Tax-Smart Strategies for Maximizing Retirement Income with Mark Hoffman and Paul Samuelson

Jack Sharry: Hello, everyone. Thank you for joining us for this edition of WealthTech on Deck. The Investment and Wealth Institute, IWI, recently invited my colleague, Paul Samuelson, to write a white paper on asset location. As we all read and hear and know, taxes matter to investors and advisors a lot and most want to figure out how to minimize taxes, and in our world, that means how to minimize investment taxes. Paul has been a portfolio manager and has written algorithms that power investment software for more than four decades. He is a founder and the Chief Investment Officer at LifeYield, and has spent the past 16+ years devising algorithms around minimizing taxes and maximizing retirement income, all part of a robust asset location process. So no wonder that IWI invited Paul to share his findings in a paper that appears in the October/November 2024 edition of IWI’s Investment and Wealth Monitor. The title of the paper is “The Critical Trend of Applying Asset Location in Wealth Management.” I also invited another LifeYield founder, Mark Hoffman, to join our conversation. Mark serves as CEO of LifeYield. He works closely with Paul to turn Paul’s algorithms into industrial strength software that is used by many of the largest financial institutions in the world. Today, we will talk about what Paul has written about in the white paper, how Mark has converted that to software that is designed to improve financial outcomes for investors, advisors, and firms. Paul, Mark, welcome back to WealthTech on Deck.

Mark Hoffman: Great to be here, Jack. Thanks.

Paul Samuelson: Nice to be back.

Jack Sharry: So Mark, we’ll kick it off with you. Why don’t you start by just defining, what is asset location?

Mark Hoffman: Well, asset location is the process of simply placing the most tax efficient assets into an investor’s portfolio, into their taxable accounts, and then placing the most tax inefficient assets of the investor’s portfolio in their IRAs, or qualified accounts. A simple example would be putting bonds in the IRA, because the bond income is taxed at a higher rate, and putting low turnover stocks in the brokerage account, because long term capital gains are taxed at a lower rate, so you’re basically getting a higher after tax return for the portfolio without changing the asset allocation of it at all.

Jack Sharry: And why don’t you just describe a little about where it fits into an ecosystem, into a platform. Often it’s either in the planning tool, proposal tool. Why don’t you just talk about where, where the software resides, at least in the initial stages, as people are setting up their household level or multi account portfolio?

Mark Hoffman: Well, it really depends upon the firm, where they want it to reside. Some firms have it reside in multiple places. I guess what I would do is I’d talk about a little bit about how the industry has been changing. Years ago, things were just very transactional and very product oriented, single account oriented. But over the last 10 years or more, and particularly in the last several years, clients have been demanding of their advisors to provide them solutions, you know, to help them reach their goals. You know, to help articulate what’s the reasons that they’re saving their different money. And so those are holistic solutions by nature, where you need to take a look at all of the client’s assets, what they’re saving in their retirement accounts, what they have in their brokerage account, maybe other things as well. And so with a holistic approach, you really do need to look at things in terms of after tax returns, because, like I said, you can have the risk profile of a client that’s expressed in terms of an asset allocation, and it can be the same, the asset allocation, across your multiple accounts, but you’re not getting the highest after tax return, which is what the investor actually gets to keep. So financial planning systems are one good way to be able to look at multiple accounts and then to have the financial plan implemented, you really do need to consider asset location. Investment proposal systems are also multi account, and that’s another area of technology where advisors can then take a look at both the asset allocation but also the asset location to get the highest after tax return for their clients.

Jack Sharry: Terrific. So, Paul, you cooked up this idea way back when. Let’s go back in time, what experiences, lessons led you to focus your work on helping advisors produce better outcomes for their investors using asset location.

Paul Samuelson: Well, I’ve, like Jack, perhaps not so much Mark, I’ve lived for a long time, so I have experienced most roles of a multi generational family. I have not yet experienced old, old age…

Jack Sharry: Right. But it’s coming, Paul, it’s coming.

Paul Samuelson: Yes, or the loss of a spouse, or preparing to predecease the spouse. But most of the other roles, I’ve been a participant, and I was lucky enough to be introduced to investments at age 18, when I was supposed to sign some papers for a trust fund. But I really didn’t pay attention to it at all, it was just something my father was up to, until I had gotten a master’s in finance, and then I thought it was time that maybe I should pay a little bit of attention. And I have five siblings, and two of them, besides myself, have PhDs, one in economics, but my father helped to manage their accounts until his old age, and then they all had the good sense to get advisors to help them to manage the accounts. So I’m sort of the only one, and it’s just because I want to have the experience, which then can be translated into software of performing, you know, what’s really a very complicated set of tasks.

Jack Sharry: Yeah, we’ll get into that complexity in a little bit. But really, one of the things that should be underscored for our audience, because we’re hearing lots of different people talking about tax optimization and tax alpha, but asset location is inherently a multi account exercise. Do you want to, want to wax poetic on the importance of having it be multi account? For us, it’s obvious, but maybe not everyone understands that.

Paul Samuelson: Well, essentially, it’s similar to what Mark said, that certain assets are likely to be more tax inefficient, but it doesn’t always land the way you would expect. So for investors who happen to hold low turnover stock portfolios, which can either be associated with just holding stocks directly or holding index funds that have very, very few capital gain distributions, you can effectively have quite tax efficient equity investing, as long as you’re willing to pay great attention to sales of stock.

Jack Sharry: We’ll get into that in a little bit more. But basically, where you hold it matters, and also as, as we’ll talk some more about, it’s important also to not just do tax loss harvesting, but also locate the assets properly. We’ll get into that in a little bit. So, Mark, you work with wealth and asset managers who are building modern portfolio management systems, or what I also call comprehensive advice platforms. How tuned in to asset location are they and what are they doing to harness the potential?

Mark Hoffman: I think many of them are tuned into asset location because they have to be, because their clients are demanding it, and advisors these days who are offering solutions, think in terms of financial planning or investment proposals like we talked about, are really hanging their shingle out with the goal of, you know, helping their client strategically and giving them advice, as opposed to just selling them a product, and talking about the stock market and the bond market and returns. So the advisors have had to adjust over the last few years into being solutions providers for their client and actually focusing more on what the needs are than what their needs might be in terms of just selling a product and moving on. So I think all the firms are thinking about it. The real issue is, can they implement it? Because knowing about it and talking about it with your client doesn’t do any good if you can’t actually put your money where your mouth is and implement the asset location to get your client the actual benefits.

Jack Sharry: Yeah. So, Paul, in the white paper you did for IWI, by the way, for our listening audience, we’re going to include a link in the podcast notes. In that paper, Paul, you modeled a hypothetical scenario of a client household and how asset location significantly improved their outcome is 10 years later. So can you describe for our audience the types of clients who stand to gain the most from asset location and a little bit about that example?

Paul Samuelson: Yes. Well, in general, and this is where I’ve, luckily enough, had a lot of experience, the people who benefit most from asset location are the people who have high earned income. And significant accumulated or accumulating investment assets. So those are the people where it really matters a lot, and they’re likely to be the clients of the advisors, often only for one type of account, but if you can provide a solution for more than one type of account, you know both their defined… at least take into account their defined contribution, their their Keogh assets, and their brokerage assets, you’re likely, over time, when they’re restricted positions are no longer restricted, you’re likely to get those assets. And that’s what you want. You want the all the household assets, but in particular, the larger accounts and where there are small accounts, you want to be able to provide advice either how to roll up those accounts or just manage them in a cost effective way.

Jack Sharry: So, Mark, the concept of asset location is solid. It’s been proven by a whole bunch of firms. I know Envestnet, EY, Morningstar, I’m leaving one out, but… Vanguard, all have done studies. They all say about the same thing. So we know that asset location works. Interestingly, all the firms that have done studies can’t do it, haven’t operationalized it, but they talk about how important it is, interestingly. And we know it’s critical for firms that want to achieve the ability to deliver on a UMH, that’s become the cause celebre of late, it seems. I guess, the basic question, can advisors do it on their own?

Mark Hoffman: Well, certainly. I was recently at a conference with advisors, and I got the opportunity to talk to a number of different firms, all of which were aware of, and these were RIAs, all of which were aware of asset location, and all of which had some form of it that they were performing for their clients. But they were very excited about our capability, because to a firm, they said, we can only do this for our top 10 clients or our top 15 clients on our spreadsheets. It’s just not scalable, and they really wanted to supply the same capability, the same benefit for all their clients, but it’s that complicated, and by nature, because each client is different and they have different savings and capacity in their IRAs and brokerages and different risk profiles, it’s going to be a unique, customized answer for each of the clients, and it’s just not a scalable capability. When it is scalable, using technology like ours, then the wealth management firm can actually not only provide scale to any level of client portfolio that they might have, but they can quantify the benefit in dollars and cents. So those advisors that were doing the work, even if it was manual or with a spreadsheet, they were never really able to quantify the benefit to say to their investor/client, here’s all the work I’m doing, and I’m saving you money that even covers the cost of my advisory fee and still gives you more back. So scaling it and putting it, operationalizing it with the technology provides both the benefit of being able to show the client what you’re doing for them and then actually doing it.

Jack Sharry: Yeah, and we’ll talk some more about that in a minute, but fundamentally, it improves the outcome for the client, and it can be demonstrated in dollars and cents, as you indicated. But it also, frankly, helps the advisor address the age old issue of, what do I get for the fee I’m paying for you? Especially if there’s a down quarter or whatever, you can just say, well, here’s what we’re doing in terms of after tax results. One of the things, Paul, that we find is that people are talking a lot these days about tax alpha or tax optimization, and what they’re really talking about is single account tax loss harvesting, which is great, should be done. In the case of LifeYield, it’s a multi account exercise, as everything else LifeYield does. Why don’t you make that distinction? What’s the difference between a single account tax loss harvest and a multi account, and what do you gain from that?

Paul Samuelson: Well, essentially, you will find that there are particular positions which were often purchased in a particular time period across more than one account. So you don’t want to find the best tax lots to sell to raise, you know, $100,000 in one account when you really should have been looking in another account. So there’s no, there’s no rule of thumb which would tell you, take it from this account or take it from that account, unless you are assembling the tax lots from both accounts and have the software to select the most favorable positions to sell.

Jack Sharry: Gotcha. And one of the things that we’re finding with direct indexing and programs that are designed for single account tax loss harvesting or transitions or both. Really, what it comes down to is that those are good, those should be taken advantage of. But really, when you talk about asset location, you’re looking at a variety of different factors, ultimately leaning toward multi account look at portfolio management, rebalancing, transitions, tax loss harvesting, and ultimately income generation. So we’ll talk a little bit more about income in a moment. But the whole idea here is to get the right stuff in the right place, maintain your risk profile and then just optimize in all the different ways that you can. And so Paul addressed this in the white paper with some examples. So why don’t we switch gears a little bit, Mark, and just talk about the technology that is so expensive to do this if you’re at the firm level. What can advisors and firms who are bold enough to take this on, what do they get from modernizing their portfolio management systems?

Mark Hoffman: Well, they get to add more clients. They get to focus on what is probably their best skill set, which is communicating with a client. Financial services is very complex. It always seems to be, and the client needs somebody who can translate and maybe minimize talking about the complexities and translate it into what the client is concerned the most about, which is, will I have enough… how much money do I need to save? And will I have enough money to last through retirement? And can I achieve my goals? Can I use my savings to supplement anything I might get from Social Security all the way down to hey, I need to, I’d like to buy a house in Florida, can I do that, withdrawal from my portfolio and minimize the taxes. So advisors who are spending the money on technology and updating their platforms so they’re explaining less to the client about investments in the markets and more about here’s how I can help you. Here’s what I’m saving you. I’m covering my costs because I’m managing things efficiently. You know, they get more and bigger clients.

Jack Sharry: So, Mark, a follow up back to the complexity question. Models are the rage. Everyone’s doing models of one description or another. You mentioned spreadsheets before. I would imagine managing multiple model models, it’s got to be pretty close to impossible. So talk a little bit about just basically the role of technology and parsing all that and figuring all that out in terms of how to manage multiple UMAs, if you will, or multiple models.

Mark Hoffman: Well, I guess I look at a model… and Paul can, can correct me or add to it, I look at a model the way that they’re being prescribed these days as an investable portfolio. So oftentimes, when the advisor is talking with a client, they want to assess what their risk profile is. Are they really risk adverse in a market downturn? Do they have anxiety, or are they a little less risk adverse? They don’t need to look at their portfolio balance every day. They’re willing to ride out events in the market, which goes up and down. So you’ve got to have a risk profile for a client, and that can be assessed and it’s placed on the client’s portfolio by the advisor. But that risk profile, or that asset allocation, if you will, needs to become an investable portfolio. And a model is just that. A model may be a set of exchange traded funds. It may be a set of mutual funds that have different exposures to different areas of the market, or even different asset types like fixed income and alternatives and equities. It may be individual stocks in a UMA or a combination of all of them, but really a model is an investable portfolio that’s an expression of the risk that that client feels comfortable taking with their investments that they want to have produce money for future things, future goals and future use.

Jack Sharry: Cool. So, Paul, a couple questions for you. Both are having to do with the different age brackets. There’s boomers like you and me. We tend to hang out with people like you and me, and then the next will be around millennials. But first, let’s, what do you hear from your friends today, about taxes, retirement, leaving legacies to family and charity. How does asset location help them? I know you addressed that a bit in the paper.

Paul Samuelson: Well, the important thing often with the brokerage accounts is that people have significant holdings of either mutual funds, stock mutual funds, or individual stocks with large gains, so that the challenge is to be able to make smart withdrawals, and that means trying to avoid the gains, occasionally relieving, reducing the concentrated positions, if one is making material amounts of charitable contributions, so that the donor advised funds are extremely useful… to be funded with appreciated stock. And fortunately enough, the taxable event is, which is a deduction, is… occurs when you make the donation to the fund, and not when you actually make a grant to a charity itself. The name of the game for lots of people is to avoid two mistakes. One is realizing gains unnecessarily in your brokerage account, and then the other mistake, which people make on a regular basis is to take very lumpy withdrawals from their IRAs and in general, what you’re trying to do is to smooth the withdrawals as much as you can, and you need to, with the help of a tax accountant estimating your other taxable income, you need to try and smooth your calendar year income. That ends up being the operative goal, and just to get to Mark’s point, advisors can explain somewhat complicated transactions to their clients if they fit a particular pattern. So that, you know, the boomers may… there may be an issue of how IRA withdrawals are made, and there may be an issue about realizing some long term gains, but it’s often going to look pretty similar across that age category, whereas when you’re talking to the young people, like one or more of my children, and you say, you’re kind of messing around with the do it yourself investments where you thought you were a genius when the market was going up qnd you were buying these call options, and you’ve given it all back. There are some ways to do a little bit of dad-like management, which your advisor is going to be really good at implementing. And as fun as it was to buy the options, it was a lot less fun when there’s nothing in your do it yourself account left.

Jack Sharry: Yep, gotcha. So, thanks for that. I was going to ask you about millennials, but you, I think you hit it. It’s one of those things that some of our millennial children learned the hard way recently, not too long ago. So, Mark, as we look to wrap up, any key takeaways you wanted to share with our audience about asset location?

Mark Hoffman: Paul had talked a little bit about the tax loss harvesting and that capability, and that’s been around for years. It seems to cycle and become a rage again, which it has with direct indexing and whatnot. But what people don’t often realize is that asset location, again, placing the most tax efficient assets in your taxable accounts and the least tax efficient assets in the qualified accounts, raises the after tax return of your portfolio. Ultimately, that means you’re going to get more balance which can create more income, and it’s really the dominant form, asset location is the dominant form of tax alpha that you’ll get, it clearly dominates any tax loss harvesting you’re going to be able to get. And there are a few other things that add to tax alpha, but very few that add as many basis points as asset location. In fact, in many cases, we see our clients who use it, it not only protects that advisor’s fee, but it also gets the client more money. It just does.

Jack Sharry: It also, frankly, causes asset consolidation from other…

Mark Hoffman: It’s a good reason for asset consolidation, absolutely.

Jack Sharry: Yeah. Paul, anything to add?

Paul Samuelson: The real opportunity in terms of looking at all the household assets is that you’re going to be able to pick up some of the client accounts that have been unmanaged or, you know, very poorly managed. And so it’s both an opportunity for the advisor, but it’s a real service to the clients, because they get tired of having people pitch things. They worry about the orphan accounts. They really want to hear from just one advisor if there’s a market event. It doesn’t help them to hear from three advisors. So to use a cliche, it really is a win-win.

Jack Sharry: Gentlemen, it’s been a pleasure to have this conversation. I’ve enjoyed it very much. If you’ve enjoyed our podcast, please rate, review, subscribe, and share what we’re doing here at WealthTech on Deck. We’re available wherever you get your podcasts. You should also check us out at our dedicated website, wealthtechondeck.com. All of our episodes are there, along with blogs and curated content from many folks around the industry. Paul and Mark, thanks again. It’s been a real pleasure.

Paul Samuelson: Thank you, Jack.

Mark Hoffman: Thanks, Jack.