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JPMorgan Chase has attracted assets from wealthy clients worth more than $15 billion for its fledgling tax strategy business, according to people familiar with the matter. The US bank is trying to steal further shares in the business from Goldman Sachs and Morgan Stanley.
Over the past two years, JPMorgan has stepped up efforts to attract more clients who want to reduce their tax bill by selling stocks at a loss and offsetting them against other gains – a common tactic in separately managed accounts (SMAs) known as “tax loss harvesting.” In addition to reducing tax burdens, investors use SMAs to own individual securities and express certain preferences, such as favoring environmental, social and governance factors.
“It could be the fastest-growing wealth management arm of the last 18 months,” said a JPMorgan banker. JPMorgan declined to comment.
Wealthy investors are increasingly using SMAs to reduce their tax burden. According to consulting firm Cerulli Associates, assets in SMAs increased by nearly 30 percent, from $1.7 trillion in 2022 to $2.2 trillion in 2023.
Tax loss management is also becoming standard in the wealth management industry. It has grown in popularity in recent years as investors took advantage of slumps in the stock and bond markets to offset years of high returns and the associated tax burden. Wealth managers surveyed by Cerulli earlier this year told him that 45 percent of their assets were subject to tax management, up from 33 percent in 2022.
SMAs, which offer the ability to offset losses by selling individual securities, have gained popularity among wealthy clients, largely because the highly customizable portfolios offer generous tax benefits. These portfolios typically require high minimum account balances, making them more suitable for wealthier investors.
“Clients want to continue to grow this space because they want to control the future of their holdings,” said Daniel Gamba, president of Northern Trust Asset Management, one of the top 10 SMA issuers.
Despite the growth of SMAs at JPMorgan, the bank still lags behind Goldman Sachs Asset Management, which has about $280 billion worth of tax-conscious strategies, and Morgan Stanley’s Parametric platform, the leader in direct indexing, which creates custom indexes based on client preferences.
Goldman launched a tool for direct indexing clients last year that allows them to diversify concentrated equity positions over a decade, while Parametric has meanwhile expanded its ability to harvest tax losses in multi-asset portfolios within SMAs.
Morgan Stanley acquired Parametric in 2021 as part of its $7 billion purchase of asset manager Eaton Vance, which JPMorgan had also tried to buy. Shortly after that deal fell through, JPMorgan bought 55ip, which now forms the basis of its tax platform.
After BlackRock bought SMA shop Aperio in early 2021, the company closed a deal to buy SMA specialist SpiderRock Advisors this spring, citing “growing demand from asset managers for personalized, tax-efficient portfolios.” Vanguard made its very first acquisition in 2021 with the purchase of Just Invest, a direct indexing boutique.
Less established players are also on the rise. Following a 66 percent increase in its tailored retail SMA investments in 2023, Invesco recently launched two tax-conscious SMAs, including one based on its flagship $291 billion QQQ ETF.
Asset managers have said for years that they see SMAs as one of the biggest growth opportunities for institutional clients, competing with the fast-growing exchange-traded fund industry, which, like SMAs, offer investors tax advantages over mutual funds.
“We want to diversify the business, and I think since we don’t have ETFs on the platform yet, we see this as the next group,” said Manju Boraiah, co-head of custom SMA investing at Allspring Global Investments, which reported a 146 percent increase in SMA platform users in the first quarter of 2024.