The Coronavirus Crisis: Tax-Tech Tools that Protect Clients from Market Volatility

The Coronavirus Crisis: Tax-Tech Tools that Protect Clients from Market Volatility

The markets are taking financial advisories and their clients for a rollercoaster ride today – days of historic losses are followed by dizzying rises, with little hint of what the next day might bring.

We can offer a safe prognostication, though: as long as the COVID-19 crisis envelopes the globe, expect a wild trip. On your next mandated exercise round, a saunter to the pharmacy for anti-nausea meds might be in order.

Experienced hands in the financial industry are veterans of volatility. Crisis has followed crisis, sometimes broadly reported, often localized and unknown to the general public, but no mystery to the affected souls and the financial wizards trying to steady their client portfolios.

Thankfully, the window ledge today offers no solace, despite lurid Wall Street myth: we’re too busy trying to save our businesses, and that means our customers. The search for strategies to soften the blows of the coronavirus crisis is job number one.

Today, tax efficient strategies are in strong demand. When the bear flashes his claws, the safest escape route leads to tax management. At Orion, risk manager Chris Romano says that highly volatile environments are when tax management schemes “really prove their value” to clients.

How do we proceed? Luckily, financial tech firms offer a host of applications to help manage vertiginous market volatility. Orion has been using its Astro tool for about a year. The app is designed to optimize client portfolios rapidly under extreme market stress. Romano describes Astro as “tax-aware” and says it has allowed the firm to earn 100 basis points of active returns on investment in only two weeks, despite circumstances that baffle otherwise savvy financial specialists.

Romano says the company’s internal data tells a promising tale. Over the last three weeks, with advisors and clients alike riding the wild scree of tumbling markets, he says, “we’ve been able to realize about three-and-a-half percent tax alpha” for clients on the Astro platform. Since the start of 2020, Orion’s clients are up 4.5% in tax-alpha terms. If markets were their normal, relatively tranquil selves, they could expect only 1.5% alpha, Romano says. Everything gained via Astro creates real economic value for customers, he emphasizes, a true silver lining for clients in dark-clouded days.

Astro’s algorithms are tuned to automatically examine a client’s portfolio and determine the adjustments needed to keep the financial plan on course. Its speed is the key to staying ahead of unpredictably. Orion has offered the tool for around a year now, and its popularity has risen in tandem with ravenous bear markets, Romano says.

Romano points to two crucial areas: asset allocation and asset location planning, both equally vital today, in his view. Financial planning begins with asset allocation, a crucial matter forming the “baseline” of your strategy – this needs to be done right, from the very start, or the strategy will never optimally produce, he says.

If you want performance above the base, then asset location is the key, says Romano. When losses creep into client accounts, no matter the cause – pandemic or ordinary market hiccups – “advisors should accelerate movement of asset location” and adapt to the new situation.

Orion works with LifeYield, which provides tools to support asset location adjustments that optimize the tax advantages for clients. LifeYield executive Steven Zuschin says that in the pandemic-shocked world, asset location is just as crucial as allocation. The aim is to support a “long-term tax efficiency play” to smooth the turbulence of ultra-volatile markets. Tax-loss harvesting, where investments are sold at a loss to reduce tax liability, is a particularly useful strategy today, he says.

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