CA2309853A1 - Tax-efficient asset allocation system - Google Patents
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- CA2309853A1 CA2309853A1 CA 2309853 CA2309853A CA2309853A1 CA 2309853 A1 CA2309853 A1 CA 2309853A1 CA 2309853 CA2309853 CA 2309853 CA 2309853 A CA2309853 A CA 2309853A CA 2309853 A1 CA2309853 A1 CA 2309853A1
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Abstract
The present invention generates a risk/return efficient portfolio, consisting of assignment of investments or managed money investments representing selected asset classes to taxable and tax-sheltered (deferred) investment accounts (as applicable to the individual investor), such that overall tax payable on the combined account(s) is minimized. Tabular or graphical representation of the appropriate risk/return/tax efficient investment mix assigned to taxable and/or tax sheltered investment account(s) (as appropriate or necessary) matching the investment background and risk tolerance of an investor or range of investors is displayed.
Description
FIELD
The present invention rdates to a method/system for selecting for an investor an appropriate risk/returdtax efficient allocation of a plurality of seeds to a portfolio divided bdweea taxable and taxrsheltered investment accounts and for the display of such optimal allocation graphically or dphanumaieally, simultaneously across taxable and tax-sheltered accounts.
BACKGROUND
Investors constructing portfolios of assets inside their taxable and/or sheloered account(s), consisting of mutual funds, stocks, bonds, T'-bills or other of numerous various asset classes typically seek to maximiu the expected or mean rate of return of the overall portfolio for a given level of risk or volatility" froque~ly defmod in terms of variance of return and based either on historical data or projected cxpxtod rates of return utilizing techniques known to persons skilled in portfolio management or economic modeling.
Utilizing Markowitz's classical mesa-variance ef~~cieatt frontia or Sharpe's inclusion of the risk-froe asset in the mean-variance model, or any othea suitable risk/reward optimization technique by those experienced in the field of asset allocation and subsequent generation of the eflycient frontier or a matrix of riskheturrt values, an appropriate optitaizad investment portfolio can be selected offering the highest rcturn/reward for a given level of risk/volatility suitable for an investor of a particular risk tolerance level.
Classical modern portfolio theory (MP'I~ and other sophisticated asset allocation models are ecadeanic models based oa tax-free iavestmaut rates of return. In fact, one of the underlying assn~tions of MPT is the absence of tax. "Chase useful and powerful theories arc utilinod and applied to the practical world in the management of ime~nent portfolios with the objective of maxianizing return and minimizing risk of invesmtent portfolios designed for the investor's individual return objectives sad tolerances for portfolio risk or volatility.
From a practical standpoint investment portfolios are immediately or ultimately subject to tax (in most cases, undo most taxation regimes), whether the investment assets are held in taxable accounts or in tax-sheltered accounts. Not only this, but certain investment assets are taxed more favourably than others. In the field of finance iavestmertts that are taxed at lower rates and/or taxed only upon disposition, are rofa~rod to as tax-advantaged while those taxed at highs rates and/or when they generate income are refarod to as tax-disadvaatagod.
Contributing to the effective tax-adva~age or disadvantage of t particular investment asset that usually has to be coasidaod, in practice, its the timing of the taxation of investment assets.
For example, sn equity asset can usually grow in value indefinitely and not be subject to tax until it is disposed of, while interest income Gem interest bearing investments is genaally taxed annually, at unfavourable tax rates. The interest-bearing asset can only be prevented form generating taxable income on a regular basis by being placed into a tax-sheltered plea. 'The equity asset may be tax-advantaged therefore for two reasons: 1. A Lower taxation rate, and 2. An innate sheltering from tax thus allowing a tax,free compounding of its market value.
Tax-disadvantaged investments ere therefore usually best held in tax-sheltered investrnent accounts where the ~rnings can compound rather than sensate innmodiarte taxes that reduce the funds available for re-investment.
Astute investors will find that even invesmxats or investment income that are taxed at favourable rates, for axmmplo marl-bonds (in the US) or prafeaed shares (in Canada) should oftat be bald inside tax-sheltered accounts as opposed to inside taxable accounts, to prevent loss of the potential compound ea<uings on the annual taxes snood.
Since a tax-advantaged investment tray not be perfectly tax-efficient over very long investment holding periods, say over 40 years, it may on lain occasions be favourable to hold tax-disadvantaged investments outside tax-sheltered plans to replace the tax-advantaged invas~ents usually held outside. The compound growth of the "not perfectly" tax-et~cient tax-advantaged investm~ent(s) held inside the aht1lerect account and an equal amount of the tax-disadvantaged investmeat(s) held in the taxable account, owes time may exceed the growth-after tax- of the tax-advantagod investments) being held in taxable accounts end the equal amount of tax-dissdvarnaged investments) held in a sheltezed account. Over very long periods of time the compound growth of the taxes saved on an ineffcient tax-advamagad investmem may supercode its innate tax advantage.
In most situations tax-advamaged investments such as stocks or equity mutual funds, or exchaa~go-traded fords are sufficiently tax-e~ciec~t and tax-advantaged when cxtmparod to tax-dissdvantggod investments such as ea~tiueates of deposit to allow an investor to makc the geareral assumption that tax-disadvantaged investments should be held in sheltered accounts and tax-sdvant:aged outside.
In this taoc-e~ieat optimization system a trst for tnu long-term tax-~ei~ciency of each investment in comparison to each other investment, although not essential, should be condrrctod to ensure appropriate assignment to taxable or sheltered account.
For the above reasons one can see that them is a wide gap betwe~ acsdernic tiraozyr and itc advanced risk/reward optimization techniques and the practical minimization of an invest~'s takes. This gulf has not boon broached despite practical application of sophisticated asset allocation memodolog~ies to institutional and individual investment portfolios. 'Ihe present state of the art is focussed and centred on the generation of optimal investment portfolios that match investor risk tolerance, but that do not account for altar-tax investiment rdurns.Usually asset allocation portfolios npr~nting ranges of risk/return optimizations are frequently categorized as "low," "medium," or "high" risk portfolios suitable for "conservative", "modorata" and "aggressive" investors. These allocation recommendations are applied to both taxable and tax-shaltered investm~t accounts in an identical fashion, with ao inclusion ofy or refs to, the tax implications of those recommendations, nor are suitable adjustments made to reduce tax on the overall portfolio. Investors may not even ovntemplate, nar have a~ control over the tax implications of the particdar asset allocstiaa investrneat product that they are purchasing such as an asset allocation mutual fund or a balanced mutual firad (which is also an asset allocation fund), since the fund will be invested as is, in either a taxable or tax-sheltered account, or both, once again without a~ reference to tax, yr the ability to make adjustments to reduce overall tax.
Some advisors provide model portfolios rew:ommavded for taxable and tax-sheltered accounts.
However, the inves~nent allocations for bath taxable and tax-sheltered accounts, given an investor's cisk/retarn optimization era invariably identical. Even in the situation where an advisor differentiates between taxable and tax-sheltered portfolios to adjust for after-tax returns in the taxable portfolio, the recommendations for either portfolio are performed in isolation, and do not attempt to simultaneously allocate across all accounts. The division between taxable and t$x-shelterod accounts in the investor's overall portfolio needs to be considered in conjunction with the risk/reward optimization before the alkxations can be apportioned to minimize tax aaoss the overall portfolio and not just on one side ofthe overall portfolio, i.e. the taxable side.
The present invention rdates to a method/system for selecting for an investor an appropriate risk/returdtax efficient allocation of a plurality of seeds to a portfolio divided bdweea taxable and taxrsheltered investment accounts and for the display of such optimal allocation graphically or dphanumaieally, simultaneously across taxable and tax-sheltered accounts.
BACKGROUND
Investors constructing portfolios of assets inside their taxable and/or sheloered account(s), consisting of mutual funds, stocks, bonds, T'-bills or other of numerous various asset classes typically seek to maximiu the expected or mean rate of return of the overall portfolio for a given level of risk or volatility" froque~ly defmod in terms of variance of return and based either on historical data or projected cxpxtod rates of return utilizing techniques known to persons skilled in portfolio management or economic modeling.
Utilizing Markowitz's classical mesa-variance ef~~cieatt frontia or Sharpe's inclusion of the risk-froe asset in the mean-variance model, or any othea suitable risk/reward optimization technique by those experienced in the field of asset allocation and subsequent generation of the eflycient frontier or a matrix of riskheturrt values, an appropriate optitaizad investment portfolio can be selected offering the highest rcturn/reward for a given level of risk/volatility suitable for an investor of a particular risk tolerance level.
Classical modern portfolio theory (MP'I~ and other sophisticated asset allocation models are ecadeanic models based oa tax-free iavestmaut rates of return. In fact, one of the underlying assn~tions of MPT is the absence of tax. "Chase useful and powerful theories arc utilinod and applied to the practical world in the management of ime~nent portfolios with the objective of maxianizing return and minimizing risk of invesmtent portfolios designed for the investor's individual return objectives sad tolerances for portfolio risk or volatility.
From a practical standpoint investment portfolios are immediately or ultimately subject to tax (in most cases, undo most taxation regimes), whether the investment assets are held in taxable accounts or in tax-sheltered accounts. Not only this, but certain investment assets are taxed more favourably than others. In the field of finance iavestmertts that are taxed at lower rates and/or taxed only upon disposition, are rofa~rod to as tax-advantaged while those taxed at highs rates and/or when they generate income are refarod to as tax-disadvaatagod.
Contributing to the effective tax-adva~age or disadvantage of t particular investment asset that usually has to be coasidaod, in practice, its the timing of the taxation of investment assets.
For example, sn equity asset can usually grow in value indefinitely and not be subject to tax until it is disposed of, while interest income Gem interest bearing investments is genaally taxed annually, at unfavourable tax rates. The interest-bearing asset can only be prevented form generating taxable income on a regular basis by being placed into a tax-sheltered plea. 'The equity asset may be tax-advantaged therefore for two reasons: 1. A Lower taxation rate, and 2. An innate sheltering from tax thus allowing a tax,free compounding of its market value.
Tax-disadvantaged investments ere therefore usually best held in tax-sheltered investrnent accounts where the ~rnings can compound rather than sensate innmodiarte taxes that reduce the funds available for re-investment.
Astute investors will find that even invesmxats or investment income that are taxed at favourable rates, for axmmplo marl-bonds (in the US) or prafeaed shares (in Canada) should oftat be bald inside tax-sheltered accounts as opposed to inside taxable accounts, to prevent loss of the potential compound ea<uings on the annual taxes snood.
Since a tax-advantaged investment tray not be perfectly tax-efficient over very long investment holding periods, say over 40 years, it may on lain occasions be favourable to hold tax-disadvantaged investments outside tax-sheltered plans to replace the tax-advantaged invas~ents usually held outside. The compound growth of the "not perfectly" tax-et~cient tax-advantaged investm~ent(s) held inside the aht1lerect account and an equal amount of the tax-disadvantaged investmeat(s) held in the taxable account, owes time may exceed the growth-after tax- of the tax-advantagod investments) being held in taxable accounts end the equal amount of tax-dissdvarnaged investments) held in a sheltezed account. Over very long periods of time the compound growth of the taxes saved on an ineffcient tax-advamagad investmem may supercode its innate tax advantage.
In most situations tax-advamaged investments such as stocks or equity mutual funds, or exchaa~go-traded fords are sufficiently tax-e~ciec~t and tax-advantaged when cxtmparod to tax-dissdvantggod investments such as ea~tiueates of deposit to allow an investor to makc the geareral assumption that tax-disadvantaged investments should be held in sheltered accounts and tax-sdvant:aged outside.
In this taoc-e~ieat optimization system a trst for tnu long-term tax-~ei~ciency of each investment in comparison to each other investment, although not essential, should be condrrctod to ensure appropriate assignment to taxable or sheltered account.
For the above reasons one can see that them is a wide gap betwe~ acsdernic tiraozyr and itc advanced risk/reward optimization techniques and the practical minimization of an invest~'s takes. This gulf has not boon broached despite practical application of sophisticated asset allocation memodolog~ies to institutional and individual investment portfolios. 'Ihe present state of the art is focussed and centred on the generation of optimal investment portfolios that match investor risk tolerance, but that do not account for altar-tax investiment rdurns.Usually asset allocation portfolios npr~nting ranges of risk/return optimizations are frequently categorized as "low," "medium," or "high" risk portfolios suitable for "conservative", "modorata" and "aggressive" investors. These allocation recommendations are applied to both taxable and tax-shaltered investm~t accounts in an identical fashion, with ao inclusion ofy or refs to, the tax implications of those recommendations, nor are suitable adjustments made to reduce tax on the overall portfolio. Investors may not even ovntemplate, nar have a~ control over the tax implications of the particdar asset allocstiaa investrneat product that they are purchasing such as an asset allocation mutual fund or a balanced mutual firad (which is also an asset allocation fund), since the fund will be invested as is, in either a taxable or tax-sheltered account, or both, once again without a~ reference to tax, yr the ability to make adjustments to reduce overall tax.
Some advisors provide model portfolios rew:ommavded for taxable and tax-sheltered accounts.
However, the inves~nent allocations for bath taxable and tax-sheltered accounts, given an investor's cisk/retarn optimization era invariably identical. Even in the situation where an advisor differentiates between taxable and tax-sheltered portfolios to adjust for after-tax returns in the taxable portfolio, the recommendations for either portfolio are performed in isolation, and do not attempt to simultaneously allocate across all accounts. The division between taxable and t$x-shelterod accounts in the investor's overall portfolio needs to be considered in conjunction with the risk/reward optimization before the alkxations can be apportioned to minimize tax aaoss the overall portfolio and not just on one side ofthe overall portfolio, i.e. the taxable side.
Another deficaertcy in the present practice off asset aDocation is the racommardation of portfolios that are tax-effici~t, g~erally by way of a'"hands-on" dent of appropriate assets to applicable taxable or tax-sheltered accounts by the financial advise, leading to an overall portfolio that is tax-efficient but that lacks risk-reward optimization.
Assignment of assets to portfolios is generally accomplished through financial advisors while optimization of inve~ment assds is usually the domain of academics. Thus, advisors seddng both tax-e~ciency and risk/rcward efficiarcy, do not have a formal process enabling them to optimize portfolios vis-~
vis risk, return and tax.
The present invention addresses these difficulties by providing a system that combines academic portfolio theory with practical tax planning. In addition, the print process incorporates another fimdarnental principal in finaact, namely, the time value of money. As stated in the claims, the tax-efficiency of the overall sheltered and taxable accounts is taken ova a number of periods, the fixed investment period, automatically accounting for the effects of compounding rtturas.
Traditioosl asset allocation models not only allow tax disadvantaged investments to be plead in taxable accounts without consideration of potential placement of thox investments to tax-sheltered accounts, btit they do not consider the potential compounding earnings that could be made if those taxes paid on the tax-disadvantaged investments were tax sheltered.
Tax shehered and taacable portfolio management covers but is not limited to the following types of investment strategies and investmeart acranunts: cash or invcstiment accounts, pension plans including RRSPs, RRIFs, RESPs, invesunont componau of universal life insurance policies. The asset allocation decision in terms of today's state of the art tends to allocate solely for the particular accoum that is under consideration, for example an R.RSP account, or a RRIF account, or for a taxable brokerage account. ion with nefor~ce to risk/rehun for the risk tolerance of the investor is most likely achieved, but the tax implications are unfortunately ignored due to the construction of either the asset allocation program or dre product itself. For exatnpley bala<rced mutual fiends do not easily facilitate practical tax minimization. A balanced mutual fiend cannot be split so thpt the interest bearing investments can be naosferred to the tax-shelterod plan, while the equity investments; arc transferred to the taxable plan.
Ia fact, one could go so far as to say that with the present stato-of-the~art only invGStors solely holding tax-sheltered investment accounts, containing assets prodwcizrg income and withdrawals trued equally for tax proposes do not naedl to be concerned about the tax-et~cieocy. Those investors owning any inveatmeuts held outsade tax-sheltered pl~rs and employing say state of the art asset allocation system or model will most likely pay more tax than need be gives a particular level of risk tolerance. Spxifically they mast likely will bo paying tax on their interest bearing investments at a higher rate and fitquency »haa on lower tax rate equity investments taxed only on dispositiarr. Factors not accomrted for in traditional risk/reward optimizations.
Another defici~cy one notes with the prestxrt practice of asset allocation is in the preseattation of suitable asset rocommeudations for investors. The standard format, whether the media be brochures, computer software or proBraats, models displayed on web-sites, or other mediums of display or computation, is to prat pie charts or similar mesas of visual or alphanumeric display detailing suitable wtighting of asset clasxs or investment mix, either for each of an investor's taxable and tax-sheltered accounts; or to supply present a "suitable" mix or allocation of investment assess for the investor's complete portfolio, without consideration of the magnitude of the two types of accounts. Investment xlecxion for the investor's accounts then takes place through selection of one or more of these "!model" portfolios, or of investments representing these models. Unfortunately for the reasons mentioned earlier in this text these recommendations are, most probably, not tax-efficient, except in the one case of an investor holding only a tsx-sheltered account Another observation that should be~ noted is that even in the situation of an investor solely holding a taxable account the rocomnxndcd asset allocation is most likely not optimal since carefid comparison of the advisor's rccommendod taxable and tax-sheltered accounts invariably illustrates identical allocations for both. Therefore, the recommended portfolio most likely will not lie on the efficient frontier du~c to the different aRcx-tax return of the investments held in a taxable account versus a tax-sh~teTed one. In addition, most likely it will n~ provide effective tax-minimization.
The present inv~tion provides not only a system to provide risk/rewardltax efficient portfolios, but an effective means of display; neither of which has been addressed by existing asset allocation models.
SUI~IARY OF THE INVENTION
The present invention is a system, method and/or process to date and display investment portfolios for investors that arc rish/return and tax efficient. In other words, the objective is to assign and display weightings of various investinents, representing selected asset classes, to portfolios that maximize return ova time fir a given level of risk, while simultaneously minimizing taxes vn the investor's overall pottfolio-whether it cotapeisos taxable, sheltered, or both taxable and sheltered accounts. The systan, process and method can utilize forms, coa~tputer programs or hardware, the Internet (World Wide Web) or other ~titable mediums through which the system, method and~or process can bo implemented, utilized and displayed Data is imputed representing rates of rorurc~ of selected investrnant assets, then modern portfolio theory and/or other techniques employed by dtose txperienced in the investment management field are used to generate an efficient frontier or array of portfolios representing the highest expo~dlprojecxsd redvms for given risk loveLs. Based on the risk tolerance levels of various investors "ideal" matching lane-sheltered pcHtfolios consisting of the appropriate mix of the investment assets are produced. These "ideal" portfolios provide the template from which the suitable overall ascot allocation for both ts;Kablc and sheltered portfolios will take place.
After-tax rattan data representing rates of mtmn of the same selected investment assets is imputed. The investor's lima frame and dre exact tax treatment of the returns wiU affad the atta-tax tines of return. MPT and/or other tochruques employed by those experienced in the investment management Geld is/are used two generate an efficient frontier or array of portfolios representing the highest expxtod/potentiall returns for given risk levels.
Based on risk tolaance levels of various investors' ideal matching taxable portfolios consisting of the appropriate mix of the investment assets arc produced.
Prior to assignment of investment assets to taxable and sheltered accounts in accordance with the investor's optimal asset mixes for taxable and sheltered portfolios, the weighting of these rospoarve accounts to the investor's overall portfolio is calculated. The size of the investor's shehuod scoount in relation to the investor's overall portfolio, and the ratio of the tax-disadvantaged assets in the "ideal" portfolio plax a constraint on the assignment of tax-disadvaataged assets to the tax-sheltered portfolio. Prior to assignment, as applicable, of the tax-disadva~ged ascots, a test of the tsx-effi~aency of the tax-advantaged assets is wade. Based on the investor's time frame and the tax-efficiency of the inveshuent(s) over that time Frame, a comparison between the rntu<n of the invrsOment inside a tax-sheltered plan and ~tside is made.
This is done to account for the chance that even a tax-advantaged investment may do worse outside a teat-sheltered plan if the loss of growth on the taxes paid on the tax-advantaged CA 02309853 2001-Oa-03 invesanent(s) over the investor's time p~io<i exceeds the highs-taxed growth inside. In most cases this will not be the case. In the situation that it is, however, the tax-sdvantaga3 investment will be assigned on a priority basis to the tar; sheltered plan.
In the most common assigamont, that of the tax-disadvantaga3 invastcnent(s) to the tax-sheltered account, the ratio of the tsx-disadvantaged invesmiont(s), calculata3 earlier in the ideal portfolio (a value between zero and one), is subtracta3 from the weighting of the tax-sheltered account to the investor's overall portfolio (a value between zero and one). If the re~ltant is positive, the full value of the tax-disadvantaged investment is assigned to the tax-sheltered account and the shortfall of content in the tax-sheltered plan is provided by assignment of the tax-advantaged investment. If the result~t is negative, in other words there is an excess of the teat-disadvantaged assets that cannot be assigned to the tax-sholtend account, it is necessary for them to be assigned to the taxable account employing the results, for the optimal taxable account.
This is achieved by multiplying the ratio of the excess tax-disadvantaga3 investments) to the size of the taxable account with the ratio of the tax-disadvantgga3 investments) to tax-adva~agod investments) selected firom the after-teat array of portfolicrs. The balance of the taxable account will consist of the tax-advamaged investment(s).
Once the optimal allocations have boon asa;rtainod, the present invention provides a technique of display for rive investors, either in chart or alphanumeric form, of bodt their recommended taxable and tax-sheltecod/deferred account, that automatically imbeds the most effodive investrneat/asset assignment from a taxation standpoint.
It is accordingly an object of the present inv~tion to overcome the limitations of the known art and to provide an asset allocation mdhod that accounts for the tax implications of tax-advantagod, tax-disadvantaged investments, both inside and out of taxable and shelbetbd (deferred) invesmnent portfolios.
It further is an object of this invention to sunuhanoously display for both investor's taxable and tax-sheltered accounts, either Graphically rnr alphanumerically, charts that effectively "imbed"
tax~fficieacy into a risk/roturrt opa~ZOn for investors of varying risk tolerances (and timo-horizons).
It further is an object ofthis invention to provide and/or display tax/risk/return efficient portfolios for investors who solely own taxable or tax:-sheltered (deferred) accounts.
It further is an object of this invention to provide a systom/process of op~mizstion for all ascot classes and investment accotsat types. These investment accounts could iactude, but would not be restricted to, RRSPs/RRIFs, RESPs, univwsal life insurance, and other tax shelters.
It further is an intention of this invention to provide graphical display of taxable and tax-shelteeed accounts that provides comparative sizing of the investor's respective accourrts. For example, if the investor has equally sized taxable and Isx-sheltered accounts the simultaneously displayed aocoums would be of equal size. If the imostor has a teat-sheltered account that is twice as large as his taxable account the size of graphical representation of the tax-sheltered account will be twice the size of the taxable account.
It is, however, not an intention of this invention to be restricted by this method of displgy. Equal sized charts representing taxable and sheltered accounts, even if they are not of equal monerety size, may be desired. This will in no way c;ffea the essential nature of the charts to imbai tax-efFcioncy into risk/reward efficient portfolio displays.
GLOSSARY OF TERMS
Asset - refrrs to an investment, usually classified as either cash, bond(debt) or equity (stock) Exempt - refers to an investment or account that avoids tax completely. An txarnple could be the investment account of a life insurance policy that grows without taxation and pays out tax-Gee upon death of the insured Investment- refers to property in which money is invested, can include assets such as cash, bonds, equities, mutual funds, pooled funds, end other managed money accounts Investor - any person, partnership, corporation or any entity committing mosey to an investment portfolio.
Managed money - any poanfolio of moray that is professionally managed and invested - includes products and services such as mutual funds, unit trusts, wrap accounts, pooled funds, pension fiends.
MPT - abbreviation for modern portfolio theory.
Sheltered investment/account- any investment or account that tends to defer, shelter, redacx or eliminate tax.
Note that the word sheltered and tmc-sheltered have the same meaning throughout this application Taxable account - refers to an account that offers no means of tax sheltering to the invesaaants held within it, although some of those investments may have their own innate tax-sheltering ability.
Tax-sdva~ged investments - are generally those that have an i~te ability to defer tax, or are taxed at prefearatial rules. The most common type of tax-advantaged investmem would be an equity or oamrron stock. However it is possible for every tax-advantaged investments to have tax-dissdvanmgod income, such as dividends.
Tax~i~advsatagod iavestmarts - are gea~rally those that do not have an ability to defer tax, andlor are taxed at highs tax rates. Bonds generally pay internal that is taxable, in most regimes, armually at high rates, with little or no possibility of deferral.
Tax-efEcaoncy - a moasun of the ability of an investment or account to ma~cirniu after-tax rehrm. The more tax-efficient it is the higher the aver-tax rettnn.
Tax-shelter - refers to the ability for an itrvestment strategy or investment to defer, shelter, reduce or eliminate tax. RRSPs, RR>Fs. IRAs and 401Ks are examples of tax shelters. An extreme, but never-the-less important tax-shelter would be an exempt investment such as the investment side of an universal lifo-insurancc policy that shelters earnings growth and pays out tax-exempt.
DIAGRAMS
Brief description of diagrams FIG. 1 depicts the prior art method for displaying recommended "model" taxable (cash/investment accounts) and tax-sheltered accounts (registerod/t~c-exempt) or p«tfolios FIG. 2 depicts simuitana~usly optimized risk/retum/t~c efficient taxable and tax-sheltered accounts FIG. 3 is a flow chart of the system, method and process used to arrive at the optimized investment poctfotio(s) FIG. 4 depicts two aheraative visual displays of tax-eflzci~t asset allocation models DETAILED DESCRIPTION OF A PREFERRED EMBODIMENT
The foregoing features of the invention will be more readily understood with refaencx to the following ddailod description taken with the accompa~ing diagrams.
The present invention is a systan, process and/or method for optimizing fram a risk/rdurn perspective an inveswr's more investment portfolio whether it be invested in tax-sheltered, taxable, or auy mixhue of these two types of accounts. Additionally the procedure could be used to tax-efficiently assign assets to sheltued/~9afertod and taxable accounts on a stand-alone basis without reference to modern portfolio thorny or other commonly utilized techniques of portfolio optunizatiion or rislc/rtward management. In traditional asset allocation modois, the assignmcut of selecxed invesdme~ asset is often indicated through display of particular investrnent account, usually taxable, aheitercd, or neither. FIG I shows some typical "models". 10, 30 and 50 show conservative, moderate and aggressive m«lels for taxable pisos (accounts). 20, 40, 60 show conservative, moderate and aggn:asive m«leis for tax-sheltered/deferred plans (accounts). 70, 80 and 90 show conservative, moderate and alrgressive models without consideration of type of plan or account. These models, although perhaps risklnwvard etficitut is a worid without taxation, in no way consider the after-tax returns of the, various investment assets in their assignment to taxable and shdtered/deferred accounts, rcsuiting in overall portfolios that are not tax-efficient.
FIG. 2, 100 and 110 (oogether~ 120 sad 130 (together), 140 and 150 (together) show simultaneously optimized risk/rawdtmc-e~cient taxable and aheltered/defc~rod accounts for conservative, moderate and aggressive investors r~peaively. 160 shows a traditional asset alMc~tioa for en investor (of moderate risr: toleranx level) with only a taxable account. 170 shows a tax-efficient allocation for the same investor. (hots the inexease in weighting of equity, tax-advmrtaged, assets and decrease in weighting of cashlbonds due to the higher after-tax r~ehmt of the equity aliocation versus 160). 180 slhows traditional asset allocation for a moderate investor with only she)taed/delierrod accounts. For that same investor 190 shows a tax-efficient allocation.
There is no difference in percentage allocF~tion in this case, as there is no opporhinity for this investor to preferentially allocate some of his tax-advantaged investments to taxable accounts.
Note that in these diagxems the magnitude of the various accounts is not signi6od.
The first step of any asset allocation proce~durc is an assessment of the investors' 200 profile, 210 in FIG 3. The investor" with hisJher individual and unique respective investment profile answers questions to ascertain en appropriate mix of investment assets. This is done through electronic means (computer. latemct), paper-based questionnaire or other appropriate means 220. Based on the investor's risk tokrau~e sad tax situation an appropriate assignment of investm~t assets will be made. Before this stage is reached, the tax-efficiency of the potential investrncnt assets that the investor will select from must be detaTnirtal.
In most circumstances it is fairly clear and obvious as to which investments can be classified as tax-advantaged and which cam be tax~dissdvantaged. For example stocks, are generally tax-advantagad investm~ts, and bonds are usually classified as tax-disadvantaged investments.
However, ova time, and due to what is commonly called "tax-inef6tciency" it is possible for stocks to become less tax-efficient than bonds, and to be better held inside a tax-sheltered account. To ensure that tinder any circumstances the comet labeling of the selected investment assets as other tax-advantaged or disadvantaged dte following methodology can be used, 230:
1) For the fixed investment period a calculation of the total after-tax portfolio return where the "tax-advantaged" investm~t is held in a taxable account and an equal value of the "tax-disadvantaged" investment asset is held inside a sheltered account is made.
II) The same calculation, switching both investment assets to the odxr account is made.
The portfolio with the highest return represents the appropriate priority of assignment of investment assets to type of account. It may also indicate a necessary reclassification of the foruur "~c-advantaged" investment to thm~ of "tax-disadvantaged" investment sad vice-versa Suitabk formulae for steps I and II to facilitate prioritization of investment asset assignment are:
[1* (1 + R,,~T - (1*(ACB~T)T -ACH~T))'~1 + [(1* ((1 + RB)T - ACB~))' (1-~I
11. [I* (1 + RAT - (1*(ACB~)T ..ACBaT))*~) + [(1* (U + RAT - ACB~T))* (1-~1 Wh~e:
R" _ (annual) rehun on "hoc advantaged" investment inside tax-sheltered aca~ount RN _ (amroal) aRer-tax return (in taxable account) of "tax-advantaged" investmem Ra = (annual) beforo-tax return (in sheltered account) of tax-disadvantaged investment R~ _ (annual) after-tan return (in taxable aocouut) of tax-disadvaraaged investment ACBaT = adjusted cost base of "taac-disadvantaged" investm~t at time T
ACB~T = ad)ustod Cost base Of "tax-advantaged" investment et time T
M= investota' applicable tax rate at time T
T= investor's time horizon Note: the initial value for both invcstmeat A & B is assumed to be 1 and each investment initially has no unrealized capital gains Note: after this prioritization the asset found to be best assigned to the sheltered account will be called the taoc-disadvantaged asset and the asset found to be best assigned to the taxable aCCOUm the tax-advantaged asset.
Using dais of the before-tax rates of return, 240 characterizing the universe of assets considered to comprise a portfolio as e~cient frontier or matrix of risk/rtward optimized assets is generated.
This genantion of the etl~cient frontier is in accordance with one of the underlying assumptions of MPT, namely, no taxes.
A second efficient frontier or matrix of riskJreward optimized assets is generated using MPT or other technique of risk/reward optimization utilized by those sltilled in the art, this limo factoring in the adjusted rates of return for the universe of assets on an after-tax rate of return, 240. The calculation of the after-tax return should matdc the investor's time frame.
For example, the after-tax rates of return of tax-advantaged and tart-disadvantaged investments will vary with the tax-advantagod becoming more favourable over a longer period of time due to the increased potential of growth of the taxes defaced. An equity asset can grow in value and not attract taxes on its increase in capital until :it is disposed o!; while an interest bearing asset usually forces an investor to pay annual tax on the interest Taxes paid on the interest bearing assets are funds that cannot be utilized for future growth.
Baaod on a particular investor's risk tolerance level and investment time horizon a suitable portfolio is selected from the first efficient :&ornier or optinaizod matrix.
This selearon represents the ideal rislc/reward optimization in the unreal world of no taxation. From this point on the preforred embodiment of this invention is essentially adjusting this "ideal"
to fit the real world where tax~ion plays a vital mle in influencing the best allocation of investment assets across as investor's taxable and shdtared accounts. laasad on what a particular investor's risk tolerance level and investment time horizon a suitable portfolio is selected from the second ei~cient frontier or opmnized matrix. The asset mix and yield for this aptimal portfolio will differ from the first d~ to the difference in tax treatmcat of the different asset classes.
In the instance first an investor has ortly taxable or sheltered account(s), he/she will move dirxtty to the respective taxable aptimizabon 280 and sheltered optimization 270 suitably displayed, 250 and 260, respectively.
The allocation to concurrently best fit the assets to both sheltered and taxable accounts for the situation of the investor with both sheltered/defecred and taxable accounts takes place, moving first to 270 and then to 280 in Fig.3.
The following algorithms, or other mesas derived by a person slcillod is the art, are used to ascertain the weighting of invents to the investor's tax sheltered and taxabk accounts as indicated in 270 end 280:
T= tJ(t+s) and S= s/(t+s), where T= proportion of taxable account with respect to hiaJher entire portfolio S= proportion of sheltered acoou~ with respect to hislher entire portfolio t= value of taxable account s= value of sheltered accoum Tax disadvantaged assets are first assigned to the tax-sheltered accounts;
excess tax-dissdva~aged investments are then assigned to the unsheltered account according to the following processlformulae:
if S .d, they d,=1 & a, _ 0 & dc= (d-S~T'(da,d) & a< = ( 1- d~) Wht1'e:
a, = weighting of tax-advantaged assets in sheltered accounts at= weighting of tax-advantaged needs in taxable account d=weighting of tax-disadvantaged assets Gem step b in claim 1,4,7,10,13 d,= weighting; of tax-disadvsatagod assets in sheliexed account d~ = weighting; of tax-disadventagod assets in taxable accou~s tier= weighting; of tax-disadvantaged assets in after-tax optimizaticm from step d in claim 1,4,7, 10,13 In the situation where weighting of the tax ~disadvantagod investment (s) from step b in claim 1 (4,7,10,13) is equal to or less than the prop~~rtion of the tax-sheltered account with respect to the entire portfolio, the tax-advantaged investaaeats will be assigned to the balance of the tax-sheltered account and the entire taxable account according to the following process and formulae.
if S2d, then d;-d/S & a,=(1-d,) 8c a,= 18c d, = 0 The resultant optimized taxable and defarexi accounts are than displayed either graphically or alph~erically 290. For a pmrdicular risk tokrance level and ratio of taxable to tax-shclteced accounts sad after using the aforementioned methodology, or other technique derived by those sldllod in the art, the resultant portfolio (s) are concurrently displayed is a graphical foa~mat such as a pie chart representing the assignment of the assets to both the accounts as shown in Fig. 2. In the event that the imestor(s) has/have only one account (ie taxable or sheltered) suitable optimizations, for a given risk level, will be displayed only for taxable or sheltered accoums.
Those stalled in the art will appreciate that there are many methods for suitably displaying the resultant portfolios.
The nsultemt portfolios can consist of assignment of combinations of invest assets (mutual fiends, pooled fiends, wraps, segregated fiends end individual investment assets), 300, as optimized above, to match investor investment objective, or could consist of a series of pro-existing tax-eff dent optimal portfolios inconded to mapch a wide range of various investor objectives. Much in the same way that countless financial institutions have set up series of faced "model portfolios"
of funds to madch a wide range of investor profiles, a series of tax-etlicieat model portfolios utilizing this methodology and aneompassing investors' ahelterod and/or taxable accounts could be arranged.
To typify with an example, say an investor has a portfolio consisting of a sheltered account of 5150,000 and a taxable account of 2200,0(10, has a moderate risk tolerance indicating a preferred bench mark asset allocation consisting of a mix of 10% cash, 20% bonds(debt) and 70% equity, to produce the greatest return for a given risk level. Traditional asset allocation models would usually assign asset weightings of 0.10 cash, 0.20 bonds and 0.70 equity to each of his accounts.
In dollar terms this translates into 515,000, 530,000, 5105,000, of cash, bonds, equity respectively for his sheltered account and 520,000, 540,000 and S 140,000 of cash, bonds, equity respectively for his taxabk accou~.
Using the afottmeationod tax-efbciaut optimization method/prn~sslsystem and assuming this investor was determiaod, using MPT or other rislc/reward optimization technique, to have an optimal "iishJreward" sheltered account consisting of weighting mix of 0.10/0.20!0.70 (cash/bond/oquity) and as optimal risk/reward taxable account weighting mix of 0.08J0.16/0.76, then the optimal risk/reward/tax efficient portfolio using the methodology and algorithms above, would consist of a weighting mix of 0.23/0.47/0.30 (cas6/boud/equity) to his sheltered accmmt and 0/0/1 (cash/bo~d/oquity) to his taxable account. These results in dollar terms would translate into a sheltec~od account of S34,SOO170,300/45,000 (eash/bondlequity) and a taxable account of 5200,000 equity The disclosed method for optimizing investment portfolios may be implemented as a computer progrs~m pmduct or as a paper-based work shoot or through other appropriate means, for example over the Internet, to produce the resultant portfolio in a merino suitable to be utilized by an end user.
The implementation may include, but not be restricted to a series of computer instructions fixed either on a hard-drive or server or a mediocre such as a diskette, CD-ROM, (ROM or fixed disk) A preferred ~bodiment of the present inmention includes the visual or alphanumeric display of the o~imized taxable and tax-shelbered/dal:emed prntfolios (as applicable), Fig 4. 310 and 320 (together) show tax-efficiem optimization without indecatiag magnitude of taxable and sheltered accounts, while 330 and 340 (together) show magnitude of accounts.
Unlike traditional asset allocation models that do not consider taxation, and therefore display recommratdations that are only risklreward efficicat, this present invention not only provides a solution to the investor's quest for a risk/roward efficient portfolio, it illustrates, either graphically or alpha-numericdly, the appropriate risk/r~ewardltax e~cient recommendations simultmm~ously across all investment accounts (as applicable). T'ho recommended asset ailoc~tion effectively imbeds tax-etbciency into the recommended asset allocation. Additionally, this imbedded tax-eflaciency is not only with respect to either sheltered or taocable accounts but, simultaneously across all accounts.
The principal features end advantages aro thus apparent from the steps in the above flow charts over the present systan of asset allocation pertaining to taxable and ahelterod accounts, and thus, it is intended that all such ~urcs and advantages of the instant invention fall within the true spirit and scope ofthe pit invention far optimizing investors' investments in risk/reward/tax_ efficient portfolios across taxable and ahelt:ered accounts, a process with unique, novel and creative attributes. ModiBcetions and variations will readily occur to those skilled in the art, and it is not the intention of the present invention to be limited to the exact constntction and operation as illustrated and described herein.
Assignment of assets to portfolios is generally accomplished through financial advisors while optimization of inve~ment assds is usually the domain of academics. Thus, advisors seddng both tax-e~ciency and risk/rcward efficiarcy, do not have a formal process enabling them to optimize portfolios vis-~
vis risk, return and tax.
The present invention addresses these difficulties by providing a system that combines academic portfolio theory with practical tax planning. In addition, the print process incorporates another fimdarnental principal in finaact, namely, the time value of money. As stated in the claims, the tax-efficiency of the overall sheltered and taxable accounts is taken ova a number of periods, the fixed investment period, automatically accounting for the effects of compounding rtturas.
Traditioosl asset allocation models not only allow tax disadvantaged investments to be plead in taxable accounts without consideration of potential placement of thox investments to tax-sheltered accounts, btit they do not consider the potential compounding earnings that could be made if those taxes paid on the tax-disadvantaged investments were tax sheltered.
Tax shehered and taacable portfolio management covers but is not limited to the following types of investment strategies and investmeart acranunts: cash or invcstiment accounts, pension plans including RRSPs, RRIFs, RESPs, invesunont componau of universal life insurance policies. The asset allocation decision in terms of today's state of the art tends to allocate solely for the particular accoum that is under consideration, for example an R.RSP account, or a RRIF account, or for a taxable brokerage account. ion with nefor~ce to risk/rehun for the risk tolerance of the investor is most likely achieved, but the tax implications are unfortunately ignored due to the construction of either the asset allocation program or dre product itself. For exatnpley bala<rced mutual fiends do not easily facilitate practical tax minimization. A balanced mutual fiend cannot be split so thpt the interest bearing investments can be naosferred to the tax-shelterod plan, while the equity investments; arc transferred to the taxable plan.
Ia fact, one could go so far as to say that with the present stato-of-the~art only invGStors solely holding tax-sheltered investment accounts, containing assets prodwcizrg income and withdrawals trued equally for tax proposes do not naedl to be concerned about the tax-et~cieocy. Those investors owning any inveatmeuts held outsade tax-sheltered pl~rs and employing say state of the art asset allocation system or model will most likely pay more tax than need be gives a particular level of risk tolerance. Spxifically they mast likely will bo paying tax on their interest bearing investments at a higher rate and fitquency »haa on lower tax rate equity investments taxed only on dispositiarr. Factors not accomrted for in traditional risk/reward optimizations.
Another defici~cy one notes with the prestxrt practice of asset allocation is in the preseattation of suitable asset rocommeudations for investors. The standard format, whether the media be brochures, computer software or proBraats, models displayed on web-sites, or other mediums of display or computation, is to prat pie charts or similar mesas of visual or alphanumeric display detailing suitable wtighting of asset clasxs or investment mix, either for each of an investor's taxable and tax-sheltered accounts; or to supply present a "suitable" mix or allocation of investment assess for the investor's complete portfolio, without consideration of the magnitude of the two types of accounts. Investment xlecxion for the investor's accounts then takes place through selection of one or more of these "!model" portfolios, or of investments representing these models. Unfortunately for the reasons mentioned earlier in this text these recommendations are, most probably, not tax-efficient, except in the one case of an investor holding only a tsx-sheltered account Another observation that should be~ noted is that even in the situation of an investor solely holding a taxable account the rocomnxndcd asset allocation is most likely not optimal since carefid comparison of the advisor's rccommendod taxable and tax-sheltered accounts invariably illustrates identical allocations for both. Therefore, the recommended portfolio most likely will not lie on the efficient frontier du~c to the different aRcx-tax return of the investments held in a taxable account versus a tax-sh~teTed one. In addition, most likely it will n~ provide effective tax-minimization.
The present inv~tion provides not only a system to provide risk/rewardltax efficient portfolios, but an effective means of display; neither of which has been addressed by existing asset allocation models.
SUI~IARY OF THE INVENTION
The present invention is a system, method and/or process to date and display investment portfolios for investors that arc rish/return and tax efficient. In other words, the objective is to assign and display weightings of various investinents, representing selected asset classes, to portfolios that maximize return ova time fir a given level of risk, while simultaneously minimizing taxes vn the investor's overall pottfolio-whether it cotapeisos taxable, sheltered, or both taxable and sheltered accounts. The systan, process and method can utilize forms, coa~tputer programs or hardware, the Internet (World Wide Web) or other ~titable mediums through which the system, method and~or process can bo implemented, utilized and displayed Data is imputed representing rates of rorurc~ of selected investrnant assets, then modern portfolio theory and/or other techniques employed by dtose txperienced in the investment management field are used to generate an efficient frontier or array of portfolios representing the highest expo~dlprojecxsd redvms for given risk loveLs. Based on the risk tolerance levels of various investors "ideal" matching lane-sheltered pcHtfolios consisting of the appropriate mix of the investment assets are produced. These "ideal" portfolios provide the template from which the suitable overall ascot allocation for both ts;Kablc and sheltered portfolios will take place.
After-tax rattan data representing rates of mtmn of the same selected investment assets is imputed. The investor's lima frame and dre exact tax treatment of the returns wiU affad the atta-tax tines of return. MPT and/or other tochruques employed by those experienced in the investment management Geld is/are used two generate an efficient frontier or array of portfolios representing the highest expxtod/potentiall returns for given risk levels.
Based on risk tolaance levels of various investors' ideal matching taxable portfolios consisting of the appropriate mix of the investment assets arc produced.
Prior to assignment of investment assets to taxable and sheltered accounts in accordance with the investor's optimal asset mixes for taxable and sheltered portfolios, the weighting of these rospoarve accounts to the investor's overall portfolio is calculated. The size of the investor's shehuod scoount in relation to the investor's overall portfolio, and the ratio of the tax-disadvantaged assets in the "ideal" portfolio plax a constraint on the assignment of tax-disadvaataged assets to the tax-sheltered portfolio. Prior to assignment, as applicable, of the tax-disadva~ged ascots, a test of the tsx-effi~aency of the tax-advantaged assets is wade. Based on the investor's time frame and the tax-efficiency of the inveshuent(s) over that time Frame, a comparison between the rntu<n of the invrsOment inside a tax-sheltered plan and ~tside is made.
This is done to account for the chance that even a tax-advantaged investment may do worse outside a teat-sheltered plan if the loss of growth on the taxes paid on the tax-advantaged CA 02309853 2001-Oa-03 invesanent(s) over the investor's time p~io<i exceeds the highs-taxed growth inside. In most cases this will not be the case. In the situation that it is, however, the tax-sdvantaga3 investment will be assigned on a priority basis to the tar; sheltered plan.
In the most common assigamont, that of the tax-disadvantaga3 invastcnent(s) to the tax-sheltered account, the ratio of the tsx-disadvantaged invesmiont(s), calculata3 earlier in the ideal portfolio (a value between zero and one), is subtracta3 from the weighting of the tax-sheltered account to the investor's overall portfolio (a value between zero and one). If the re~ltant is positive, the full value of the tax-disadvantaged investment is assigned to the tax-sheltered account and the shortfall of content in the tax-sheltered plan is provided by assignment of the tax-advantaged investment. If the result~t is negative, in other words there is an excess of the teat-disadvantaged assets that cannot be assigned to the tax-sholtend account, it is necessary for them to be assigned to the taxable account employing the results, for the optimal taxable account.
This is achieved by multiplying the ratio of the excess tax-disadvantaga3 investments) to the size of the taxable account with the ratio of the tax-disadvantgga3 investments) to tax-adva~agod investments) selected firom the after-teat array of portfolicrs. The balance of the taxable account will consist of the tax-advamaged investment(s).
Once the optimal allocations have boon asa;rtainod, the present invention provides a technique of display for rive investors, either in chart or alphanumeric form, of bodt their recommended taxable and tax-sheltecod/deferred account, that automatically imbeds the most effodive investrneat/asset assignment from a taxation standpoint.
It is accordingly an object of the present inv~tion to overcome the limitations of the known art and to provide an asset allocation mdhod that accounts for the tax implications of tax-advantagod, tax-disadvantaged investments, both inside and out of taxable and shelbetbd (deferred) invesmnent portfolios.
It further is an object of this invention to sunuhanoously display for both investor's taxable and tax-sheltered accounts, either Graphically rnr alphanumerically, charts that effectively "imbed"
tax~fficieacy into a risk/roturrt opa~ZOn for investors of varying risk tolerances (and timo-horizons).
It further is an object ofthis invention to provide and/or display tax/risk/return efficient portfolios for investors who solely own taxable or tax:-sheltered (deferred) accounts.
It further is an object of this invention to provide a systom/process of op~mizstion for all ascot classes and investment accotsat types. These investment accounts could iactude, but would not be restricted to, RRSPs/RRIFs, RESPs, univwsal life insurance, and other tax shelters.
It further is an intention of this invention to provide graphical display of taxable and tax-shelteeed accounts that provides comparative sizing of the investor's respective accourrts. For example, if the investor has equally sized taxable and Isx-sheltered accounts the simultaneously displayed aocoums would be of equal size. If the imostor has a teat-sheltered account that is twice as large as his taxable account the size of graphical representation of the tax-sheltered account will be twice the size of the taxable account.
It is, however, not an intention of this invention to be restricted by this method of displgy. Equal sized charts representing taxable and sheltered accounts, even if they are not of equal monerety size, may be desired. This will in no way c;ffea the essential nature of the charts to imbai tax-efFcioncy into risk/reward efficient portfolio displays.
GLOSSARY OF TERMS
Asset - refrrs to an investment, usually classified as either cash, bond(debt) or equity (stock) Exempt - refers to an investment or account that avoids tax completely. An txarnple could be the investment account of a life insurance policy that grows without taxation and pays out tax-Gee upon death of the insured Investment- refers to property in which money is invested, can include assets such as cash, bonds, equities, mutual funds, pooled funds, end other managed money accounts Investor - any person, partnership, corporation or any entity committing mosey to an investment portfolio.
Managed money - any poanfolio of moray that is professionally managed and invested - includes products and services such as mutual funds, unit trusts, wrap accounts, pooled funds, pension fiends.
MPT - abbreviation for modern portfolio theory.
Sheltered investment/account- any investment or account that tends to defer, shelter, redacx or eliminate tax.
Note that the word sheltered and tmc-sheltered have the same meaning throughout this application Taxable account - refers to an account that offers no means of tax sheltering to the invesaaants held within it, although some of those investments may have their own innate tax-sheltering ability.
Tax-sdva~ged investments - are generally those that have an i~te ability to defer tax, or are taxed at prefearatial rules. The most common type of tax-advantaged investmem would be an equity or oamrron stock. However it is possible for every tax-advantaged investments to have tax-dissdvanmgod income, such as dividends.
Tax~i~advsatagod iavestmarts - are gea~rally those that do not have an ability to defer tax, andlor are taxed at highs tax rates. Bonds generally pay internal that is taxable, in most regimes, armually at high rates, with little or no possibility of deferral.
Tax-efEcaoncy - a moasun of the ability of an investment or account to ma~cirniu after-tax rehrm. The more tax-efficient it is the higher the aver-tax rettnn.
Tax-shelter - refers to the ability for an itrvestment strategy or investment to defer, shelter, reduce or eliminate tax. RRSPs, RR>Fs. IRAs and 401Ks are examples of tax shelters. An extreme, but never-the-less important tax-shelter would be an exempt investment such as the investment side of an universal lifo-insurancc policy that shelters earnings growth and pays out tax-exempt.
DIAGRAMS
Brief description of diagrams FIG. 1 depicts the prior art method for displaying recommended "model" taxable (cash/investment accounts) and tax-sheltered accounts (registerod/t~c-exempt) or p«tfolios FIG. 2 depicts simuitana~usly optimized risk/retum/t~c efficient taxable and tax-sheltered accounts FIG. 3 is a flow chart of the system, method and process used to arrive at the optimized investment poctfotio(s) FIG. 4 depicts two aheraative visual displays of tax-eflzci~t asset allocation models DETAILED DESCRIPTION OF A PREFERRED EMBODIMENT
The foregoing features of the invention will be more readily understood with refaencx to the following ddailod description taken with the accompa~ing diagrams.
The present invention is a systan, process and/or method for optimizing fram a risk/rdurn perspective an inveswr's more investment portfolio whether it be invested in tax-sheltered, taxable, or auy mixhue of these two types of accounts. Additionally the procedure could be used to tax-efficiently assign assets to sheltued/~9afertod and taxable accounts on a stand-alone basis without reference to modern portfolio thorny or other commonly utilized techniques of portfolio optunizatiion or rislc/rtward management. In traditional asset allocation modois, the assignmcut of selecxed invesdme~ asset is often indicated through display of particular investrnent account, usually taxable, aheitercd, or neither. FIG I shows some typical "models". 10, 30 and 50 show conservative, moderate and aggressive m«lels for taxable pisos (accounts). 20, 40, 60 show conservative, moderate and aggn:asive m«leis for tax-sheltered/deferred plans (accounts). 70, 80 and 90 show conservative, moderate and alrgressive models without consideration of type of plan or account. These models, although perhaps risklnwvard etficitut is a worid without taxation, in no way consider the after-tax returns of the, various investment assets in their assignment to taxable and shdtered/deferred accounts, rcsuiting in overall portfolios that are not tax-efficient.
FIG. 2, 100 and 110 (oogether~ 120 sad 130 (together), 140 and 150 (together) show simultaneously optimized risk/rawdtmc-e~cient taxable and aheltered/defc~rod accounts for conservative, moderate and aggressive investors r~peaively. 160 shows a traditional asset alMc~tioa for en investor (of moderate risr: toleranx level) with only a taxable account. 170 shows a tax-efficient allocation for the same investor. (hots the inexease in weighting of equity, tax-advmrtaged, assets and decrease in weighting of cashlbonds due to the higher after-tax r~ehmt of the equity aliocation versus 160). 180 slhows traditional asset allocation for a moderate investor with only she)taed/delierrod accounts. For that same investor 190 shows a tax-efficient allocation.
There is no difference in percentage allocF~tion in this case, as there is no opporhinity for this investor to preferentially allocate some of his tax-advantaged investments to taxable accounts.
Note that in these diagxems the magnitude of the various accounts is not signi6od.
The first step of any asset allocation proce~durc is an assessment of the investors' 200 profile, 210 in FIG 3. The investor" with hisJher individual and unique respective investment profile answers questions to ascertain en appropriate mix of investment assets. This is done through electronic means (computer. latemct), paper-based questionnaire or other appropriate means 220. Based on the investor's risk tokrau~e sad tax situation an appropriate assignment of investm~t assets will be made. Before this stage is reached, the tax-efficiency of the potential investrncnt assets that the investor will select from must be detaTnirtal.
In most circumstances it is fairly clear and obvious as to which investments can be classified as tax-advantaged and which cam be tax~dissdvantaged. For example stocks, are generally tax-advantagad investm~ts, and bonds are usually classified as tax-disadvantaged investments.
However, ova time, and due to what is commonly called "tax-inef6tciency" it is possible for stocks to become less tax-efficient than bonds, and to be better held inside a tax-sheltered account. To ensure that tinder any circumstances the comet labeling of the selected investment assets as other tax-advantaged or disadvantaged dte following methodology can be used, 230:
1) For the fixed investment period a calculation of the total after-tax portfolio return where the "tax-advantaged" investm~t is held in a taxable account and an equal value of the "tax-disadvantaged" investment asset is held inside a sheltered account is made.
II) The same calculation, switching both investment assets to the odxr account is made.
The portfolio with the highest return represents the appropriate priority of assignment of investment assets to type of account. It may also indicate a necessary reclassification of the foruur "~c-advantaged" investment to thm~ of "tax-disadvantaged" investment sad vice-versa Suitabk formulae for steps I and II to facilitate prioritization of investment asset assignment are:
[1* (1 + R,,~T - (1*(ACB~T)T -ACH~T))'~1 + [(1* ((1 + RB)T - ACB~))' (1-~I
11. [I* (1 + RAT - (1*(ACB~)T ..ACBaT))*~) + [(1* (U + RAT - ACB~T))* (1-~1 Wh~e:
R" _ (annual) rehun on "hoc advantaged" investment inside tax-sheltered aca~ount RN _ (amroal) aRer-tax return (in taxable account) of "tax-advantaged" investmem Ra = (annual) beforo-tax return (in sheltered account) of tax-disadvantaged investment R~ _ (annual) after-tan return (in taxable aocouut) of tax-disadvaraaged investment ACBaT = adjusted cost base of "taac-disadvantaged" investm~t at time T
ACB~T = ad)ustod Cost base Of "tax-advantaged" investment et time T
M= investota' applicable tax rate at time T
T= investor's time horizon Note: the initial value for both invcstmeat A & B is assumed to be 1 and each investment initially has no unrealized capital gains Note: after this prioritization the asset found to be best assigned to the sheltered account will be called the taoc-disadvantaged asset and the asset found to be best assigned to the taxable aCCOUm the tax-advantaged asset.
Using dais of the before-tax rates of return, 240 characterizing the universe of assets considered to comprise a portfolio as e~cient frontier or matrix of risk/rtward optimized assets is generated.
This genantion of the etl~cient frontier is in accordance with one of the underlying assumptions of MPT, namely, no taxes.
A second efficient frontier or matrix of riskJreward optimized assets is generated using MPT or other technique of risk/reward optimization utilized by those sltilled in the art, this limo factoring in the adjusted rates of return for the universe of assets on an after-tax rate of return, 240. The calculation of the after-tax return should matdc the investor's time frame.
For example, the after-tax rates of return of tax-advantaged and tart-disadvantaged investments will vary with the tax-advantagod becoming more favourable over a longer period of time due to the increased potential of growth of the taxes defaced. An equity asset can grow in value and not attract taxes on its increase in capital until :it is disposed o!; while an interest bearing asset usually forces an investor to pay annual tax on the interest Taxes paid on the interest bearing assets are funds that cannot be utilized for future growth.
Baaod on a particular investor's risk tolerance level and investment time horizon a suitable portfolio is selected from the first efficient :&ornier or optinaizod matrix.
This selearon represents the ideal rislc/reward optimization in the unreal world of no taxation. From this point on the preforred embodiment of this invention is essentially adjusting this "ideal"
to fit the real world where tax~ion plays a vital mle in influencing the best allocation of investment assets across as investor's taxable and shdtared accounts. laasad on what a particular investor's risk tolerance level and investment time horizon a suitable portfolio is selected from the second ei~cient frontier or opmnized matrix. The asset mix and yield for this aptimal portfolio will differ from the first d~ to the difference in tax treatmcat of the different asset classes.
In the instance first an investor has ortly taxable or sheltered account(s), he/she will move dirxtty to the respective taxable aptimizabon 280 and sheltered optimization 270 suitably displayed, 250 and 260, respectively.
The allocation to concurrently best fit the assets to both sheltered and taxable accounts for the situation of the investor with both sheltered/defecred and taxable accounts takes place, moving first to 270 and then to 280 in Fig.3.
The following algorithms, or other mesas derived by a person slcillod is the art, are used to ascertain the weighting of invents to the investor's tax sheltered and taxabk accounts as indicated in 270 end 280:
T= tJ(t+s) and S= s/(t+s), where T= proportion of taxable account with respect to hiaJher entire portfolio S= proportion of sheltered acoou~ with respect to hislher entire portfolio t= value of taxable account s= value of sheltered accoum Tax disadvantaged assets are first assigned to the tax-sheltered accounts;
excess tax-dissdva~aged investments are then assigned to the unsheltered account according to the following processlformulae:
if S .d, they d,=1 & a, _ 0 & dc= (d-S~T'(da,d) & a< = ( 1- d~) Wht1'e:
a, = weighting of tax-advantaged assets in sheltered accounts at= weighting of tax-advantaged needs in taxable account d=weighting of tax-disadvantaged assets Gem step b in claim 1,4,7,10,13 d,= weighting; of tax-disadvsatagod assets in sheliexed account d~ = weighting; of tax-disadventagod assets in taxable accou~s tier= weighting; of tax-disadvantaged assets in after-tax optimizaticm from step d in claim 1,4,7, 10,13 In the situation where weighting of the tax ~disadvantagod investment (s) from step b in claim 1 (4,7,10,13) is equal to or less than the prop~~rtion of the tax-sheltered account with respect to the entire portfolio, the tax-advantaged investaaeats will be assigned to the balance of the tax-sheltered account and the entire taxable account according to the following process and formulae.
if S2d, then d;-d/S & a,=(1-d,) 8c a,= 18c d, = 0 The resultant optimized taxable and defarexi accounts are than displayed either graphically or alph~erically 290. For a pmrdicular risk tokrance level and ratio of taxable to tax-shclteced accounts sad after using the aforementioned methodology, or other technique derived by those sldllod in the art, the resultant portfolio (s) are concurrently displayed is a graphical foa~mat such as a pie chart representing the assignment of the assets to both the accounts as shown in Fig. 2. In the event that the imestor(s) has/have only one account (ie taxable or sheltered) suitable optimizations, for a given risk level, will be displayed only for taxable or sheltered accoums.
Those stalled in the art will appreciate that there are many methods for suitably displaying the resultant portfolios.
The nsultemt portfolios can consist of assignment of combinations of invest assets (mutual fiends, pooled fiends, wraps, segregated fiends end individual investment assets), 300, as optimized above, to match investor investment objective, or could consist of a series of pro-existing tax-eff dent optimal portfolios inconded to mapch a wide range of various investor objectives. Much in the same way that countless financial institutions have set up series of faced "model portfolios"
of funds to madch a wide range of investor profiles, a series of tax-etlicieat model portfolios utilizing this methodology and aneompassing investors' ahelterod and/or taxable accounts could be arranged.
To typify with an example, say an investor has a portfolio consisting of a sheltered account of 5150,000 and a taxable account of 2200,0(10, has a moderate risk tolerance indicating a preferred bench mark asset allocation consisting of a mix of 10% cash, 20% bonds(debt) and 70% equity, to produce the greatest return for a given risk level. Traditional asset allocation models would usually assign asset weightings of 0.10 cash, 0.20 bonds and 0.70 equity to each of his accounts.
In dollar terms this translates into 515,000, 530,000, 5105,000, of cash, bonds, equity respectively for his sheltered account and 520,000, 540,000 and S 140,000 of cash, bonds, equity respectively for his taxabk accou~.
Using the afottmeationod tax-efbciaut optimization method/prn~sslsystem and assuming this investor was determiaod, using MPT or other rislc/reward optimization technique, to have an optimal "iishJreward" sheltered account consisting of weighting mix of 0.10/0.20!0.70 (cash/bond/oquity) and as optimal risk/reward taxable account weighting mix of 0.08J0.16/0.76, then the optimal risk/reward/tax efficient portfolio using the methodology and algorithms above, would consist of a weighting mix of 0.23/0.47/0.30 (cas6/boud/equity) to his sheltered accmmt and 0/0/1 (cash/bo~d/oquity) to his taxable account. These results in dollar terms would translate into a sheltec~od account of S34,SOO170,300/45,000 (eash/bondlequity) and a taxable account of 5200,000 equity The disclosed method for optimizing investment portfolios may be implemented as a computer progrs~m pmduct or as a paper-based work shoot or through other appropriate means, for example over the Internet, to produce the resultant portfolio in a merino suitable to be utilized by an end user.
The implementation may include, but not be restricted to a series of computer instructions fixed either on a hard-drive or server or a mediocre such as a diskette, CD-ROM, (ROM or fixed disk) A preferred ~bodiment of the present inmention includes the visual or alphanumeric display of the o~imized taxable and tax-shelbered/dal:emed prntfolios (as applicable), Fig 4. 310 and 320 (together) show tax-efficiem optimization without indecatiag magnitude of taxable and sheltered accounts, while 330 and 340 (together) show magnitude of accounts.
Unlike traditional asset allocation models that do not consider taxation, and therefore display recommratdations that are only risklreward efficicat, this present invention not only provides a solution to the investor's quest for a risk/roward efficient portfolio, it illustrates, either graphically or alpha-numericdly, the appropriate risk/r~ewardltax e~cient recommendations simultmm~ously across all investment accounts (as applicable). T'ho recommended asset ailoc~tion effectively imbeds tax-etbciency into the recommended asset allocation. Additionally, this imbedded tax-eflaciency is not only with respect to either sheltered or taocable accounts but, simultaneously across all accounts.
The principal features end advantages aro thus apparent from the steps in the above flow charts over the present systan of asset allocation pertaining to taxable and ahelterod accounts, and thus, it is intended that all such ~urcs and advantages of the instant invention fall within the true spirit and scope ofthe pit invention far optimizing investors' investments in risk/reward/tax_ efficient portfolios across taxable and ahelt:ered accounts, a process with unique, novel and creative attributes. ModiBcetions and variations will readily occur to those skilled in the art, and it is not the intention of the present invention to be limited to the exact constntction and operation as illustrated and described herein.
Claims (15)
1). A method for enabling investors to simultaneously select for both taxable/unsheltered and tax-sheltered/deferred accounts a value of portfolio weight for each of a plurality of assets that optimizes across all accounts for risk minimization, return maximization and tax minimization, comprising the steps of:
a) setting of a fixed investment period;
b) determining the investor's optimal weighting of between one and unity for each of a plurality of asset classes, based on the pre-tax return for each of the assets if held inside a tax-sheltered/deferred account (s) for the fixed investment period;
c) determining the priority of assignment of various asset classes to taxable or sheltered/deferred account(s) based on superior compounded after-tax return for the fixed investment period;
d) determining the investor's optimal weighting of between one and unity for each of a plurality of asset classes, based on the after-tax return of the assets if held inside taxable account (s) for the fixed investment period;
e) priority assignment of tax-disadvantaged investments to tax-sheltered/deferred account(s) wherein the value of the ratio of the tax-disadvantaged investment (s) in the optimal weighting for a tax-sheltered/deferred account derived in step b falling short of the value of the ratio of the tax-sheltered/deferred account(s) in relation to the investor's overall portfolio is assigned to the tax-sheltered/deferred account(s) and any amount exceeding this ratio is assigned to the taxable account(s) in the amount as determined by step f;
f) excess value of tax-disadvantaged investment(s) assigned taxable account from step e, as applicable, is scaled in proportion to the ratio of the weighting of the tax-disadvantaged investment(s) from step d divided by the weighting of the tax disadvantaged investment(s) from step b:
g) assignment of the tax-advantaged investment(s) to the tax-sheltered account(s) wherein there is a fall short amount of the tax-disadvantaged investment(s) assignment to the tax-sheltered/deferred account(s);
h) excess tax-advantaged investment(s) from step g that cannot be assigned to sheltered accounts is assigned to taxable account(s);
a) setting of a fixed investment period;
b) determining the investor's optimal weighting of between one and unity for each of a plurality of asset classes, based on the pre-tax return for each of the assets if held inside a tax-sheltered/deferred account (s) for the fixed investment period;
c) determining the priority of assignment of various asset classes to taxable or sheltered/deferred account(s) based on superior compounded after-tax return for the fixed investment period;
d) determining the investor's optimal weighting of between one and unity for each of a plurality of asset classes, based on the after-tax return of the assets if held inside taxable account (s) for the fixed investment period;
e) priority assignment of tax-disadvantaged investments to tax-sheltered/deferred account(s) wherein the value of the ratio of the tax-disadvantaged investment (s) in the optimal weighting for a tax-sheltered/deferred account derived in step b falling short of the value of the ratio of the tax-sheltered/deferred account(s) in relation to the investor's overall portfolio is assigned to the tax-sheltered/deferred account(s) and any amount exceeding this ratio is assigned to the taxable account(s) in the amount as determined by step f;
f) excess value of tax-disadvantaged investment(s) assigned taxable account from step e, as applicable, is scaled in proportion to the ratio of the weighting of the tax-disadvantaged investment(s) from step d divided by the weighting of the tax disadvantaged investment(s) from step b:
g) assignment of the tax-advantaged investment(s) to the tax-sheltered account(s) wherein there is a fall short amount of the tax-disadvantaged investment(s) assignment to the tax-sheltered/deferred account(s);
h) excess tax-advantaged investment(s) from step g that cannot be assigned to sheltered accounts is assigned to taxable account(s);
2). The method of claim 1 further comprising the step of determining whether a particular investment is tax-advantaged or tax-disadvantaged, comprising the steps of:
a). setting of fixed investment period;
b) determining the combined after-tax return of all combinations of assignment of investments to taxable and sheltered accounts;
c) combination with highest after-tax portfolio return indicates tax-advantaged investment(s) as those to be held in taxable account(s) and tax-disadvantaged investment(s) as those to be held in sheltered account(s);
a). setting of fixed investment period;
b) determining the combined after-tax return of all combinations of assignment of investments to taxable and sheltered accounts;
c) combination with highest after-tax portfolio return indicates tax-advantaged investment(s) as those to be held in taxable account(s) and tax-disadvantaged investment(s) as those to be held in sheltered account(s);
3). The method of claim 1 further composing the step of:
graphic or alpha-numeric representation of the appropriate weighting of each of the plurality of assets to each of the investor's taxable and/or sheltered/deferred account(s) representing risk minimization, return maximization and tax minimization across the investor's complete portfolio of accounts as determined in claim 1, matching the investor's investment profile
graphic or alpha-numeric representation of the appropriate weighting of each of the plurality of assets to each of the investor's taxable and/or sheltered/deferred account(s) representing risk minimization, return maximization and tax minimization across the investor's complete portfolio of accounts as determined in claim 1, matching the investor's investment profile
4) A system enabling investors to simultaneously select for both taxable/unsheltered and tax-sheltered (sheltered) accounts a valve of portfolio weight for each of a plurality of assets that optimizes across all accounts for risk minimization, return maximization and tax minimization, comprising the steps of:
a) means of setting of a fixed investment period;
b) means for determining the investor's optimal weighting between one and unity of a plurality of asset classes based on the pre-tax return of the assets if held inside a tax-sheltered/deferred account (s) for the fixed investment period;
c) means for determining the priority of assignment of various seed classes to taxable or deferred accounts based on superior compounded after-tax return for the fixed investment period;
d) means for determining the investor's optimal weighting between one and unity of a plurality of asset classes based on the after-tax return of the assets if held inside taxable account (s) for the fixed investment period;
e) means for priority assignment of tax-disadvantaged investments to tax-sheltered/deferred account(s) wherein the value of the ratio of the tax-disadvantaged investment (s) in the optimal weighting for a tax-sheltered/deferred account derived in step b falling short of the value of the ratio of the tax-sheltered/deferred account(s) in relation to the investor's overall portfolio is assigned to the tax-sheltered/deferred account(s) and any amount exceeding this ratio is assigned to the taxable account(s) in the amount as determined by step f;
f) means for assigmnent of excess value of tax-disadvantaged investment(s) assigned to taxable account from step e, scaled in proportion to the ratio of the weighting of the tax-disadvantaged investment(s) from step c divided by the weighting of the tax disadvantaged investment(s) from step b;
g) means foe assignment of the tax-advantaged investment(s) to the tax-sheltered account(s), as applicable, wherein there is a fall short amount of the tax-disadvantaged investment(s) assignment to the tax-sheltered/deferred account(s);
h) means for assignment of excess tax-advantaged investment(s) from step g that cannot be assigned to sheltered accounts assigned to taxable account(s).
a) means of setting of a fixed investment period;
b) means for determining the investor's optimal weighting between one and unity of a plurality of asset classes based on the pre-tax return of the assets if held inside a tax-sheltered/deferred account (s) for the fixed investment period;
c) means for determining the priority of assignment of various seed classes to taxable or deferred accounts based on superior compounded after-tax return for the fixed investment period;
d) means for determining the investor's optimal weighting between one and unity of a plurality of asset classes based on the after-tax return of the assets if held inside taxable account (s) for the fixed investment period;
e) means for priority assignment of tax-disadvantaged investments to tax-sheltered/deferred account(s) wherein the value of the ratio of the tax-disadvantaged investment (s) in the optimal weighting for a tax-sheltered/deferred account derived in step b falling short of the value of the ratio of the tax-sheltered/deferred account(s) in relation to the investor's overall portfolio is assigned to the tax-sheltered/deferred account(s) and any amount exceeding this ratio is assigned to the taxable account(s) in the amount as determined by step f;
f) means for assigmnent of excess value of tax-disadvantaged investment(s) assigned to taxable account from step e, scaled in proportion to the ratio of the weighting of the tax-disadvantaged investment(s) from step c divided by the weighting of the tax disadvantaged investment(s) from step b;
g) means foe assignment of the tax-advantaged investment(s) to the tax-sheltered account(s), as applicable, wherein there is a fall short amount of the tax-disadvantaged investment(s) assignment to the tax-sheltered/deferred account(s);
h) means for assignment of excess tax-advantaged investment(s) from step g that cannot be assigned to sheltered accounts assigned to taxable account(s).
5). The method of claim 4 further comprising the step of determining whether a particular investment is tax-advantaged or tax-disadvantaged, comprising the steps of:
a). setting of fixed investment period;
b) determining the combined after-tax return of all combinations of assignment of investments to taxable and sheltered accounts;
c) combination with highest after-tax portfolio return indicates tax-advantaged investment(s) as those to be held in taxable account(s) and tax-disadvantaged investment(s) as those to be held in sheltered account(s).
a). setting of fixed investment period;
b) determining the combined after-tax return of all combinations of assignment of investments to taxable and sheltered accounts;
c) combination with highest after-tax portfolio return indicates tax-advantaged investment(s) as those to be held in taxable account(s) and tax-disadvantaged investment(s) as those to be held in sheltered account(s).
6). The system of claim 4 further comprising;
means for graphic or alpha-numeric representation of the appropriate weighting of each of the plurality of assets to each of the investor's taxable and/or sheltered/deferred account(s) representing risk minimization, return maximization and tax minimization across the investor's complete portfolio of accounts as determined in claim 4, matching the investor's investment profile.
means for graphic or alpha-numeric representation of the appropriate weighting of each of the plurality of assets to each of the investor's taxable and/or sheltered/deferred account(s) representing risk minimization, return maximization and tax minimization across the investor's complete portfolio of accounts as determined in claim 4, matching the investor's investment profile.
7) A computer-implemented system enabling investors to simultaneously select for both taxable/unsheltered and tax-sheltered/deferred accounts a value of portfolio weight for each of a plurality of assets that optimizes across all accounts for risk minimization, return maximization and tax minimization comprising the steps of:
a) setting of a fixed investment period;
b) determining the investor's optimal weighting between one and unity of a plurality of asset classes based on the pre-tax return of the assets if held inside a tax-sheltered/deferred account (s) for the fixed investment period;
c) determining the priority of assignment of various asset classes to taxable or deferred accounts based on superior compounded after-tax return for the fixed investment period;
d) determining the investor's optimal weighting between one sad unity of a plurality of asset classes based on the after-tax return of the assets if held inside taxable account (s) for the fixed investment period;
e) priority assignment of tax-disadvantaged investments to tax-sheltered/deferred account(s) wherein the value of the ratio of the tax-disadvantaged investment (s) in the optimal weighting for a tax-sheltered/deferred account derived in step b falling short of the value of the ratio of the tax-sheltered/deferred account(s) in relation to the investor's overall portfolio is assigned to the tax-sheltered/deferred account(s) and any amount exceeding this ratio is assigned to the taxable account(s) in the amount as determined by step f;
f) excess value of tax-disadvantaged investment(s) assigned to taxable account from step e, scaled in proportion to the ratio of the weighting of the tax-disadvantaged investment(s) from step c divided by the weighting of the tax disadvantaged investment(s) from step b;
g) assignment of the tax-advantaged investment(s) to the tax-sheltered account(s) wherein there is a fal short amount of the tax-disadvantaged investment(s) assignment to the tax-sheltered/deferred account(s);
h) excess tax-advantaged investment(s) from step g that cannot be assigned to sheltered accounts assigned to taxable account(s);
a) setting of a fixed investment period;
b) determining the investor's optimal weighting between one and unity of a plurality of asset classes based on the pre-tax return of the assets if held inside a tax-sheltered/deferred account (s) for the fixed investment period;
c) determining the priority of assignment of various asset classes to taxable or deferred accounts based on superior compounded after-tax return for the fixed investment period;
d) determining the investor's optimal weighting between one sad unity of a plurality of asset classes based on the after-tax return of the assets if held inside taxable account (s) for the fixed investment period;
e) priority assignment of tax-disadvantaged investments to tax-sheltered/deferred account(s) wherein the value of the ratio of the tax-disadvantaged investment (s) in the optimal weighting for a tax-sheltered/deferred account derived in step b falling short of the value of the ratio of the tax-sheltered/deferred account(s) in relation to the investor's overall portfolio is assigned to the tax-sheltered/deferred account(s) and any amount exceeding this ratio is assigned to the taxable account(s) in the amount as determined by step f;
f) excess value of tax-disadvantaged investment(s) assigned to taxable account from step e, scaled in proportion to the ratio of the weighting of the tax-disadvantaged investment(s) from step c divided by the weighting of the tax disadvantaged investment(s) from step b;
g) assignment of the tax-advantaged investment(s) to the tax-sheltered account(s) wherein there is a fal short amount of the tax-disadvantaged investment(s) assignment to the tax-sheltered/deferred account(s);
h) excess tax-advantaged investment(s) from step g that cannot be assigned to sheltered accounts assigned to taxable account(s);
8). The method of claim 7 further comprising the step of determining whether a particular investment is tax-advantaged or tax-disadvantaged, comprising the steps of:
a). setting of fixed investment period;
b) determining the combined after-tax return of all combinations of assignment of investments to taxable and sheltered accounts;
c) combination with highest after-tax portfolio return indicates tax-advantaged investment(s) as those to be held in taxable account(s) and tax-disadvantaged investment(s) as those to be held in sheltered account(s).
a). setting of fixed investment period;
b) determining the combined after-tax return of all combinations of assignment of investments to taxable and sheltered accounts;
c) combination with highest after-tax portfolio return indicates tax-advantaged investment(s) as those to be held in taxable account(s) and tax-disadvantaged investment(s) as those to be held in sheltered account(s).
9). The method of claim 7 further comprising the step of:
graphic or alpha-numeric representation of the appropriate weighting of each of the plurality of assets to each of the investor's taxable and/or sheltered/deferred account(s) representing risk minimization, return maximization and tax minimization across the investor's complete portfolio of accounts as determined in claim 7, matching the investor's investment profile.
graphic or alpha-numeric representation of the appropriate weighting of each of the plurality of assets to each of the investor's taxable and/or sheltered/deferred account(s) representing risk minimization, return maximization and tax minimization across the investor's complete portfolio of accounts as determined in claim 7, matching the investor's investment profile.
10) A computer-implemented system enabling investors to simultaneously select for both taxable/unsheltered and tax-sheltered/deferred accounts a value of portfolio weight for each of a plurality of assets that optimizes across all accounts for risk minimization, return maximization and tax minimization, comprising the steps of:
a) means for setting of a fixed investment period;
b) means for determining the investor's optimal weighting between one and unity of a plurality of asset classes based on the pre-tax return of the assets if held inside a tax-sheltered/deferred account (s) for the fixed investment period;
c) means for determining the priority of assignment of various asset classes to taxable or deferred accounts based on superior compounded after-tax return for the fixed investment period;
d) means for determining the investor's optimal weighting between one and unity of a plurality of asset classes based on the after-tax return of the assets if held inside taxable account (s) for the fixed investment period;
c) means for priority assignment of tax-disadvantaged investments to tax-sheltered/deferred account(s) wherein the value of the ratio of the tax-disadvantaged investment (s) in the optimal weighting for a tax-sheltered/deferred account derived in step b falling short of the valve of the ratio of the tax-sheltered/deferred account(s) in relation to the investor's overall portfolio is assigned to the tax-sheltered/deferred account(s) and any amount exceeding this ratio is assigned to the taxable account(s) in the amount as determined by step f;
f) means for assignment of excess value of tax-disadvantaged investment(s) assigned to taxable account from step e, scaled in proportion to the ratio of the weighting of the tax-disadvantaged investment(s) from step c divided by the weighting of the tax disadvantaged investment(s) from step b;
g) means for assignment of the tax-advantaged investment(s) to the tax-sheltered account(s) wherein there is a fall short amount of the tax-disadvantaged investment(s) assignment to the tax-sheltered/deferred account(s);
h) means for assignment of excess tax-advantaged investment(s) from step g that cannot be assigned to sheltered accounts, assigned to taxable account(s).
a) means for setting of a fixed investment period;
b) means for determining the investor's optimal weighting between one and unity of a plurality of asset classes based on the pre-tax return of the assets if held inside a tax-sheltered/deferred account (s) for the fixed investment period;
c) means for determining the priority of assignment of various asset classes to taxable or deferred accounts based on superior compounded after-tax return for the fixed investment period;
d) means for determining the investor's optimal weighting between one and unity of a plurality of asset classes based on the after-tax return of the assets if held inside taxable account (s) for the fixed investment period;
c) means for priority assignment of tax-disadvantaged investments to tax-sheltered/deferred account(s) wherein the value of the ratio of the tax-disadvantaged investment (s) in the optimal weighting for a tax-sheltered/deferred account derived in step b falling short of the valve of the ratio of the tax-sheltered/deferred account(s) in relation to the investor's overall portfolio is assigned to the tax-sheltered/deferred account(s) and any amount exceeding this ratio is assigned to the taxable account(s) in the amount as determined by step f;
f) means for assignment of excess value of tax-disadvantaged investment(s) assigned to taxable account from step e, scaled in proportion to the ratio of the weighting of the tax-disadvantaged investment(s) from step c divided by the weighting of the tax disadvantaged investment(s) from step b;
g) means for assignment of the tax-advantaged investment(s) to the tax-sheltered account(s) wherein there is a fall short amount of the tax-disadvantaged investment(s) assignment to the tax-sheltered/deferred account(s);
h) means for assignment of excess tax-advantaged investment(s) from step g that cannot be assigned to sheltered accounts, assigned to taxable account(s).
11). The method of claim 10 further comprising the step of determining whether a particular investment is tax-advantaged or tax-disadvantaged, comprising the steps of:
a). setting of fixed investment period;
b) determining the combined after-tax return of all combinations of assignment of investments to taxable and sheltered accounts;
c) combination with highest after-tax portfolio return indicates tax-advantaged investment(s) as those to be held in taxable account(s) and tax-disadvantaged investment(s) as those to be held in sheltered account(s).
a). setting of fixed investment period;
b) determining the combined after-tax return of all combinations of assignment of investments to taxable and sheltered accounts;
c) combination with highest after-tax portfolio return indicates tax-advantaged investment(s) as those to be held in taxable account(s) and tax-disadvantaged investment(s) as those to be held in sheltered account(s).
12). The method of claim 10 further comprising the step of:
graphic or alpha-numeric representation of the appropriate weighting of each of the plurality of assets to each of the investor's taxable and/or sheltered/deferred account(s) representing risk minimization, return maximization and tax minimization across the investor's complete portfolio of accounts as determined in claim 10, matching the investor's investment profile.
graphic or alpha-numeric representation of the appropriate weighting of each of the plurality of assets to each of the investor's taxable and/or sheltered/deferred account(s) representing risk minimization, return maximization and tax minimization across the investor's complete portfolio of accounts as determined in claim 10, matching the investor's investment profile.
13). A method enabling investors to simultaneously select for both taxable/unsheltered and tax-sheltered/deferred accounts a value of portfolio weight for each of a plurality of managed money investments that optimizes across all accounts for risk minimization, return maximization and tax minimization, comprising the steps of:
a) means for setting of a fixed investment period;
b) means for determining the investor's optimal weighting between one and unity of a plurality of managed money investments based on the pre-tax return of the investments if held inside a tax-sheltered/deferred account (s) for the fixed investment period;
c) means for determining the priority of assignment of various managed money investments to taxable or deferred accounts based on superior compounded after-tax return for the fixed investment period;
d) means for determining the investor's optimal weighting between one and unity of a plurality of managed money investments based on the after-tax return of the assets if held inside taxable account (s) for the fixed investment period;
e) means for priority assignment of tax-disadvantaged managed money investments to tax-sheltered/deferred account(s) wherein the value of the ratio of the tax-disadvantaged managed money investment (s) in the optimal weighting for a tax-sheltered/deferred account derived in step b falling short of the value of the ratio of the tax-sheltered/deferred account(s) in relation to the investor's overall portfolio is assigned to the tax-sheltered/deferred account(s) and any amount exceeding this ratio is assigned to the taxable account(s) in the amount as determined by step f;
f) means for assignment of excess value of tax-disadvantaged managed money investment(s) assigned to taxable account from step e, scaled in proportion to the ratio of the weighting of the tax-disadvantaged managed money investment(s) from shop c divided by the weighting of the tax disadvantaged managed money investment(s) from step b;
g) means for assignment of the tax-advantaged managed money investment(s) to the tax-sheltered account(s) wherein there is a fall short amount of the tax-disadvantaged managed money investment(s) assignment to the tax-sheltered/deferred account(s);
h) means for assignment of excess tax-advantaged managed money investment(s) from step g that cannot be assigned to sheltered accounts, assigned to taxable account(s).
a) means for setting of a fixed investment period;
b) means for determining the investor's optimal weighting between one and unity of a plurality of managed money investments based on the pre-tax return of the investments if held inside a tax-sheltered/deferred account (s) for the fixed investment period;
c) means for determining the priority of assignment of various managed money investments to taxable or deferred accounts based on superior compounded after-tax return for the fixed investment period;
d) means for determining the investor's optimal weighting between one and unity of a plurality of managed money investments based on the after-tax return of the assets if held inside taxable account (s) for the fixed investment period;
e) means for priority assignment of tax-disadvantaged managed money investments to tax-sheltered/deferred account(s) wherein the value of the ratio of the tax-disadvantaged managed money investment (s) in the optimal weighting for a tax-sheltered/deferred account derived in step b falling short of the value of the ratio of the tax-sheltered/deferred account(s) in relation to the investor's overall portfolio is assigned to the tax-sheltered/deferred account(s) and any amount exceeding this ratio is assigned to the taxable account(s) in the amount as determined by step f;
f) means for assignment of excess value of tax-disadvantaged managed money investment(s) assigned to taxable account from step e, scaled in proportion to the ratio of the weighting of the tax-disadvantaged managed money investment(s) from shop c divided by the weighting of the tax disadvantaged managed money investment(s) from step b;
g) means for assignment of the tax-advantaged managed money investment(s) to the tax-sheltered account(s) wherein there is a fall short amount of the tax-disadvantaged managed money investment(s) assignment to the tax-sheltered/deferred account(s);
h) means for assignment of excess tax-advantaged managed money investment(s) from step g that cannot be assigned to sheltered accounts, assigned to taxable account(s).
14). The method of claim 13 further comprising the step of determining whether a particular managed money investment is tax-advantaged or tax-disadvantaged, comprising the steps of:
a). setting of fixed investment period;
b) determining the combined after-tax return of all combinations of assignment of investments to taxable and sheltered accounts;
c) combination with highest after-tax portfolio return indices tax-advantaged investment(s) as those to be held in taxable account(s) sad tax-disadvantaged investment(s) as those to be held in sheltered account(s).
a). setting of fixed investment period;
b) determining the combined after-tax return of all combinations of assignment of investments to taxable and sheltered accounts;
c) combination with highest after-tax portfolio return indices tax-advantaged investment(s) as those to be held in taxable account(s) sad tax-disadvantaged investment(s) as those to be held in sheltered account(s).
15). The method of claim 13 further comprising the stop of:
graphic or alpha numeric representation of the appropriate weighting of each of the plurality of managed money investments to each of the investor's taxable and/or sheltered/deferred account(s) representing risk minimization, return maximization and tax minimization across the investor's complete portfolio of accounts as determined in claim 13, matching the investor's investment profile.
graphic or alpha numeric representation of the appropriate weighting of each of the plurality of managed money investments to each of the investor's taxable and/or sheltered/deferred account(s) representing risk minimization, return maximization and tax minimization across the investor's complete portfolio of accounts as determined in claim 13, matching the investor's investment profile.
Priority Applications (1)
| Application Number | Priority Date | Filing Date | Title |
|---|---|---|---|
| CA 2309853 CA2309853A1 (en) | 2000-05-29 | 2000-05-29 | Tax-efficient asset allocation system |
Applications Claiming Priority (1)
| Application Number | Priority Date | Filing Date | Title |
|---|---|---|---|
| CA 2309853 CA2309853A1 (en) | 2000-05-29 | 2000-05-29 | Tax-efficient asset allocation system |
Publications (1)
| Publication Number | Publication Date |
|---|---|
| CA2309853A1 true CA2309853A1 (en) | 2001-11-29 |
Family
ID=4166280
Family Applications (1)
| Application Number | Title | Priority Date | Filing Date |
|---|---|---|---|
| CA 2309853 Abandoned CA2309853A1 (en) | 2000-05-29 | 2000-05-29 | Tax-efficient asset allocation system |
Country Status (1)
| Country | Link |
|---|---|
| CA (1) | CA2309853A1 (en) |
Cited By (3)
| Publication number | Priority date | Publication date | Assignee | Title |
|---|---|---|---|---|
| US7028005B2 (en) * | 1999-12-30 | 2006-04-11 | Ge Capital Commercial Finance, Inc. | Methods and systems for finding value and reducing risk |
| US8200561B1 (en) * | 2002-03-29 | 2012-06-12 | Financial Engines, Inc. | Tax-aware asset allocation |
| US8401949B1 (en) | 2006-12-12 | 2013-03-19 | Goldman, Sachs & Co. | Method, system and apparatus for wealth management |
-
2000
- 2000-05-29 CA CA 2309853 patent/CA2309853A1/en not_active Abandoned
Cited By (3)
| Publication number | Priority date | Publication date | Assignee | Title |
|---|---|---|---|---|
| US7028005B2 (en) * | 1999-12-30 | 2006-04-11 | Ge Capital Commercial Finance, Inc. | Methods and systems for finding value and reducing risk |
| US8200561B1 (en) * | 2002-03-29 | 2012-06-12 | Financial Engines, Inc. | Tax-aware asset allocation |
| US8401949B1 (en) | 2006-12-12 | 2013-03-19 | Goldman, Sachs & Co. | Method, system and apparatus for wealth management |
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