The Portfolio Management System is a real-time, tax-lot accounting application that is fully integrated with the Brokerage Accounting System.
The Portfolio System provides advisors and their customers' monthly performance reports, including realized and unrealized gains and losses, net security positions, and estimated income spreadsheets.
Advisors can easily get an up-to-date picture of an account's portfolio composition and recent activity within the account.
Tax Lots and how they impact a portfolio.
A tax lot is created each time a security is purchased. For example, if an investor purchased 200 shares of Pfizer, Inc., on February 15, 2007, for $36.14 per share, and 300 shares of Pfizer, Inc., on March 1, 2007, for $35.00 per share, then this investor has two tax lots of Pfizer, Inc. The two lots represent the two different purchases of Pfizer, Inc., on two different dates at two different prices.
To manage a portfolio effectively, a tax manager needs to know not only what securities are held in the portfolio but also what the underlying tax lots are for those securities.
Continuing the example above, a tax manager must not only know that the investor owns 500 shares of Pfizer, but also that the investor purchased the shares on two different dates for two different prices. Furthermore, there could be two similar sets of portfolios and tax lots and yet the optimal portfolio management solution may be different because the investors’ tax circumstances and objectives differ. For example, one investor may have a significant capital loss carryforward and the other may have a net gain for the year. Therefore, the application of a single “standard” strategy cannot effectively meet all investors’ needs.
Customized Portfolio Management Approach
Systems. The foundation of a customized product structure is a flexible portfolio management system that provides the portfolio manager with analysis tools. The system must provide separate consideration of short- and long-term gains and losses, and objective functions designed to help an investor maximize losses and minimize gains while monitoring active risk.
Maximizing realized losses and minimizing realized gains are common objectives for individuals with taxable investments because a net realized loss can be used to offset some income (currently $3,000 for most individuals), and minimizing realized gains reduces the investor’s overall tax bill. Although this functionality may seem basic, not all portfolio management tools can perform at this level of customization. In such cases, the actual after-tax value may be significantly reduced. For example, if the portfolio management tool allows the tax manager only to generate a net loss, then the tax manager may be generating unwanted gains. The parameter of a net loss means that the system can generate both gains and losses as long as the net loss equals the desired amount. In essence, this reduces the manager’s after-tax returns by the amount of gains generated due to the inadequate tool. After-tax returns begin with the portfolio’s pretax return and then add in or subtract out the impact of taxes on the portfolio. For example, if a portfolio generates net realized gains, then the portfolio’s after-tax return will be less than the pre-tax return because the investor will have to pay taxes on the realized gains.