Building Stronger Portfolios with Active and Passive Strategies

Investment strategies have oscillated between active and passive methodologies for years, each offering unique benefits. A growing consensus is recognizing the potential of combining both for a well-rounded portfolio. Merging active and passive strategies empowers advisors to build customized portfolios that balance cost-efficiency with client goals and unique circumstances.

Active investing involves actively picking and trading stocks, bonds, and other investments with the goal of beating the market's return. This requires significant research and analysis, often leading to higher fees but it offers the potential for above-average returns. This approach isn't just about beating the market; it's about leveraging market knowledge to navigate volatility and tailor portfolios to each client's unique needs. Active managers can customize portfolios to align with the nuanced investment goals and risk profiles of their clients. They can also tap into sectors where passive strategies may not fully penetrate, such as niche real estate investments or high-yield bonds.

Passive investing aims to mirror the performance of a market index by holding a basket of investments that reflect that index. This "set-and-forget" approach typically comes with lower fees and a more predictable investment process. The rise of passive investing can be attributed to its straightforward nature and cost efficiency. It offers expansive market coverage at a lower cost and reduces the urge to pursue fleeting market trends. Passive strategies often resonate with the belief in market efficiency, that consistent outperformance is a challenging feat.

When it comes to the portfolio construction using active and passive investing strategies, two popular methods are the core-satellite approach and strategic asset allocation.

The core-satellite method utilizes a core portfolio built on a stable, low-cost index fund that tracks a broad market segment. It provides the foundation for the portfolio, offering broad market exposure and stability. The satellite portion allows for incorporating actively managed elements that aim to capture short-term gains or capitalize on specific market opportunities.

Strategic asset allocation focuses on allocating assets across different categories based on market efficiency. Actively managed allocations target areas where the market is less efficient or where indices might not fully capture the potential, such as smaller companies or emerging markets. Passive allocations, in this context, provide broad exposure through index funds and act as a stabilizing force in the overall portfolio.

The active versus passive debate doesn’t need to be divisive because both methods should be used. Merging these strategies provides an opportunity to build stronger portfolios that prioritize clients. By strategically blending active and passive strategies, we can craft personalized investments that target not just higher returns and lower fees, but also fit seamlessly with each client’s unique financial goals and vision for the future.

Emerging Developments in Tax-Deferred Investment Strategies

Insurance-dedicated funds (IDFs) have become increasingly popular with wealthy investors and institutions. Driven by tax law changes like the expiration of the Bush tax cuts and the 2017 Tax Act this surge makes IDFs' ability to minimize or avoid taxes on investment gains even more attractive. 

Particularly valued for their tax efficiency, IDFs are upheld by IRS regulatory guidance which ensures operations are both transparent and compliant. They offer investors several benefits, such as deferring taxes on investment earnings and permitting tax-free transitions between investment options. IDFs serve as a strategic tool to manage risk-based capital charges, enhance after-tax returns, and achieve stable value wrap accounting advantages, among other financial and tax benefits.

High minimum investments and complex setup processes limit IDFs' accessibility. Many IDFs require substantial upfront capital, putting them out of reach for a large population of investors. Setting up an IDF can be intricate, involving insurance contracts and lengthy procedures. These complexities, coupled with the need for advisors to hold specific insurance licenses, can deter both investors and financial advisors. As a result, IDFs become exclusive investment vehicles primarily suited for ultra-wealthy individuals with the resources to navigate the setup process.

 Silverheels’ groundbreaking financial product, the Tax-Efficient Fund (TEF) democratizes access to IDF and its benefits. The TEF breaks down barriers by lowering minimum investment amounts, simplifying the subscription process, and allowing advisors to recommend it without needing a specific insurance license. This opens the door to a wider range of investors seeking tax advantages. With annuity sales increasing by over 29% in the fourth quarter of 2023 compared to the same period in the previous year, it’s clear that investors and advisors are rapidly recognizing the value of tax-deferred growth in their portfolios.

The inaugural TEF was launched this year with the first strategy under the management of Nick Mancini from Broadstreet Global Advisors. The TEF has allowed Nick to offer his clients a range of diversified investment options, especially those suited for a long-term investment horizon and who recognize the potential of the mid/small cap private equity options. It also provides a key advantage - the flexibility to transition between investments without incurring tax penalties. The TEF has enabled Nick to provide a more tailored and tax-efficient approach for his clients.

The TEF unlocks more potential for millions of people by reducing entry barriers and simplifying the investment process, signaling a new phase in tax-deferred investment possibilities. The movement towards greater accessibility and acknowledgment of IDF advantages is expected to persist, ushering in a new era of investment opportunities.  

Introducing the Tax-Efficient Fund (TEF)

In the ever-evolving landscape of financial planning and investment management, one challenge has consistently stood out: achieving tax efficiency in high-tax investments and alternatives. While effective to a degree, traditional vehicles often come with complexities and limitations, particularly when it comes to insurance-based products. Recognizing this gap, Silverheels, in partnership with Katten Munchin Rosenman LLP and Crown Global Insurance Group, pioneered a new financial product, the Tax-Efficient Fund (TEF).

The TEF is designed to revolutionize how investors approach alternatives and high-taxed investments by harnessing the tax benefits traditionally associated with insurance annuities. Accessibility sets the TEF apart. The complexities and regulatory hurdles inherent in purchasing insurance products have historically restricted their appeal and utility. Typically, only licensed insurance agents can sell these products, leaving a significant portion of financial advisors—and, by extension, their clients—in the dark about these potentially advantageous solutions.

The TEF transcends these obstacles. By making this fund accessible to all fiduciary advisors, it unlocks the door to a broader range of investment strategies. This inclusivity enables advisors to craft more comprehensive financial plans for their clients, integrating the tax efficiencies of insurance-based investments without constraints.

Why Investors Should Consider the TEF

The TEF is a game-changer for investors. It unlocks access to alternative investments and traditionally tax-heavy assets while offering the tax benefits usually associated with insurance products. This translates to potentially higher returns you can take home, thanks to the reduced drag from taxes on your investment gains.     

Beyond accessibility, the TEF streamlines the investment process. Investors aren't required to navigate the complexities of insurance products directly. This simplicity and tax efficiency make the TEF an attractive option for those looking to diversify their portfolios with alternatives while optimizing for tax implications.

The Value of TEF for Advisors

Fiduciary advisors are increasingly looking beyond the conventional 60/40 portfolio model and incorporating more alternatives and private equity investments to diversify and enhance returns. However, this shift introduces significant tax complexities, particularly for long-term investors, underscoring a critical need for tax-efficient solutions.

The Tax Efficient Fund (TEF) is a pivotal tool that stands at the forefront of innovative financial planning. It enables advisors to bridge the gap in traditional portfolio strategies, offering a strategic avenue for integrating tax-optimized investment advice. Its introduction into an advisor's toolkit not only broadens the scope of services available to clients but also significantly mitigates the tax disadvantages associated with alternative investments and private equity.

Moreover, the TEF's design for tax efficiency makes it an indispensable resource for advisors aiming to enhance their value proposition. By facilitating access to tax-smart investment strategies that were once only available to insurance-licensed professionals, the TEF empowers advisors to deepen client relationships and improve retention rates, cementing their role as proactive and comprehensive planners in the eyes of their clients.

A Strategic Growth Opportunity for Fund Managers

For fund managers, the Tax Efficient Fund (TEF) offers a strategic avenue to widen their existing Insurance Dedicated Funds (IDFs) reach and marketability. Engaging with the TEF framework allows managers to appeal to a more diverse group of investors and advisors eager to find creative solutions for tax management. This interest marks a substantial market potential, providing fund managers with a unique chance to stand out by catering to investors aiming to optimize their returns after taxes. Through leveraging the TEF, fund managers can differentiate their product offerings and attract investors focused on enhancing their after-tax investment outcomes.

Looking Ahead

Introducing the Tax-Efficient Fund marks a pivotal moment in the financial services industry. It embodies a shift towards more accessible, tax-optimized investment strategies that can benefit investors, advisors, and fund managers. As we move forward, the TEF stands to change the game, breaking down barriers and opening up new financial planning and investment management possibilities.

Investors, advisors, and fund managers should explore the benefits of the TEF and consider how it might fit into their strategies and offerings. By embracing this innovation, we pave the way for a new era of financial planning – holistic, tax-optimized, and more inclusive.