Envestnet Whitepapers

• Periodic Deposits – newly deposited cash is used to purchase fresh positions at a cost basis in line with current market values. • Dividend Reinvestments – similarly to deposited cash, dividend reinvestments are also used to establish fresh positions that may more easily become loss harvesting candidates in the future, so long as wash sale limitations are considered. • Annual Tax Budget Provision – a non-zero annual tax budget allows the direct index manager to turnover positions to more closely track the intended index, while simultaneously establishing fresh basis positions. • Gifting – for those interested in gifting, gifting appreciated securities can be an effective way to avoid or reduce the tax consequence associated with lower basis positions outside of the natural parameters of tax loss harvesting. While tax lock is a real consideration for direct indexing accounts, its effects, when studied in a vacuum, likely do not fully capture the reality of managing live accounts. It doesn't stop here. Direct indexing can provide even more client value. Specifically, advisors can establish client-specific capital gains budgets and desired levels of aggressiveness in tax loss harvesting to target specific outcomes based on client needs. For example, if a client is selling a business and desires banking losses while maintaining their equity exposure, they could dial up their tax loss harvesting aggressiveness. Packaged investment products simply don't enable the level of tax management flexibility that can be achieved through direct indexing. "Tax alpha will quickly fade into tax lock." Tax lock occurs when no more losses can be harvested in a portfolio and tax alpha goes to zero. This is a natural phenomenon arising from the fact that markets go up more than they go down. While studies show this ossification effect in direct indexing accounts, much of the research into tax lock ignores real world implementation considerations, which can delay its onset: 20250701-4620699 █████████████████ Ì200009WWHAÎ

• Cover