Envestnet Whitepapers

5 20241217-4105197 What Is the Opportunity Cost of Harvesting a Loss? Harvesting losses does have two consequences. The process can temporarily shift a portfolio away from the desired allocation, and it will lower the cost basis of the account. The wash sale rule places constraints on the timing of repurchasing securities recently sold for losses, which can affect the portfolio's performance. As for the reduction in portfolio cost basis, this reset happens whenever a capital loss is booked. Depending on various market factors, and how aggressively losses are harvested, this process can cause portfolio lock. What Is Portfolio Lock? Portfolio lock occurs when losses are relentlessly and aggressively harvested until the portfolio has no further unrealized losses in the account, causing any trading in the account to result in a capital gain. This can make future tax-efficient portfolio management far more difficult. The key to avoiding portfolio lock is to harvest losses in a balanced manner. The approach to loss harvesting should be driven by an individual client's tax circumstances (the tax budget). The tax management process should not introduce unintended consequences by aggressively, and possibly blindly, loss harvesting. Tax Overlay Concerns We view the use of a holistic tax overlay as an integral component of HNW portfolio management. Ultimately, the overlay is another way to deliver account customization without the advisor making manual trades and juggling many tax rules. Conducting tax management on client accounts manually requires a lot of time and is prone to human error. An automated, holistic tax overlay service can bring tremendous efficiency to this process, though. Clients appreciate the consistent and customized tax management from the overlay service, too. This opportunity for mutual benefit is why we view the use of a holistic tax management approach as a potential win-win service for both advisors and clients. Contact Envestnet | PMC about your next client case to see an example of how holistic tax overlay can benefit your practice. If you would like more information on how you can incorporate holistic tax overlay services into your practice, please reach out to PMC Consulting Sales at PMCConsultingSales@envestnet.com. We look forward to hearing from you. This commentary is provided for educational purposes only. The information, analysis and opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Information obtained from third party resources are believed to be reliable but not guaranteed. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index. Investors should consider the investment objectives, risks, and charges and expenses of mutual funds carefully before investing. A prospectus or summary prospectus which contains this and other information about these funds can be obtained by contacting your Financial Advisor. Please read the prospectus carefully before investing. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Income (bond) ETFs are subject to interest rate risk which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investors' specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses. Past performance is not indicative of future results. Neither Envestnet, Envestnet | PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor. Client must carefully determine if the use of tax overlay services is appropriate for their circumstances, risk tolerance, and investment objectives. Tax management services are limited in scope and are not designed to permanently eliminate taxes in the account. In providing tax overlay services, Envestnet will allow Client's account to deviate from Client's selected investment strategy. Client's account may experience significant performance differences from the selected investment strategy due to Client's selection of tax overlay services. Envestnet makes no guarantee that the account's performance will be within any range of the selected investment strategy or the strategy´s benchmark. If Client subsequently disables tax overlay services this may result in the recognition of significant capital gains. FOR ONE-ON-ONE-USE WITH A CLIENT'S FINANCIAL ADVISOR ONLY © 2025 Envestnet. All rights reserved.

• Cover