatment, which is taxed at lower rates than ordinary income. As an investor, you could also benefit from depreciation and amortization, which reduce taxable income while still allowing your investment to grow. If you're in a high tax bracket, you may be attracted to the tax-exempt benefits of municipal bonds. These are issued by state and local governments, and they collect interest that is free from federal taxes. They may also be exempt from state and local taxes if you live in the issuing state. You might choose municipal bonds as a way to bring balance to your portfolio. In a shifting market, they could provide some diversity if you also hold stocks. Bonds generally provide steady returns, which could make them a smart choice for preserving capital. If you are a high-net-worth individual and are nearing retirement or seeking steady income with minimal tax exposure, you might consider municipal bonds. Introduced as part of the 2017 Tax Cuts and Jobs Act, Opportunity Zones refer to a tax incentive program. They are designed to generate investment in economically distressed areas. If you are thinking about investing in Opportunity Zones, it can be helpful to be aware of the benefits they offer: By using a combination of investments and structures, high-income individuals can find ways to protect their wealth for their families and beyond. If you're an accredited investor, you might decide to use private equity and municipal bonds, or to invest in Opportunity Zones to reduce your tax liability. You'll need to work closely with a tax professional who is aware of your financial goals and can present options to you so you're able to make decisions that are best for your situation.
