For high-net-worth investors, the true measure of success isn’t what a portfolio earns—it’s what stays in their pockets after taxes. More clients now evaluate their advisors on after-tax performance, not pre-tax returns. Still, many advisors fall short of that expectation. While investors assume tax management is built in, few advisors can clearly show the value they add.
Erik Preus, Group Head of Investment Solutions at Envestnet, sat down with The Wealth Advisor’s Scott Martin to discuss how Envestnet helps advisors bridge the divide between client expectations and delivery. His team’s research shows that while high-net-worth clients overwhelmingly want their advisors to prioritize after-tax returns and provide proactive tax planning, many feel those services are lacking.
“We also know that those same investors don’t always feel like their financial advisors are providing that,” Preus explains. “So, there’s a tremendous opportunity for financial advisors to add more value to their client relationships by demonstrating that they can improve their after-tax investment results.”
After-tax performance represents one of the few areas where advisors can actively control outcomes independent of market conditions. Tax alpha—generally speaking, the added value a portfolio can achieve by deploying tax-efficient strategies—doesn’t depend on rallying equity markets or falling interest rates. The value shows up whether the S&P 500 gains 20% or loses 10%, making tax management a reliable potential differentiator in any environment.
Translating Tax Management Into Measurable Client Value
Clients don’t want vague promises about “tax efficiency”—they want results. Envestnet’s After-Tax Benefit Report does exactly that, showing how the overlay affects returns in concrete terms. The report compares three data points: a portfolio’s pre-tax return, its after-tax return with overlay management, and an estimated after-tax return without it.
For example, a hypothetical portfolio returning 13.25% before taxes might drop to 12.62% after taxes with overlay in place—a 63-basis-point effect. Without the overlay, taxes could have cut 175 basis points, reducing the after-tax return to 9.47%. The difference—112 basis points—shows the overlay’s explicit potential impact.
Advisors can point to specific amounts saved through strategic tax management. Envestnet’s system can even estimate the tax cost of turning off the overlay, showing investors exactly what they might give up by leaving the strategy.
The report “quantifies the value of the service directly so that the advisor can share that with the client,” says Preus.
It also breaks down where the savings come from: capital gain deferral, loss harvesting, and exposure management. The benefits vary depending on how accounts are funded. Portfolios with legacy securities and embedded gains tend to show larger tax alpha—sometimes exceeding 100 basis points—while accounts funded entirely with cash typically show less.
Beyond justifying advisory fees, the reporting creates year-round transparency. Clients gain insight on their expected tax obligations rather than discovering unpleasant surprises the following April. “You need to have that clarity,” Preus notes. “You need to have a tax budget, and our service provides that and provides real quantification of what that tax bill could be if you don’t use that service.”
Smoothing Account Transitions to Win New Clients
Winning new clients often comes down to how advisors handle transitions. Even a better investment strategy can be a tough sell if it comes with a $500,000 tax bill.
“But if you can show them an analysis that demonstrates you’re moving them to a better portfolio and you’re able to spread those associated taxes over five or seven tax years, you’ve mitigated the tax pain and made it much more likely that that client is going to move their account to you,” says Preus.
Envestnet’s tax overlay service can spread tax liabilities across multiple years, gradually transitioning portfolios while deferring gain recognition. The extended transition period may result in stronger client commitment—investors seeing a multiyear plan are more likely to stay the course rather than evaluating their advisor choice annually.
“It does create that stickiness because they like clarity on their tax bill,” he adds. “A big part of financial planning is to understand what you are going to owe the IRS next April.”
Prioritizing Short-Term Gain Elimination and Strategic Deferral
Few tax issues sting more than short-term capital gains. For high-income investors, those gains can be taxed at combined federal and state rates exceeding 50%. That’s why Envestnet’s overlay starts by targeting short-term gains first.
“We want to be implementing the target model that that advisor is doing for the client,” Preus says. “However, we also recognize that short-term capital gains are the most painful type of capital gains.” The goal is to maintain zero net short-term gain exposure across accounts.
Once short-term gains are mitigated, the platform manages toward long-term gain budgets set for each client. “They can specify what type of gains realization they want to have,” Preus notes. The budget provides clarity for tax planning while giving advisors flexibility to implement portfolio changes without triggering unexpected liabilities.
The service also incorporates strategic gain deferral. When portfolio managers make changes late in the year, the overlay system evaluates whether deferring recognition until January would serve clients better. The platform also considers whether waiting until positions cross from short-term to long-term holding periods would reduce tax impact.
Envestnet’s overlay engine continuously monitors holding periods and tax lots, making real-time decisions on which positions to trade. The platform never misses a holding period or inadvertently triggers short-term gains due to last-minute portfolio changes.
Calibrating Loss Harvesting to Individual Circumstances
Tax-loss harvesting has become a standard practice in wealth management, but Envestnet’s approach recognizes that aggressive harvesting doesn’t suit every client situation. The platform allows advisors to calibrate harvesting strategies based on individual tax circumstances and financial plans.
“We strongly believe that taxes are a very personal issue,” says Preus. “Each tax circumstance is different based on the investor. We know they virtually all want to avoid short-term capital gains, but the aggressiveness of the lost harvesting really depends on the investment objectives of that client.”
A client planning to sell a business in two or three years likely wants aggressive loss harvesting to bank offsets against the anticipated gain. The accumulated losses become a strategic asset, reducing the tax burden when the business sale closes. Meanwhile, other clients without major liquidity events may prefer a lighter approach to avoid creating larger unrealized gains later.
“An investor who does not have that type of gain realization in the future may not want to harvest as aggressively because it does introduce risk to the portfolio,” Preus adds. “So, there’s some consequences you need to think about when aggressively loss harvesting.”
Customization aims to ensure that tax management aligns with broader financial planning goals rather than operating in isolation. “There’s a mechanism for them to give us that information,” he points out. Envestnet collects client-specific tax variables through a structured form, allowing advisors to communicate information about expected outside gains—planned business sales, inheritances, or other gain events—that should factor into the harvesting strategy.
Moving Beyond Year-End Harvesting to Continuous Optimization
Many advisors still treat tax management as a December project. But waiting until year-end often means missing opportunities—especially after strong market years when few losses remain to harvest.
“We do see advisors who also only loss harvest, and so that’s their form of tax management,” Preus says. “And we believe tax management is more than that.”
Comprehensive tax management encompasses gain deferral, gain-loss matching, tax budgeting, and strategic harvesting—all applied year-round. Doing this manually across multiple accounts can be asking a lot of an advisory practice.
“That sometimes is difficult for advisors to scale their business while trying to do all that themselves,” notes Preus. “Hence the interest that we’ve gotten in our tax overlay service where it’s all outsourced to Envestnet.”
Envestnet’s risk-based optimization engine evaluates tax consequences and portfolio tracking error for every potential trade in real time, balancing multiple objectives simultaneously: implementing target models precisely, avoiding short-term gains, adhering to tax budgets, and harvesting losses according to customized levels.
“Advisors have a lot more on their plate today than they did 15, 20 years ago,” he acknowledges. “They are expected to be holistic financial advisors that handle all elements of the financial plan for that client. They need to be spending less time managing accounts and doing the operational work that can be effectively offloaded to a third party like Envestnet.”
Coordinating Tax Management Across Asset Classes
Envestnet’s approach goes beyond equities. The platform now coordinates tax management across multiple asset classes and account types through unified managed accounts (UMAs).
“I think that you’re seeing tax management be embedded in virtually every single type of an account,” Preus says. What began as tax management for equity separately managed accounts (SMAs) has expanded to passive index-based accounts, then to UMAs with multiple equity sleeves, fixed income allocations, and exchange-traded fund (ETF) strategies.
The goal is to optimize at the household level. “Where it’s going is really a comprehensive consideration of the possible tax consequences of an entire investible set of assets,” Preus explains. “So, it is expanding to be where it should be: a fundamental consideration of a taxable account.”
The UMA structure serves as the vehicle for delivering household-level tax coordination. “That’s why a unified managed account is such a helpful vehicle because it can typically include all of their investible taxable assets within that one account,” he says. “Have one overlay manager that considers all of those consequences and adheres to a client-specific budget.”
The integration allows the overlay engine to evaluate trades across asset classes, optimizing tax outcomes at the household level rather than within isolated sleeves. A loss in one equity position might offset a gain in another. A fixed income trade might be timed to complement equity rebalancing. The coordination occurs automatically, managed by algorithms that consider the full tax picture continuously.
Responding to Industry-Wide Recognition of Tax Management
Tax management is no longer optional—it’s now a central client demand, and advisors are increasingly taking notice. Preus characterizes the adoption curve as reaching an inflection point.
“It absolutely is taking off. It’s been fun to be part of it,” he says. “That’s because we’ve kind of hit that hockey stick where virtually all advisors are realizing they need to have tax management as a fundamental part of their value proposition in order to appeal to their existing clients, let alone new clients. So, we’ve really, I think, gotten to that tipping point and are really seeing the assets move in this direction.”
The shift from nice-to-have to must-have reflects changing client expectations, particularly among high-net-worth investors who increasingly evaluate advisors based on after-tax performance. Advisors who can’t demonstrate tax management capabilities risk losing clients to competitors who can.
The competitive pressure comes not just from other advisors but from automated platforms and robo-advisors that have made tax-loss harvesting a standard feature. Wealthy clients accustomed to seeing tax management in their automated accounts expect at least the same sophistication from their human advisors—and preferably more.
Envestnet’s overlay service aims to provide the additional sophistication—customization based on individual tax circumstances, integration across multiple asset classes, strategic gain deferral, and transparent reporting that quantifies value. “It’s a tremendously powerful solution,” Preus observes.
Tax management has moved from the periphery to the center of what clients need and what advisors must deliver. Envestnet’s platform seeks to handle the operational work at scale, freeing advisors to demonstrate value where clients can see and feel the difference most clearly.
For more information, go to www.envestnet.com.
_____________________
Additional Resources
______________________
Disclosures
This is a paid advertisement. Envestnet has multiple paid engagements with The Wealth Advisor including payment for participation in America’s Best TAMPs, an annual directory of investment outsourcing organizations, with a minimum asset level of $200 million, catering to financial intermediaries.
The information, analysis, and opinions expressed herein are for general information only. Nothing contained in this video is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. Investing carries certain risks and there is no assurance that investing in accordance with the portfolios or strategies mentioned will provide positive performance over any period of time. 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.
