Wealth Management Strategies for Significant Assets

By Brian J. Cunningham, CFP (R)

As discussed in my previous blog, I offer several investment opportunities that are particularly attractive to wealthy clients. Many of these strategies are not available to all wealth managers. My high-net-worth clients may benefit from sophisticated strategies that help minimize their capital gains tax liability. During my first consultation with potential clients possessing significant assets, I often find they are unaware of the range of tools, products, and programs we can utilize to impact their portfolios.

One challenging concept to grasp is that there are times when realizing a loss within their portfolios can be advantageous when used to offset anticipated capital gains taxes. No one likes to hear the word "loss" regarding their finances. However, by the end of the tax year, the logic can become clear when it's apparent that a realized loss might reduce one's tax burden. 

When we anticipate that a client will experience significant gains—such as from selling a business, real estate, or a profitable stock—we proactively plan ways to mitigate the taxes generated by these events. One effective strategy can be direct indexing.

Direct Indexing

Direct indexing is a strategy to reduce tax liability through tax-loss harvesting within a direct indexing portfolio. This type of portfolio is managed using sophisticated software and algorithms that track an index's components and weightings. Instead of purchasing a fund, individual stocks that comprise the index are bought directly. For instance, a direct indexing portfolio might mimic the S&P 500. Typically, within any 12 months, even when an index performs positively, certain stocks in that index may perform negatively. For example, this year, the index experienced declines amid discussions about tariffs in March and early April.

Portfolio managers using direct indexing have similar investments ready, so when a stock's performance dips, they can sell it to create a tax loss and immediately reinvest in a similar stock, a transaction that allows the client to claim the loss, while still being "fully invested." Conversely, a "wash sale" is disallowed by the IRS. In a wash sale, an investor sells or trades a security at a loss and purchases "a substantially similar one" 30 days before or 30 days after the sale. The IRS enacted this rule to prevent investors from using capital losses to their advantage at tax time. (U.S. Internal Revenue Code Section 1091: Loss from wash sales of stock or securities). 

In a typical year, the portfolio managers aim to match the index's returns, plus or minus. Generally, the client receives stock market returns, but each year, managers strive to generate between 5% and 7% of the account value in tax losses. If a loss isn't utilized in the current year, it can be carried forward indefinitely.

Why It Can Work

High-wealth clients who benefit most from a direct indexing portfolio often struggle to understand that they may need to "lose" money to ultimately pay less to the IRS. I explain that if, for example, you started the year with an investment, and the index dropped by 20% in March but rebounded by year-end, doing nothing would result in a gain and tax liability. However, if you sold the asset, purchased a similar one, and stayed invested, you would benefit from the decline, the subsequent recovery, and the tax loss for harvesting. 

Direct indexing is especially attractive because it adheres to the IRS's "wash sale rule." This regulation states that you cannot repurchase the same or substantially identical investment within 30 days before or after the sale date, covering 61 days, including the sale date. If a loss harvest sale violates this rule, it cannot offset other gains or income and would instead be added to the cost basis of the repurchased stock. Given how rapidly the market can change over those 61 days, being sidelined can frustrate many investors.

The Downsides of Success

Some wealthy clients express their concerns by stating that paying capital gains taxes makes them feel like victims of success, as do potentially higher fees and minimums. They often ask, "How can I manage this windfall, which I rightfully earned by making sound decisions, without being burdened by the IRS?" Currently, capital gains rates remain relatively stable due to recent tax legislation. Individuals in lower tax brackets might pay zero capital gains for a specific period, then 15% when their income rises. Loss harvesting benefits wealthy individuals in higher brackets, who may face a 20% tax rate. When state taxes—ranging from 5% to 8%—are added, tax-loss harvesting can significantly reduce their overall tax burden, allowing them to retain more earnings.

Want to Know More?

Direct indexing may not suit every wealthy client, nor do I endorse it universally. Sophisticated wealth management requires careful consideration and an understanding of individual financial circumstances. If you want to learn more about these opportunities, please get in touch with me at your convenience.   

This material is for general information and educational purposes only and is not intended to provide specific advice or recommendations for any individual. Investing involves risk, including the loss of principal. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. This material is for general information and educational purposes only and is not intended to provide specific advice or recommendations for any individual.

Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal.​ Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

September 4, 2025