Success Story

Balasa Dinverno & Foltz LLC

Savvy Advisors Put Taxes to Work for Investors

Balasa Dinverno & Foltz Trust Tamarac to Manage Tax Effects

For many investors, taxes arrive as either surprisingly large penalties or a recurring, annoying bite out of annual gains. But Mark Balasa, of Balasa Dinverno & Foltz LLC, argues that taxes are an effective tool in portfolio management. That is, as you long as you have the expertise and the technology to leverage tax effects.

"Tax management is our differentiator," said Balasa. The majority of the Illinois-based firm's $1.5 billion in assets under management are taxable-only 40% is made up of tax-deferred pension and Profit Sharing Accounts.

"With our core portfolios matched to indexes, our clients know their money is being invested most efficiently," explained Balasa. The firm's tax-managed core portfolios are primarily indexed to the S&P 500 or the Russell 3000. "Then with Tamarac Advisor, we create tax alpha."

Tax alpha is the value gained because of the different ways tax can be applied to a portfolio's earnings or losses, and it can be a powerful tool for those who use it well. According to the Journal of Wealth Management, long-term, a top-performing manager might reach an alpha of 1% on average over a given market benchmark. But that rare market genius can be matched by an index fund managed on an after-tax basis.

Balasa came by his expertise in tax harvesting through years of experience. "When we started the firm in the late 1980s, we began with an active management approach, picking actively managed mutual funds," he said. "But by the mid-'90s, we turned to passive management, a buy-and-hold philosophy, to avoid market blow-ups and downturns." Though successful, the firm was getting typecast as strictly a "mutual fund shop." Balasa needed a differentiator.

"We knew we had the expertise to take on more sophisticated accounts," continued Balasa, "but to start generating those kinds of referrals, we needed to market that kind of capability. That's when we came across Tamarac at a conference and they showed us a way to stand out."

A web-based, investment strategy management platform, Tamarac Advisor offers advisors pure number-crunching power-simultaneously rebalancing individual accounts or households, up to 1,000 accounts in about 10 minutes. For busy RIAs juggling SEC compliance regulations, client communications, and account management, Tamarac has the kind of speed, utility, and accuracy that enable advisors to spend more time with their most valuable asset - their clients. Tamarac also provides RIAs with optional scenarios based on factors such as risk, fees and tax effects.

It was that ability to automatically chart tax effects as part of Tamarac's modeling process that made Balasa's eyes light up when he was introduced to Tamarac in late 1999. When he learned the details of Tamarac Advisor's fully automated, tax-aware trade management, including tax loss harvesting, he knew he'd found a perfect match with Balasa Dinverno & Foltz's tax-managed core portfolios.

"A technological edge is critical for a small business," said Balasa. "When we started, we signed up with Advent, we moved through different CRM systems, we had trading software developed for us. Then we found Tamarac. Most investment advisors know Tamarac simply as a rebalancing engine, but we were more interested in its portfolio-modeling capabilities and getting good use out of its tax-harvesting features."

Today, Balasa employs 26, of whom 12 are professionals: attorneys, CPAs, CFP®s, and MBAs, and offers comprehensive financial planning, for retirement, taxes, estate, and philanthropic and family gifts. They are fee-only advisers; account minimum is $1 million (or a $10,000 annual fee). Their team has sat on advisory panels for Morningstar, The Alpha Group, The Financial Advisory Board of TIAA-CREF Institute, The Charles Schwab Institutional Advisory Board, and the FPA's Investment Committee. Both the Bloomberg and Mutual Funds magazines have listed the firm among the nation's top money managers.

Commented Balasa, "Tamarac Advisor has been a very useful and important tool in how we've grown our business." About 25% of the firm's taxable accounts are managed via Tamarac; they are also the most significant accounts. Tamarac is Balasa's tool of choice "because it streamlines what we need to do. Within those asset classes, it's difficult to out-perform the market-our concern is making sure we're accurately tracking whichever index is the model. With its speed and accuracy in matching indexes, Tamarac reduces our risk."

Where talk ends and results begin

Balasa Dinverno & Foltz LLC promises clients that their globally diversified portfolios are extremely tax-efficient, thanks to cutting edge financial service and wealth management technology. For proof, clients can review their investment performance online, updated every Friday.

"Tamarac Advisor is particularly valuable for us," said Balasa, "because you're talking about gaining efficiencies that-without the right technology and infrastructure-would devour your manpower. And while it's true that tax effects are not as overlooked as they were in the late '90s, many firms just don't have the bandwidth. We were just referred one account that had had nothing done for it on a tax-management basis over the past two years."

Taking tax management positions can require strategic endurance, too. Balasa gave an interesting example: "We had a gentleman come in about four years ago with a substantial amount of Boeing stock, which has a very low basis. We wanted to diversify his holdings, but minimize the tax costs resulting from the gains. Over four years, we used Tamarac to find and harvest tax losses, sell that amount of Boeing, and reinvest in his portfolio. That entire time, his portfolio has been tax-neutral."

Market swings tend not to ruffle indexed funds' feathers. But in the case of extreme market volatility, Balasa can change weightings within Tamarac while keeping the basic index model match. Tamarac's mass customization capability allows him to make those kinds of adjustments across portfolios while retaining personalized portfolio behavior.

"Tamarac just gets better and better over time," reported Balasa. (Tamarac Advisor is a web-based solution, and upgrading is continuous.) For him, Tamarac is about spreading peace of mind, one tax-efficient trade at a time. Clients at Balasa Dinverno & Foltz LLC expect no less.