Method and apparatus for tax efficient investment management

• US 6,687,681 B1
• Filed: 05/28/1999
• Issued: 02/03/2004
• Est. Priority Date: 05/28/1999
• Status: Expired due to Fees

• Current Assignee: Marshall & Ilsley Corporation (Bank of Montreal)
• Original Assignee: Marshall & Ilsley Corporation (Bank of Montreal)
• Inventors: Hanson, Todd, Schulz, David W., Brown, Daniel Patrick, Blaser, John M.
• Primary Examiner(s): CHILCOT, RICHARD E
• Application Number:
  US09/322,412
• Time in Patent Office: 1,712 Days
• Field of Search: 705/36, 705/37, 705/35, 705/39
• US Class Current: 705/36.00T
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis
• CPC Class Codes: G06Q 40/10 Tax strategies

Abstract

A method and apparatus for automatically managing investment portfolios to substantially track a selected index and to automatically harvest tax losses is disclosed. Preferably, the system comprises an accounting system for maintaining tax lot information for individual accounts, an optimization system for rebalancing each account to substantially model the index and for harvesting tax losses, and a trading system for executing trades. Each investor owns the securities in his account, and therefore, harvested losses can be used to offset capital gains. The period between successive optimization procedures is selected to avoid application of the internal revenue service wash sale rules.

Claims

1. A method for passively managing an investment portfolio comprising a plurality of securities and for actively managing tax lots to automatically maximize investor wealth, the method comprising steps of:

constructing the investment portfolio to substantially track the performance of a selected index;

periodically rebalancing the investment portfolio to assure continued tracking of the selected index;

periodically calculating a difference between a present value and a past value for each of the plurality of securities comprising the investment portfolio;

automatically trading the securities from the investment portfolio to harvest tax losses when the difference between the present value and the past value of the security is substantially equivalent to a predetermined tax loss threshold; and

automatically delaying at least a period of time required by Internal Revenue Service Wash Sale Rules prior to repurchasing the securities sold to harvest tax losses.

2. The method as defined in claim 1, wherein the step of rebalancing further comprises steps of comparing a plurality of securities comprising the index to a capitalization weighting parameter, selecting the securities which exceed a capitalization threshold, comparing a resultant portfolio to an industry balance parameter, and adding securities which do not exceed the capitalization weighting parameter to the investment portfolio to provide an industry balance which is substantially equivalent to the industry balance parameter.

3. The method as defined in claim 1, wherein the step of constructing the portfolio further comprises steps of comparing a plurality of securities comprising the index to a capitalization weighting parameter, selecting the securities which exceed a capitalization threshold, comparing a resultant portfolio to an industry balance parameter, and adding securities which do not exceed the capitalization weighting parameter to the investment portfolio to provide an industry balance which is substantially equivalent to the industry balance parameter.

4. The method as defined in claim 1, wherein the predetermined tax loss threshold is in a range between about ten and about fifteen percent.

5. The method as defined in claim 1, wherein the predetermined tax loss threshold is approximately fifteen percent.

6. The method as defined in claim 1, wherein the time period between each successive rebalancing of the investment portfolio is at least equivalent to the time period required by the Internal Revenue Service Wash Sale Rules.

7. The method as defined in claim 1, wherein the index is the Standard and Poor'"'"'s 500.

8. A method for providing a tax efficient portfolio to each of a plurality of investors, the method comprising steps of:

constructing an investment portfolio based on a capitalization weight parameter and an industry balance parameter, the investment portfolio comprising a plurality of securities selected to substantially track the performance a selected index;

establishing an individual portfolio for each of the plurality of investors wherein each investor owns shares in each security comprising the investment portfolio;

periodically determining a change in value between a present value and a past value of each security and comparing the change in value to a predetermined tax loss threshold to identify a tax harvest security;

combining the tax harvest securities from each of the plurality of investors'"'"' portfolios to form a block trade;

automatically rebalancing the investment portfolio to substantially track the selected index, wherein the investment portfolio is rebalanced based on the capitalization weight parameter and the industry balance parameter;

electronically trading the block trade and allocating the corresponding tax loss to each of the plurality of investors; and

delaying a period of time required by Internal Revenue Service Wash Sale Rules before repurchasing the tax harvest securities.

9. The method as defined in claim 8, wherein the period of time between successive rebalancing steps is substantially equivalent to the period of time between successive tax harvesting steps.

10. The method as defined in claim 8, wherein the number of securities in the investment portfolio is less than the number of securities held in the selected index.

11. The method as defined in claim 8, wherein the capitalization weight parameter is defined as a minimum position size of about three tenths of one percent of the market value of the index.

12. The method as defined in claim 11, wherein the investment portfolio further comprises diversification securities which do not have a capitalization weight in the selected index which is substantially equivalent to the capitalization weight parameter, the diversification securities being selected to provide industry diversification.

13. The method as defined in claim 8, wherein a brokerage cost associated with the block trade is allocated among each of the investors.

14. The method as defined in claim 8, further comprising the step of allocating an individual position and an individual tax lot for each investor.

15. A method for cost-effectively providing a tax efficient investment portfolio to a plurality of investors with a range of account sizes comprising steps of:

constructing a plurality of individual investment portfolios wherein each investment portfolio comprises a plurality of securities selected to model and substantially track the performance of a selected index, the plurality of securities in each individual account being owned by an individual investor;

automatically optimizing each individual account by periodically calculating a difference between a present value and a past value of each security, comparing this difference to a predetermined loss threshold value, and designating each security which has a difference which is at least substantially equivalent to the predetermined threshold as a tax harvest security;

periodically rebalancing the investment portfolios based on a capitalization weight parameter and an industry balance parameter to substantially track the performance of the selected index, wherein at least one security is designated as rebalance security to be traded;

establishing at least one block trade comprising the tax harvest securities and the rebalanced securities from each individual account;

automatically trading the securities in the block trade;

allocating a brokerage cost to each of the individual accounts;

allocating a security position and a tax lot to each individual account; and

periodically optimizing each individual account, wherein a time period between successive optimizations is at least equivalent to the time required by the Internal Revenue Service Wash Sale Rules.

16. The method as defined in claim 15, wherein the predetermined loss threshold is in the range of about ten percent to about fifteen percent.

17. The method as defined in claim 15, wherein the security position data and the tax lot data for each individual account is maintained in a computerized accounting system.

18. The method as defined in claim 15, further comprising the step of purchasing a security in the index to replace each tax harvest stock, wherein the security is selected to provide diversification based on the industry balance parameter.