July 2024
Here are some key takeaways from their conversation:
• For clients bringing cash to invest rather than an existing portfolio, Hunter and his team will use dollar cost averaging to mitigate market timing risks. This means they will make periodic investments over time which helps average the purchase cost and reduce the impact of market volatility.
• Hunter and Chris highlight strategies like tax loss harvesting and the utilization of tax loss carryforwards from previous years.
• Hunter explains the importance of asset location, which involves strategically placing investments in various accounts (taxable, IRA, Roth IRA) to maximize after-tax returns. For example, the team will aim to locate income-generating investments in IRAs, where the income won't be taxed until withdrawal. Conversely, they might place growth-focused stock funds in taxable accounts, where gains can be managed for tax efficiency.
• Client accounts are reviewed daily and trades are made 4-6 times a year to keep portfolios in line with our investment strategies.
Watch previous episodes:
Ep. 93 Why Valuations Matter When Investing in Stocks
Ep. 92 Advanced Estate Tax Planning Strategies
Hello, everyone. And thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Gillespie, joined by Portfolio Management Analyst Hunter Daniel. That's sort of a fancy word for a portfolio manager. Hunter, you and your team, Elias play a crucial role within our organization.
You are the backbone of the investment recommendations that we make and you work with us and the client to not only implement those investment decisions, but also manage the portfolios on a consistent basis with the advisors. So, you know, I wanted to spend some time to talk today not only about investments, but the role that our trading and our portfolio management team plays within the organization.
That's great. I really appreciate you having me back, Chris. and I know a lot of times we're behind the scenes. but it's really great to be able to work with all the advisors and coordinate also with the client coordinators and the operations group. So I'm really happy. We're kind of like sitting in the nucleus of Morton Wealth.
And so that's a big part of why I like my job, because it's so dynamic and I get to see all parts of the client experience.
Yeah. And I guess what a lot of clients don't realize is when they come to us, like, let's say you're a potential client and you come to us with a lot of statements, or you're a current client and you say, I have this outside account, like, what can you do with it? Many clients probably don't know that you and your team are somebody that we collaborate with very closely to analyze what we're currently doing for those clients, what those current assets are currently doing and what potential changes we would make as well.
Yeah, that's a really exciting part of my job that I really like and I specialize in is it's a big puzzle. There's typically two types of clients that we get business from. They may come to us and it may be all cash.
Right. So they sold a home or a business.
Or they rolled over an old retirement account.
The first thing that I'm thinking about is how that money was earned. And so whether or not we're going to use a dollar-cost averaging to enter into the equity and commodities markets, generally speaking, on the credit side, or the fixed income investments, we want to go ahead and get that to work is for as immediate as possible to start earning those yields and picking up that return for clients.
Yeah, I mean, so obviously you're looking at it like was this money previously invested or was it all cash. Like, how do we take advantage of you know, we can't market time. If we could we would leverage our crystal ball and, you know, manage all the money in the world because we can market time. That's right.
But because we can't market time, we want to prudently manage risk and get people reinvested for the long term. So when you're talking about the dollar cost averaging, it's just making purchase orders over a period of time to slowly get the money invested or wait for, you know, opportunities or dips in the market.
That's right. There's a little bit of nuance there. So generally speaking, if a client rolls over a nontaxable account for the most part, historically...
That would be an IRA.
That's right. It's best to get that money back to work. Yeah. it's been dollar cost averaging over time. Typically you have contributions to it. Your employer contributes. And so you've been buying these assets over time. You may have had to sell them out to bring the money over and there's a waiting period. So for the most part, we want to, you know, get those assets back to work.
But in a taxable account, you know, there's a benefit maybe psychologically. And also from a tax perspective, a lot of times at Morton, we use a six month DCA dollar cost averaging. And we may buy six different tranches of a position. It does increase the transaction cost for the clients, but it does give us different prices at which we enter into that position, which could potentially allow us tax loss harvesting opportunities over the way.
And I want to be clear, when we're talking about transaction costs, some of the mutual funds are investments we might purchase on a consistent basis might cost $10 per transaction.
It's still very, very low. and we try to use exchange traded funds and we have a, there's some funds on the platform, Fidelity specifically. They have no transaction fee as well on the mutual fund side. So we're very thoughtful about that. But we do know that transaction costs are one thing we can control from a portfolio management perspective, right?
Thank you. I just wanted to clarify that. So when people hear transaction costs, you know, one of the first things we do as a fiduciary is try to limit, minimize, actually get rid of that as much as possible. But from time to time there might be a small fee to make a purchase. So that's one client that comes in all cash.
Another client that comes in is somebody that has either been managing money themselves, or they've had an outside advisor and they have some legacy positions, that they've held on to that now we have to take a look at, analyze. Do we hold this? Do we sell this? How do we rebalance it from where a client currently is today to where we'd like them to be?
Yeah. So a lot of times advisors will come to me, they've had a great initial meeting with a client. Things are going well. The client sends over some statements of where they're currently at. They'll send it over to me and just have me look through it. It's not a full picture. I'm not able to see the nitty gritty details of all the positions, but I can get a general idea of if, you know, a mega cap tech stock has really, really appreciated and it's going to be hard to sell down.
Or we might need to put a plan in place to reduce the allocation to that because it's a high concentration. I can also see if there's potential tax loss opportunities in the portfolio, or how easy it will be to move around and have an estimate of what the potential capital gains estimate would be. And then we could look with the financial planning team and see what kind of tax burden that would be initially for the client.
Or maybe we spread it over a couple of years.
And that's one of the reasons why we also ask for the tax return, because somebody might have, you know, tax loss carryforwards from, you know, prior investments that, you know, they had to sell or take at a loss that they are carrying forward over the years. And we can use that opportunity in the rebalancing to minimize taxes as much as possible.
Yeah, those are incredibly valuable. We were still using all the way up through 2017, 2018, tax loss carryforwards from the Great Financial Crisis. So tax loss harvesting can be incredibly powerful. And as we know, markets tend to trend up over time. And so we just kind of hold those in our back pocket. And when we have a tax return, the trading team can know we can be more strategic and we're able to keep the portfolio more on target and in the client's risk tolerance, by rebalancing the portfolio as it appreciates.
Yeah. Thank you for sharing some of those details, especially the ways that we're able to minimize or reduce taxes when it comes to portfolio management, there's another key role that you and your team play with the advisor and the client. And it's determining which investments go in which accounts, something we call asset location. And we do this not only to help reduce or minimize taxes but try to optimize a little bit more growth and to make sure that we're sending the client the right amount of income to help them live their lifestyle or replace an income that they might have left by retiring.
How do you guys go about determining the asset location piece? What does that look like?
Yeah, so that's a really fun part and exciting part that we look at. And we start at the implementation phase. So, you know, a general client might have a taxable account- typically a trust account. They may have a his and her IRA and maybe a his and her Roth IRA. That's a general group mix. And we don't think about the accounts on an individual basis.
We wrap them together in what we call a trading group. And I think about it in a holistic perspective. There is an optimized approach of what investments to put in which account. And we do think about that from that perspective. But there also is a little bit of an art to it. So a his and her IRA, you know, ideally we like to locate our higher returning income assets in there because they kick off income that's taxed at a client's ordinary rates.
So it's in a trust account. And one of our high income, you know, earning investments, whether it's, you know, one of our private lending funds or whatever, if it's in a trust account- that's adding additional income to the client that they now have to pay taxes on.
That's right. Yeah. We do think about income as a big part of the return here from our investment philosophy. But we can locate potentially stock funds in a taxable account. And what's nice about the stock funds is that we're able to choose when we want to go ahead and realize those gains over time versus most of our income oriented investments.
Pay out that income on a monthly basis. Some of them pay quarterly. So we don't have control over that. We actually like that and are always seeking out great high-income, earning, risk-adjusted returns from those credit strategies. But if we can and the clients have the right size accounts that we can locate these assets in, we're very happy to do that.
Look, I know from talking to you as much as you like the world of investing and stocks, bonds, ETFs, mutual funds and the world of traditional portfolio management investing, one of the reasons why you were excited to come over here is because of some of the alternative assets that we leverage, especially the ones in the private lending space that generate higher, more consistent, high single digit returns.
And so I think what you're saying to summarize it for the clients is that, if we're able to shelter that into an IRA, we're getting more consistent returns and able to compound that account over time.
Exactly, what we're most focused about for the client, the end result is to get you the maximized after tax return and said plainly, all you really care about from a client perspective is how many dollars Chris, can you get me that I can actually go and spend in the economy?
Yeah, I love the way that you phrased that. So we've talked a little bit about the role that trading and the portfolio management team plays with onboarding new clients and determining which assets go into which account. Now that somebody has been a client for a while and we come up with, you know, new private investments that we might recommend or new investments within the portfolio to recommend.
How do you guys help us manage and monitor portfolios as things go up and down? What does that look like?
Yeah. So a general client, we'll see anywhere from, you know, 4 to 6 rebalancing trades, reinvesting cash from distributions, on an annual basis, clients that have reccuring distributions or taking out more money, may make more frequent trading. And then if the market's more volatile, there may be some more frequent trading, whether there's tax loss harvesting opportunities like we talked about earlier or kind of where we're at right now, like the equity markets have done very well.
The commodity markets have done very well as well.
And so that would just be traditional rebalancing.
Exactly. And so from an investment perspective, we have a target that we want to be at for these particular asset classes. And we put what we call tolerance bounds around those targets. And from a high level, it's kind of based on the volatility of that asset class. Yeah. We believe that equities is a little bit less volatile than the commodity asset class.
And with that said, our equity tolerance spans are a little bit tighter. So we're happy to rebalance as they go above a certain threshold a little more readily on the equity side than the commodity side. We're also allowed. We're basically allowing commodities to move up and down a little bit more. But on the commodity side, we want to be very disciplined because anybody that's followed, the gold or the commodities market knows that, you know, it is a bumpy ride over time.
And when we have a strong market, we want to capture some of those gains and reinvest them in some of our really, really strong credit strategies.
Yeah. Thank you for sharing that. I mean, just to kind of summarize, let's say someone's target equity or stock market exposures. Simple number 40%. If their stock exposure goes from 40 to 45%, it's going to trigger our system to say to our portfolio management team, hey, you've got to look at this, this household.
And potentially there's an opportunity to rebalance. And you might trim the stocks from 45% back down to 40 and reinvest. So capture those gains, sell high and reinvest somewhere else.
Exactly. Yeah.
And then vice versa. If they've got 40% stock exposure and it goes down a 35% stock exposure because the market's went down, a little bit, it would alert the trading team to, hey, look at this household. Maybe it's time to rebalance and buy some stocks because, you know, we're on the lower end of the threshold and we would make a determination whether we buy back all the way up to that 40% threshold or maybe just by halfway.
But this is a very active approach where we're looking at clients accounts very regularly, even if we're not necessarily making trades, more than, you know, 5 or 6 times a year.
Yeah. So we're reviewing all the client's accounts daily. We have multiple screens that we're looking at in which we're able to see which number of accounts are out of tolerance and need a trade for that particular type of tolerance that they've breached. If we have a big market moving event, those screens are going to have a ton more accounts than you're going to see on a daily basis.
You might tend to think all the portfolios move together and in concert. Generally speaking, they do. But every client's portfolios individual to them and they have it's kind of like a different vintage. So some clients may have come in, and been with us for a very long time, and they might be right on target. Some clients come in and like we talked about earlier, they bring in a mega-cap tech stop that's really highly appreciated.
You know, that being where we're at geographically in California, you know, some clients have done very well with some of those companies. and that's fantastic. We're happy for them. but we don't want to be 100% concentrated in any one name. You know, we have mutual funds that have exposure to those names.
But we don't want to just have your all your portfolio in one stock.
Hunter, thank you so much for taking the time today. I know, you know, we talked a little bit more detail or behind the scenes of how we help, you know, onboard new clients, how we determine which assets go to which account and then how we sort of manage portfolios on a consistent basis. But, you know, I love for our clients and people out there to meet people like you behind the scenes that are, you know, an integral part of the experience that they have with Morton and even some of the recommendations that we make.
Disclosure: Information presented herein is for discussion and illustrative purposes only. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax or legal advice. You should consult with your financial, legal, and tax professionals before implementing any transactions and/or strategies concerning your finances.
