The Art of Doing Asset Location

"For every problem there is an answer that is clear, simple and wrong."1

As if selecting investments (allocation) is not hard enough, identifying where those assets should be held (location) to maximize after-tax value compounds the complexity of managing wealth effectively, especially with respect to goals.

The objective seems relatively simple: reduce tax “drag” (realizing taxable events at high marginal rates, compounded) by placing tax-efficient assets in taxable accounts, and vice-versa.
The nearby graphic derived from Michael Kitces² demonstrates this heuristic while simultaneously exemplifying the messy nature of asset location. Given capacity in accounts, even a tax-efficient asset (like a high growth equity fund) with enough expected return would benefit from tax exemption when ultimately liquidated. Add to this the highly dynamic aspects of each client – time horizon, projected tax brackets, goals of varying tenors, etc. – and now the solution is not so clear nor simple, and our prioritization list is probably wrong.

To either assess a client’s current location composition or transition assets in a tax-smart proposal, we leverage optimization techniques that reference after-tax expected return of each asset per account capacity, as well as goals. This is necessary to run these at scale across clients, as well as iteratively for a single client as preferences or constraints are applied. 

At the end of the day, however, insights, planning and judgement are required to effectively apply asset location strategies to specific client situations. Robust tooling is helpful and necessary, but the art of doing asset location and wealth management lives somewhere in between.

Important Disclosures & Definitions

1 Attributed to H. L. Mencken

2 The Kitces Report- March/April 2014 issue,  Advanced Concepts & Strategies in Asset Location

AAI000687  04/30/2025