Custodians are throwing up guardrails, but the surge toward margin-enhanced, tax-aware strategies shows little signs of stopping.

By Jennifer Lea Reed

T’ S A BIZARRE REFLECTION ON THE MINDSET OF today’ s advisory clients that after a 17-year bull market, many are as hungry to find ways to earn tax losses to offset some of their unrealized capital gains as they are to generate more returns.

Over the last year, tax-aware, long-short hedging strategies have become one of the asset management industry’ s most popular products for a growing number of ultra-affluent investors. Thanks to extended returns since 2009, people’ s portfolios may have fattened beyond expectations, but they’ ve also suffered from expanding imbalances. And your clients have likely found that traditional tax-loss harvesting alone won’ t solve the problems created by their success.

However, the surge of assets into tax-minded long-short investments has also created headaches for the advisory industry’ s leading custodians: Schwab and Fidelity. While the long side of long-short is a plain old vanilla buy, the margin loans associated with the portfolios’ short positions bring their own risks and complexities. That’ s prompted both custodians to impose dra- matic restrictions on advisors attempting to help their clients jump aboard the tax-deferral bandwagon. For example, in April Schwab said RIAs can put only 30 % of their platform assets into long-short separately managed accounts. And some account minimums were raised to $ 1 million.

That’ s a lot of drama for a strategy that barely existed three years ago. Yet it’ s a tool that some advisors call the most useful, most complicated and most misunderstood in the taxplanning kit.

The strategy and its risks all come down to the nature of leverage and short selling.

“ You look at the numbers, you see the tax losses. It looks awesome. Like, trust me, it’ s awesome,” says Matt Fleissig, CEO of Fort Lee, N. J.-headquartered Pathstone, a multi-family office overseeing more than $ 100 billion for clients, many of whom have signed up for exactly this kind of tax-aware strategy.“ And it works until it doesn’ t. I’ m very clear, I’ m a believer in this. It’ s just you have to understand what it is. You have to understand that you’ re levered and short.”

36 | FINANCIAL ADVISOR MAGAZINE | SEPTEMBER / OCTOBER 2026 WWW. FA-MAG. COM