US 7,461,021 B2Granted

Method of ascertaining an efficient frontier for tax-sensitive investors

AssigneeAMG National Trust Bank

InventorsMichael D. Bergmann, Daniel Yoo

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Abstract

There are computerized processes for financial planning for individuals and groups whose financial portfolio would be subject to tax on certain events. But these processes do not take into account these taxes when optimizing investment decisions, since taxes levied on investment outcomes, typically on income and realized capital gains, may have an important impact on net portfolio results. This invention is a method for transforming the usual pretax information for calculation of an efficient frontier, unique to an investor's portfolio, in such a manner that any portfolio on the calculated frontier is efficient after incorporating the effect of taxes on the risk and expected return of each asset class permitted in the investor's portfolio. This invention addresses how this may be done and how certain facets of the process may be incorporated into a computer program or system so as to provide convenience to the potential user.

Claims8

Dependent claims

In a computerized method for financial planning, comprising:

a. a computer;
b. a computer program to optimize an investor's portfolio in order to maximize total return for any level of risk;
c. assuming certain rates of return for various types of investments in the portfolio;
d. defining several accounts within the portfolio, each of which accounts have assets, each of which asset in the account being characterized in one or more asset classes, the assets in a particular asset class having tax characteristics in common with one another and the assets in each asset class having a market value, a tax basis, an expected effective tax rate upon liquidation, investment characteristics, including after-tax expected returns and volatility estimates, and pre-tax investment constraints, which investment constraints have the effect of applying upper and lower limits to a financial value of the asset class that must be maintained;
e. determining the contingent tax on each asset class by calculating the difference between the market value of the asset class and its tax basis multiplied by the expected effective tax rate upon liquidation;
f. determining pre-tax and after-tax constraints on what asset classes are to be contained in the portfolio;
g. transforming the pre-tax constraints and pre-tax investment characteristics into a set of after-tax constraints and investment characteristics, including after-tax expected returns and volatility estimates;
h. adjusting market values of each asset class to reflect the effect of the contingent tax on the asset class;
and
i. selecting an optimized portfolio.

7 more elements

A computerized method for optimizing an investor's portfolio in order to maximize total expected rate of return for a given level of risk, which method includes

using an electronic computer configured by a computer program;
assuming certain expected total rates of return for various assets in the portfolio;
defining several accounts within the portfolio, each of which accounts have financial investments;
categorizing each asset in the portfolio as being in one or more asset classes and one or more accounts, the assets in a particular asset class and account having tax characteristics in common with one another, determining for each asset class in an account its market value, a tax basis, an effective tax rate upon liquidation, and other pre-tax and after-tax investment characteristics, including after-tax expected returns, and any pre-tax and after-tax investment constraints to which it may be subject, each of which investment constraints includes an upper limit and a lower limit on a linear combination of financial values of each asset class within each account;
determining the contingent tax on each asset class within each account by calculating the difference between the market value of the asset class within each account and its tax basis multiplied by its anticipated effective tax rate upon liquidation;
finding the after-tax market value of each asset class in each account by netting the asset class market value and its contingent tax;
transforming the pre-tax investment constraints and pre-tax investment characteristics into a set of after-tax constraints and investment characteristics, including after-tax expected returns and risk measures, and
constructing an optimized portfolio by finding the after-tax market values for each asset class within each account consistent with all after-tax constraints that produce the highest expected after-tax rate of return to the portfolio for a given level of after-tax risk for the portfolio.

5 more elements

Dependencies are inferred from the claim text.

Facts

Application: 09/995,178Filed 27 Nov 2001 · us provisional application
Priority: 29 Nov 2000
Published: US 2002/0143682 A13 Oct 2002
Granted: 2 Dec 2008
Term ends: Not estimatedThe source records don’t support an estimate.

Classification5 codes

G06Q 40/02
Finance; Insurance; Tax strategies; Processing of corporate or income taxes: banking, e.g. interest calculation or account maintenance
G06Q 30/0283
Marketing; Price estimation or determination; Fundraising: price estimation or determination
G06Q 40/00
Finance
G06Q 40/10
Finance; Insurance; Tax strategies; Processing of corporate or income taxes: tax strategies