A Q+A with CIO Jack Zhang and Managing Director of Asset Management Brian Stertzer

Tax Alpha Ensemble (“TAE”) is a low-cost indexing strategy that seeks to lock in benchmark-like returns while generating annual tax savings of 1-2%. For many years, the WEALTHSTONE ADVISORS Asset Management team has analyzed portfolios and assessed tax efficiency for our clients. Through this process, we collected valuable data that led to the genesis of TAE. As fiduciaries, we feel compelled to share our findings and recommendations with you. 

What we have observed is that for a portfolio with typical portfolio costs to just break even with TAE on an after-tax basis, it would have to outperform by 2.65% annually. Thus, investors concerned about mitigating tax costs should consider this strategy or at a minimum understand potential enhancements for their existing portfolios. 

Brian Stertzer is the Managing Director of WEALTHSTONE Asset Management and is responsible for pioneering the TAE as well as the WEALTHSTONE multi-advisor ARMADA solution for high-net-worth individuals, family offices, endowments, and foundations.

Jack Zhang is the Chief Investment Officer and oversees the implementation of strategic and tactical asset allocation strategies created by the WEALTHSTONE ADVISORS’ Investment Committee. Jack plays a key role in general asset allocation and portfolio construction and leads the firm’s investment research and due diligence efforts across equities, fixed income, and alternative investments.

We recently had the opportunity to talk with Brian and Jack about Tax Alpha Ensemble and its role within their investment strategies. 

  • What is Tax Alpha Ensemble (TAE)?

Jack Zhang: Tax Alpha Ensemble is a diversified investment solution that seeks to maximize after-tax wealth. Most advisors focus solely on pre-tax returns, which neglects one of the biggest factors (taxes) in compounding wealth over long-term horizons.

Brian R. Stertzer: TAE is a low-cost index strategy that looks to lock in benchmark returns while generating annual tax savings of 1-2%. While this sounds easy to understand, many aren’t employing this strategy for their clients, resulting in missed annual income. 

  • Why should investors consider it?

Jack Zhang: Based on both public and proprietary data from our multi-advisor ARMADA platform, the clear story that emerges is that small numbers matter. Investors should be most concerned about their after-tax wealth, and our TAE portfolios seek to maximize total wealth over time by optimizing for one of the most important but often neglected areas of investment returns: taxes.

Brian R. Stertzer: Within TAE, all four portfolio key variables are controlled to benefit the investor: 

  1. Embedded manager fees
  2. Investment advisor fees 
  3. Income tax cost
  4. Returns 

This results in a low-cost portfolio that gives investors the opportunity to achieve benchmark returns AND generates tax alpha of 1-2% per year. 

  • How can it help or benefit them?

Jack Zhang: Put simply, increased tax efficiency is one of the best ways to maximize total wealth over time, as each year of tax and fee savings compounds to the next year. Data has indicated a portfolio like TAE can add 1-2%+ in post-tax returns compared to an average advisor portfolio.

Brian R. Stertzer: Small numbers do matter. TAE has an advantage over a typical portfolio as it seeks to provide similar returns with lower costs, and lower costs mean greater after-tax wealth.

  • If their current advisor says they do “tax-loss harvesting” is that the same? 

Jack Zhang: They are similar concepts but in different orders of magnitude. Thus, while most advisors say they engage in tax-loss harvesting, it is done in a lighter way that likely generates a fraction of the tax savings compared to TAE.

Brian R. Stertzer: Most managers and/or advisors that do tax-loss harvesting (TLH) only do so at year-end or during major market corrections so as not to disturb their concentrated stock portfolios. Similarly, portfolios with mutual funds and ETFs can do TLH during major market corrections if their advisor makes it a priority. Given that these holdings are typically 5% or more of the portfolio, TLH may have an impact on performance. Meanwhile, our TAE portfolios tax-loss harvest throughout the year in both up and down markets while maintaining minimal tracking error to a diversified index.

  •  How can an investor begin assessing their own portfolio?

Jack Zhang: We pride ourselves on full transparency, which begins with clear and concise reporting. For any client looking to learn more about their portfolio in an industry that is built on obfuscation, I would recommend asking for the following information: total advisor fees, income tax costs, and performance versus an appropriate institutional benchmark (typically a globally diversified equity index).

Brian R. Stertzer:  Start by determining what your portfolio costs are. Specifically, examine the embedded portfolio fee, investment advisor fee, income tax cost, and the market return and see how those benchmarks compare to those of their existing portfolio.  

If you would like to learn more about Tax Alpha Ensemble and how it can help compound your after-tax wealth over time, we recommend that you schedule a private meeting or conversation with the WEALTHSTONE ADVISORS team. We are happy to review your existing portfolio and provide a custom small numbers matter analysis for you. 

This was prepared by WEALTHSTONE ADVISORS, a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. This information is intended to be educational and is not tailored to the investment needs of any specific investor. Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money. No investment strategy ensures a profit or guarantee against loss. For more information please visit: https://adviserinfo.sec.gov/ and search for our firm name. This is for informational purposes only. Past performance is not indicative of future results.