(Jacob Greene, Head Strategist, NB Custom Direct Investing)
While direct indexing offers clients an entry point for considering after-tax returns, at Neuberger Berman we believe that providing tax optimization across the entirety of an investor’s equity allocation can offer a better client outcome.
Our goal with the NB Custom Direct Investing (CDI)™ platform is to deliver client customization at scale, with an emphasis on maximizing clients’ after-tax wealth. While direct indexing offers clients an entry point for considering after-tax returns, at Neuberger Berman we believe that providing tax optimization across the entirety of an investor’s equity allocation can offer a better client outcome, as tax liabilities can be calculated for all clients accounts sharing the same tax ID, rather than at the individual portfolio level. This is the impetus for having a single custom SMA platform with strategies spanning core, quantitative and fundamental active equity mandates, enabling clients to implement more of their public equity allocation on a single platform.
As of March 31st, 70% of our clients have more than one NB CDI™ account. Of these clients, some are implementing multiple core equity exposures (separate SMAs for US Large Cap, US Mid Cap and US Small Cap) and others are taking a core/satellite approach in accessing several active equity portfolios. In total, 28% of platform AUM* is invested in active equity models. We want to unlock the potential for improved after-tax returns and consistent customization across the entirety of a client’s public equity allocation, which is why we have introduced NB CDI™ Householding.
Benefits of NB CDI™ Householding:
- Coordination of wash sales across accounts: taking advantage of market volatility by opportunistically realizing losses is at the core of a tax-managed approach, but those assets need to be reinvested to not miss out on the market return. The IRS Wash Sale rule says that an investor cannot reinvest the proceeds from loss harvesting in that same security or a substantially identical one for 30 days. This rule is not specific to a single account, but applies across all securities accounts sharing the same tax ID. In identifying and managing client portfolios at the household level, we seek to avoid instances of losses being disallowed.
- Consistent customization: for clients wanting to have their personal values reflected in their investment portfolio, say restricting the purchase of stocks with business ties to Alcohol and Tobacco, or those conflicting with a religious belief system, it is important those values can be applied consistently across your investments. The NB CDI™ platform takes an approach of consistency and also transparency, helping clients understand exactly how a portfolio is customized to their values.
- Comprehensive after-tax performance: monthly review of after-tax performance and tax alpha across multiple NB CDI™ portfolios. After-tax wealth is evaluated as the sum of all assets; now equity after-tax returns can be as well.
Sample NB CDI™ Householding Performance
YEAR-TO-DATE RETURNS (Total Returns, USD, Gross of Fees)
| Account No. | Account Strategy | Gross Pre-Tax |
Benchmark Pre-Tax |
Excess Return Pre-Tax |
Gross After-Tax* |
Benchmark After-Tax* |
Excess Return After-Tax* |
Tax Alpha |
|---|---|---|---|---|---|---|---|---|
| xxxxxxx | NB CDI Strategy 1 | 5.91% | 2.04% | 3.87% | 7.52% | 2.12% | 5.40% | 1.54% |
| xxxxxxx | NB CDI Strategy 2 | 8.59% | 9.17% | (0.59)% | 8.93% | 9.18% | (0.25)% | 0.34% |
| xxxxxxx | NB CDI Strategy 3 | 5.05% | 2.04% | 3.01% | 6.45% | 2.19% | 4.25% | 1.24% |
| xxxxxxx | NB CDI Strategy 4 | 9.01% | 9.17% | (0.16)% | 9.17% | 9.19% | (0.02)% | 0.14% |
| xxxxxxx | NB CDI Strategy 5 | 9.65% | 9.17% | 0.48% | 10.03% | 9.19% | 0.84% | 0.37% |
| xxxxxxx | NB CDI Strategy 6 | 4.18% | 2.04% | 2.14% | 5.81% | 2.18% | 3.63% | 1.50% |
| xxxxxxx | NB CDI Strategy 7 | (0.09)% | (2.76)% | 2.68% | 0.98% | (2.71)% | 3.69% | 1.02% |
| Parent Account | 8.30% | 7.13% | 1.17% | 9.09% | 7.17% | 1.92% | 0.75% |
Source: Neuberger Berman
