The Advisor Institute: Coach's Corner
Asset location can be as important as asset allocation

Practical messages intended to help you elevate the success of your practice.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By David GordonDirector, Eaton Vance Advisor Institute

      Asset allocation has long been "the belle of the ball" among financial advisors. Choosing the right asset class at the right time can make a huge difference in investment returns, of course, because the return on any asset class you don't own is zero. For years, advisors have sought to emulate the asset allocation practices of the "smart money" by borrowing good ideas from the best institutional money managers. Unfortunately, many institutional best practices are for tax-exempt clients like pension plans and foundations.

      Most individual investors pay taxes. And this means that the great ideas from the institutional side can have significant tax consequences for individual investors, which may impact their investment returns. For that reason, it's important that your individual clients understand that:

      "Asset location can be as important as asset allocation."

      Location, location, location

      This pearl of wisdom shouldn't belong exclusively to realtors. Asset location matters because a single investment vehicle can produce a different tax experience depending on the kind of account it is held in — its location. A mutual fund with high internal turnover, for example, could distribute a realized capital gain to shareholders even in years of declining value. These realized gains might not be an issue if the fund is held inside a tax-deferred account like a 401(k) or IRA, but could be difficult to explain if the fund is held inside a brokerage account on which the client might pay yearly taxes. Realizing tax losses in a separately managed account offers a different scenario because such tax losses can reduce taxable gains only if the SMA is in a taxable account, such as a brokerage account, rather than a tax-deferred account like an IRA.

      The cost of rebalancing

      Rebalancing a portfolio can also benefit from good asset location. In most circumstances, you can rebalance a mix of mutual funds or ETFs tax free if that mix is located in a tax-deferred or tax-exempt account, whereas the same rebalancing could carry significant tax costs if the mix is located in a taxable account. Location decisions can affect the return a client experiences after fees and after taxes, which is why we say that asset location can be as important as asset allocation.

      Bottom line: For taxable clients, it's not enough just to recommend appropriate investment vehicles — it's just as important to locate those investments in a way that can help maximize after-tax return.

      tax forward