FROM THE BLOG

Advisors increasingly encounter clients with significant exposure to large-cap growth equities, often the result of sustained market outperformance. While these gains reflect successful investing, they frequently lead to portfolio concentration risk and substantial embedded capital gains, complicating efforts to rebalance in a tax-efficient manner.

A disciplined, tax-aware strategy is essential. Rather than relying on a single solution, advisors should evaluate a combination of complementary approaches aligned with each client’s objectives, liquidity needs, and tax sensitivity.

Key approaches to consider:

• Exchange Funds (Goldman Sachs, Eaton Vance)
  • Allow clients to contribute concentrated stock positions into a pooled vehicle
  • Provide immediate diversification while deferring capital gains taxes
  • Typically require long holding periods and are best suited for patient, long-term investors
• 351 Exchange Programs (ETF Seeding / Conversion Strategies)
  • Enable clients to contribute a basket of equities into a newly launched ETF under Section 351 of the tax code
  • Offer a tax-deferred exchange into a diversified ETF structure
  • Particularly attractive for ultra-high-net-worth clients seeking institutional-level customization and long-term diversification
• Donor-Advised Funds (American Endowment Foundation)
  • Facilitate the donation of appreciated securities to support philanthropic goals
  • Provide a charitable deduction at fair market value and eliminate capital gains on contributed assets
  • Effective for clients with charitable intent as part of broader wealth planning
• Option Overlay Strategies (First Trust, RiverFront)
  • Utilize covered calls or protective puts to manage volatility and enhance income
  • Can support a measured transition away from concentrated holdings while maintaining market exposure
• Direct Indexing (Goldman Sachs, Natixis, Parametric)
  • Enables customized portfolio construction with ongoing tax-loss harvesting
  • Supports gradual diversification by offsetting gains with losses, improving after-tax outcomes over time
• Hedging & Monetization Strategies (Wells Fargo)
  • Tools such as collars or prepaid variable forwards can reduce downside risk while generating liquidity
  • Allow clients to diversify gradually without triggering immediate taxable events

There is no universal solution for addressing concentrated equity positions with significant embedded gains. Each strategy involves trade-offs across liquidity, tax deferral, cost, complexity, and time horizon.

The most effective approach is typically a coordinated combination of solutions, implemented over time. Advisors play a critical role in evaluating these tools holistically—balancing diversification goals with tax efficiency—while ensuring that the strategy aligns with the client’s broader financial plan.

Key takeaway:

Have a plan in place. Discuss all options with clients. Be ready to execute. Solve a problem and deepen the trust that the client has placed in you. We are here to support you.

Take care,

Ken Manning
Director of Platform Solutions

Posted by Prospera Financial