Six Ways Advisors Can Build More Tax-Efficient Portfolios

**Written by: Jennifer Valdez | ****RedBlack**

As investors place greater emphasis on after-tax returns, tax-smart portfolio management has become a key differentiator for advisory firms. At the same time, market volatility, changing interest rates and evolving wealth transfer needs are increasing demand for more personalized advice.

While 91% of advisor practices now use trading and rebalancing technology to improve efficiency and scale their services, only 39% report being very satisfied with their current solution. For many firms, the challenge is ensuring their technology can support increasingly sophisticated tax-management strategies and help deliver better client outcomes.

Here are six ways advisors can align their technology and processes with clients' tax goals while improving operational efficiencies and supporting growth.

1. Harvest tax losses and gains.

Volatile markets can create opportunities to improve after-tax returns through tax-loss harvesting and strategic portfolio repositioning. To capitalize on these opportunities, advisors need rebalancing technology that can identify gains and losses, maintain target allocations through substitute securities and help mitigate wash-sale risks.

The most effective solutions also support account- and household-level tax management, customizable trading rules and multiple gain- and loss-harvesting methods, helping advisors implement tax-smart strategies more efficiently and at scale.

2. Set capital gains limits.

Tax-efficient portfolio management isn't just about harvesting losses. It's also about controlling when and how gains are realized. By establishing capital gains limits, advisors can help manage clients' annual tax burdens while staying aligned with long-term investment objectives.

Modern rebalancing technology can support this effort by allowing advisors to set short-term, long-term or total capital gains budgets based on a dollar value or percentage of the portfolio. During a rebalance, the platform should be able to flag trades that may exceed those limits while accounting for factors such as loss carryovers and gains generated from the orders themselves, helping advisors balance tax efficiency with portfolio needs.

3. Optimize asset location.

Asset location can be just as important as asset allocation when it comes to improving after-tax returns. Advisors should prioritize technology that not only helps realign portfolios with clients' investment objectives but also optimizes where assets are held across taxable, tax-deferred and tax-exempt statuses. By incorporating asset location preferences into the rebalancing process, savvy advisors are minimizing unnecessary tax exposure and enhancing the overall tax efficiency of client portfolios.

4. Household level rebalancing.

As clients increasingly prioritize tax efficiency, householding can provide a more holistic approach to portfolio management. Rather than viewing accounts in isolation, advisors can evaluate risk tolerance, tax preferences and investment objectives across an entire household, helping ensure portfolios remain aligned with clients' overall financial goals.

Look for rebalancing technology that supports household-level management by incorporating location preferences, capital gains budgets and wash-sale monitoring across all related accounts. This allows advisors to implement tax-smart strategies more effectively, improving coordination across portfolios while enhancing after-tax outcomes.

5. Use what-if scenarios.

What-if analysis can help advisors make more informed, tax-aware decisions before executing trades. By modeling different capital gains budgets, tax-loss harvesting opportunities and allocation changes across individual client accounts or households, advisors can evaluate potential outcomes in advance and identify the strategies most likely to improve tax efficiency while supporting long-term client goals.

6. Do year-round tax planning.

Tax planning is most effective when it's treated as an ongoing process rather than a year-end exercise. Regular portfolio reviews and tax-sensitive rebalancing enable advisors to better identify opportunities to harvest losses, manage capital gains and keep portfolios aligned with clients' investment objectives throughout the year.

Modern rebalancing technology makes it easier to take a proactive approach by supporting quarterly portfolio reviews, opportunistic tax-loss harvesting, capital gains management and asset location adjustments. By incorporating tax considerations into routine portfolio management, advisors can improve after-tax outcomes while helping clients stay on track toward their financial goals year-round.

Turning tax efficiency into a competitive advantage. As investor expectations continue to evolve, tax-efficient portfolio management is no longer a value-add. It's becoming a core component of holistic wealth management. From tax-loss harvesting and capital gains management to asset location and household-level rebalancing, advisors who integrate tax considerations into every stage of the portfolio management process are better positioned to improve after-tax outcomes and deliver more personalized advice.

The right mindset, processes and rebalancing technology can make these strategies scalable, helping advisors automate complex decisions, uncover tax-saving opportunities and reduce operational burdens. By adopting a proactive, year-round approach to tax management, leading firms are strengthening client relationships, differentiating their services and creating a more efficient foundation for long-term growth.