By FRAN HAWTHORNE FEB. 11, 2013. The New York Times
ONE of the tax-fairness controversies in the presidential campaign last year grew out of the news that 33 of the wealthiest Americans paid little or no income tax in 2009, in part because they probably applied stock market losses to counter capital gains.
If they did, they now have plenty of less exalted company.
That tactic, called tax-loss harvesting, is one of several sophisticated financial techniques no longer confined to the ultrarich — say, those making more than $200 million, with the means to deploy family offices or personal bankers to the task. Because of a combination of technology and entrepreneurship, people a rung or two down the wealth ladder — with perhaps $250,000 to $10 million in investable assets — can avail themselves of similar tools. Partly this is because technology has simplified and sped up the work for all income levels.
“Before, if you had a lot of money, you could have analysts doing all your calculations in a manual way, in Excel,” said Mike Paulus, president of Addepar, a three-year-old firm based in Silicon Valley that offers digital sophistication in portfolio aggregation. “Due to technology, we can democratize it,” he said.
The new products are a cut above the mass-market, do-it-yourself budgeting and retirement planning tools available online, often from mutual fund houses. Financial experts say the new approaches allow users to include more personalized and complex factors, like itemized tax deductions or the types of cars they hope to buy in retirement.
The techniques have grown over the last five years and now include comprehensive digital portfolio aggregation, a service offered by Addepar, and access to sophisticated investments, along with tax strategies like loss-harvesting.
They are usually marketed to financial advisers and planners, rather than to the investors themselves.
The tax strategies, in particular, will become more important than ever, proponents say, now that, under new fiscal cliff legislation, capital gains taxes have risen and deductions have been scaled back for the better-off.
But the reliance on technology worries even some people who market the tools and advisers who use them. “What’s important is the conversation with the adviser,” said Linda Strachan, senior vice president of product management for financial planning products at Zywave, a financial software provider based in Milwaukee. Zywave’s clients are financial advisers whose clients, in turn, typically have $200,000 to $2 million in assets.
The new products are most prevalent in the areas of financial and retirement planning and are becoming more common in investment strategy.
Jacque LeFore, president of LeFore Consulting, a financial advisory firm in Portland, Ore., is using a Zywave program to adjust the tax and spending strategies of a pair of retired technology managers from Idaho, with about $800,000 in liquid assets, as they start collecting Social Security next year. He also uses a cloud- based product called eMoney for cash-flow planning and for aggregating investments and liabilities.
People with $50 million or $100 million in net worth have “ hired C.P.A.’s and attorneys to do more proactive planning like this,” Mr. LeFore said.
Those in his clients’ income range — about $200,000 to $8 million in liquid assets — cannot afford that kind of personalized advice, he said. Yet earlier planning tools were not sophisticated enough to handle all their investments.
Joel P. Bruckenstein, a consultant and newsletter publisher who specializes in the technology of financial planning, said a financial plan that took eight hours to produce five years ago could now be done in two or three.
Technological innovation has also made some of the most exclusive investments — like hedge funds or their near equivalents — available to smaller accounts.
In theory, hedge funds typically demand a minimum investment of $1 million, although even that amount cannot guarantee access to the best managers, who may be so popular that they have shut their funds to all but their close friends. But Maz Jadallah, a money manager in San Franciso, said he had built a portfolio that “clones” the strategies of top-performing hedge fund managers by tracking their
specific holdings, which they are required to file with the Securities and Exchange Commission every quarter.
The minimum investment in one of his AlphaClone accounts, which began in 2008, is $100,000, and his clients have $500,000 to $5 million in investable assets.
Of course, markets change, so planners must constantly readjust. That is where strategies like tax-loss harvesting come in.
In 2005, three financial advisers from different firms created an automated market-monitoring tool, which they later sold to TD Ameritrade, called iRebal, short for Intelligent Rebalancing. Rebalancing means that iRebal — and rival products like Tamarac and RedBlack — constantly buy and sell holdings to ensure that each person’s account maintains its desired overall allocation to various asset classes, even as markets shift and particular stocks and bonds gain and lose value.
This strategy becomes even more complex when programs aim to do it in the most tax-efficient way.
Before these automated products were available, said J. D. Bruce, president of the wealth management firm Abacus Wealth Partners in Los Angeles, the process was so labor-intensive that his firm could handle only a monthly rebalancing for most clients. Now, it is done at least twice a week.
True, that still may not be up to the standards of the superrich. A family office “has a team of people that’s watching your portfolio every day, looking for rebalance opportunities and tax-loss harvesting,” said Christopher J. Cordaro, one of the creators of iRebal and chief executive of RegentAtlantic Capital, a wealth management firm in Morristown, N.J. Perhaps a more automated tool will eventually help less wealthy investors catch up to that.
Most of these new tactics would not be possible without advanced technology, including crowdsourcing, cloud computing and ever-faster database analysis. In creating Addepar’s framework, Mr. Paulus, the president, said, “We borrowed how Google looks at the world and how Facebook looks at the world.” In addition, the company collected ideas through open-source Web communities.
But many experts caution that personal, professional advice must still accompany such tools.
Mr. Bruckenstein, the newsletter publisher, said that even the snazziest computer programs were no better than the assumptions put into them regarding inflation, investment returns, interest rates, taxes and future earnings. “Garbage
in, garbage out,” he said.
Mr. Bruce of Abacus, though, said that technology like iRebal actually
improved the conversation with clients. Because what he calls “the arcane
underpinnings” are so smooth, he said, “now we can talk about the things that
really matter, which are people’s feelings around their money.”
A version of this article appears in print on February 12, 2013, on page F3 of the New York edition with the headline: Tech Can Help to Keep Up With the Big Money.