Method and apparatus for leveraged tax efficient investment management

• US 8,688,550 B1
• Filed: 12/08/2003
• Issued: 04/01/2014
• Est. Priority Date: 05/28/1999
• Status: Expired due to Term

• Current Assignee: BMO Financial Corporation (Bank of Montreal)
• Original Assignee: BMO Financial Corporation (Bank of Montreal)
• Inventors: Schulz, David W., Blaser, John M., Brown, Daniel Patrick, Hanson, Todd
• Primary Examiner(s): Zeender, F.
• Assistant Examiner(s): BUCHANAN, CHRISTOPHER R
• Application Number:
  US10/730,428
• Time in Patent Office: 3,767 Days
• Field of Search: 705/31
• US Class Current: 705/31
• 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 computerized system for passively managing an investment portfolio for an individual investor comprising a plurality of securities and for actively managing tax lots to automatically maximize individual investor wealth, the system comprising:

an accounting subsystem which is arranged and configured to automatically calculate and maintain account position data for an investment portfolio of an individual investor which is constructed to substantially track the performance of a selected index;

an optimization subsystem which is arranged and configured to automatically, periodically rebalance the investment portfolio to assure continued tracking of the selected index, to automatically, periodically calculate a difference between a present value and a past value for each of the plurality of securities in the investment portfolio and compare the difference between the present value and the past value of each security with a predetermined tax loss threshold to identify tax harvest securities, and to automatically perform an evaluation to determine which securities in the index to purchase to replace each tax harvest security; and

a trading subsystem which is arranged and configured to automatically harvest tax losses when the difference between the present value and the past value of a security is substantially equivalent to or exceeds said predetermined tax loss threshold and replace each tax harvest security with a security in the index, said trading subsystem automatically delaying at least a period of time required by the Internal Revenue Service Wash Sale Rules prior to repurchasing any securities sold to harvest tax losses.

2. A computerized system as defined in claim 1, wherein said trading subsystem provides executed trade and tax lot data to said accounting subsystem.

3. A computerized system as defined in claim 1, wherein said accounting subsystem is arranged and configured to allocate an account position for each executed trade and a tax lot to each of a plurality of individual portfolios collectively comprising the investment portfolio.

4. A computerized system as defined in claim 1, wherein the difference in time between the past value and the present value is at least equivalent to the time period required by the Internal Revenue Service Wash Sale Rules.

5. A computerized system as defined in claim 1 further comprising a trading data subsystem which is arranged and configured to receive current security price data.

6. A computerized system for passively managing an investment portfolio for an individual investor comprising a plurality of securities, the system comprising:

an accounting subsystem which is arranged and configured to automatically manage an investment portfolio of an individual investor 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, wherein each investor'"'"'s individual portfolio includes shares in each security comprising the investment portfolio;

an optimization subsystem which is arranged and configured to automatically, periodically determine a change in value between a present value and a past value of each security, compare the change in value to a predetermined tax loss threshold to identify a tax harvest security, and combine the tax harvest securities from each of the investors'"'"' individual portfolios to form a block trade, said optimization subsystem also being arranged and configured to perform an evaluation to determine which securities in the selected index to purchase to replace each tax harvest security to automatically rebalance 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; and

a trading subsystem which is arranged and configured to automatically electronically trade the block trade and allocate the corresponding tax loss to each of the plurality of investors, said trading subsystem automatically delaying at least a period of time required by the Internal Revenue Service Wash Sale Rules before repurchasing any securities sold to harvest tax losses.

7. A computerized system as defined in claim 6, wherein said optimization subsystem is arranged and configured to rebalance the investment portfolio based on a capitalization weight parameter and an industry balance parameter.

8. A computerized system as defined in claim 6, wherein said optimization subsystem is arranged and configured to periodically perform optimization on each of a plurality of individual accounts which collectively make up the investment portfolio.

9. A computerized system as defined in claim 6, wherein the time period between successive optimizations of an individual portfolio is at least the time period defined in the Internal Revenue Service Wash Sale Rules.

10. A computerized system as defined in claim 6, wherein tax losses are harvested by said computerized system when a difference between a past value of a security and a present value of a security is substantially equal to fifteen percent.

11. A computerized system as defined in claim 6, wherein the investment portfolio comprises a plurality of securities selected from a plurality of securities comprising the selected index.

12. A computerized system as defined in claim 11, wherein the plurality of securities which comprise the investment portfolio are selected based on a capitalization weight parameter and on an industry balance parameter.

13. A computerized system as defined in claim 6, wherein the selected index is the S&

P 500®

.

14. A computerized system as defined in claim 6, wherein the investment portfolio comprises a number of securities fewer than the number of securities which comprise the selected index.

15. A computerized system as defined in claim 6, wherein said trading subsystem transmits trade data to and receives trade data from an external trading subsystem.

16. A computerized system for passively managing an investment portfolio for an individual investor comprising a plurality of securities, the system comprising:

an accounting subsystem which is arranged and configured to automatically manage a plurality of individual investment portfolios wherein each investment portfolio comprises a plurality of securities selected to model and substantially track the performance of an index, the plurality of securities in each individual account being owned by an individual investor;

an optimization subsystem which is arranged and configured to automatically optimize 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 at least substantially equivalent to the predetermined threshold as a tax harvest security, said optimization subsystem also being arranged and configured to periodically rebalance the investment portfolios based on a capitalization weight parameter and an industry balance parameter to substantially track the performance of the selected index, wherein said optimization subsystem performs an evaluation to automatically determine at least one security in the index to be purchased as a rebalance security to replace each tax harvest security, wherein said at least one security is designated as a rebalance security to be traded, said optimization subsystem also being arranged and configured to establish at least one block trade comprising the tax harvest securities and the rebalance securities from each individual account; and

a trading subsystem which is arranged and configured to automatically trade the securities in the block trade, said trading subsystem automatically delaying at least a period of time required by the Internal Revenue Service Wash Sale Rules prior to repurchasing any securities sold to harvest tax losses;

wherein a brokerage cost is allocated to each of the individual accounts by said accounting subsystem, and wherein a security position and a tax lot is allocated to each individual account by said accounting subsystem; and

wherein said optimization subsystem is arranged and configured to periodically optimize each individual account.

17. A computerized system as defined in claim 16, wherein the predetermined loss threshold value is in the range of about ten percent to about fifteen percent.

18. A computerized system as defined in claim 16, wherein the security position data and the tax lot data for each individual account is maintained in said accounting system.

19. A computerized system as defined in claim 16, wherein said optimization subsystem is arranged and configured to cause said trading subsystem to purchase a security in the index to replace each tax harvest security, wherein the security is selected to provide diversification based on the industry balance parameter.