Ep. 104: How to Protect Wealth & Maximize Tax Efficiency for High-Net-Worth Families & Business Owners

In today’s unpredictable financial environment, high-net-worth families and business owners face unique challenges when it comes to protecting their wealth and maximizing tax efficiency. As markets fluctuate and tax laws evolve, finding strategies that both safeguard assets and optimize returns is paramount.

This week on Live Life Liberated, Sean Clark, Partner at Centura Wealth Advisory, and Chris Osmond, Chief Investment Officer, dive into a transformative approach: direct indexing. This personalized investment strategy not only provides flexibility and alignment with your financial goals but also unlocks the potential for significant tax advantages.

In this blog, we’ll explore the key insights from Sean and Chris on how direct indexing can help you navigate today’s markets while maximizing your portfolio’s efficiency.

What Is Direct Indexing?

Direct indexing is an innovative investment approach that allows investors to directly own individual stocks that replicate the performance of a specific market index, such as the S&P 500. Unlike traditional mutual funds or exchange-traded funds (ETFs), direct indexing uses Separately Managed Accounts (SMAs), which provide greater customization, control, and tax advantages.

In a typical mutual fund or ETF, an investor buys shares of a pooled portfolio of stocks. The downside of this approach is the lack of flexibility—it’s difficult to exclude stocks from specific sectors or adjust for personal values. However, with direct indexing, investors hold individual stocks within their portfolios. This offers several key benefits:

Tax Loss Harvesting: Direct indexing allows for efficient tax loss harvesting, which can offset capital gains and reduce taxable income.
Customizations for Values and Financial Goals: Investors can exclude industries or companies they don’t want to invest in (e.g., tobacco or fossil fuels) and tailor sector exposures to match their financial outlook.
Flexibility: Direct indexing allows for greater control over investment decisions, as investors can add or remove individual stocks at their discretion.

Let’s take a closer look at some of the primary benefits of direct indexing.

The Power of Tax Alpha

One of the key reasons that direct indexing stands out as a wealth management tool is its ability to generate tax alpha. Tax alpha refers to the incremental value that is added to an investment portfolio through strategic tax-efficient strategies, such as tax loss harvesting.

Tax loss harvesting is particularly beneficial in volatile markets, where the value of individual stocks can fluctuate dramatically. In these circumstances, investors can sell underperforming stocks at a loss, which can be used to offset other gains or income within their portfolio. This strategy can potentially add 0.5% to 2% to your annual returns.

Here’s a breakdown of how tax loss harvesting works in the context of direct indexing:

Identify Losses: The first step is to sell underperforming stocks to realize a loss. While it’s not ideal to sell stocks at a loss, this can be a beneficial move when it helps to offset taxable gains.
Offset Gains: The loss from the sale can be used to offset capital gains or reduce taxable income, lowering your overall tax liability.
Reinvest Strategically: To maintain exposure to the same sectors or industries, investors can replace the sold positions with similar securities (often referred to as “tax-efficient replacements”). This allows them to preserve their portfolio’s overall strategy without triggering the wash-sale rule, which prevents investors from claiming tax losses on positions they repurchase within 30 days.

For high-net-worth individuals, tax loss harvesting can provide a significant advantage, especially during periods of market turbulence. This proactive strategy helps investors reduce their tax burden and optimize long-term growth.

Personalized Portfolios for Unique Goals

Direct indexing isn’t just about tax optimization—it also offers exceptional customization options, allowing families and business owners to align their investment portfolios with their unique goals, values, and financial objectives.

Align with Your Values: Many investors want to ensure that their portfolios reflect their personal values. With direct indexing, you have the ability to exclude industries or specific companies that don’t align with your ethical or social principles. For example, if you prefer not to invest in tobacco or fossil fuels, direct indexing allows you to tailor your holdings accordingly.
Tailor Exposures to Your Financial Goals: High-net-worth families and business owners often have specific financial objectives—whether that’s prioritizing growth, minimizing risk, or investing in specific sectors. With direct indexing, you can fine-tune your portfolio to emphasize the sectors or companies that align with your investment strategy and outlook for the future.

Direct indexing enables a level of portfolio customization that traditional index funds and ETFs simply cannot match. Whether you’re focused on long-term growth or specific sector exposure, this strategy offers the flexibility to build a portfolio that is perfectly aligned with your financial goals.

Best Use Cases for Direct Indexing

Direct indexing has several key advantages, but it is particularly effective in certain scenarios. Here are the best use cases for this approach:

Maximizing Tax Benefits in Taxable Accounts: For high-net-worth individuals with taxable accounts, direct indexing is a powerful tool for maximizing tax benefits. The ability to conduct tax loss harvesting and strategically offset capital gains can have a significant impact on long-term portfolio growth. This is especially important for families and business owners who may face higher tax liabilities due to significant income or capital gains.
Preparing for Liquidity Events: Business owners who are approaching a sale or other liquidity events, such as an acquisition or IPO, can greatly benefit from direct indexing. The strategy can help optimize the management of newfound wealth after these events by offering greater tax efficiency and diversification. It also provides the flexibility to adjust exposures based on changing financial circumstances and goals.
Managing Concentrated Stock Positions: Many executives and business owners hold significant amounts of stock in their own company. Direct indexing offers a tax-efficient way to diversify these concentrated positions without triggering massive tax bills. By strategically selling portions of the company stock and reinvesting in a diversified portfolio, business owners can reduce risk and maintain tax efficiency.

Why Now?

In today’s volatile markets, wealth preservation and tax efficiency are more critical than ever. Global economic uncertainty, fluctuating interest rates, and ongoing market disruptions demand proactive and flexible wealth management strategies. Direct indexing offers a unique combination of personalization, tax optimization, and customization that traditional investment vehicles simply can’t provide.

For high-net-worth families and business owners, direct indexing is more than just a tool for tax efficiency—it’s an investment strategy that provides control, flexibility, and growth potential. By partnering with wealth management experts who specialize in direct indexing, you can take a hands-on approach to safeguard your wealth, manage risk, and optimize returns.

Connect With Centura

At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.

We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.

Connect with our team today to learn how we can help you navigate complex financial decisions and secure your financial future with confidence.

Disclosures

Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.

For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.