[Among the fastest-growing product vehicles in the industry, separately managed accounts, per the FUSE Research Network, are projected to top $5.1 trillion in assets in 2026, reflecting a 15.4% CAGR over 2025 and 2026. With the ten largest SMA managers by assets representing 65% of the market, innovation will come from smaller, nimbler SMA players, that can lead with technology enhancements that help advisors address SMA investment challenges.
Financial advisors, to satisfy client demand, competitively differentiate themselves, and capture a growing share of this investment market, must now focus on building portfolios featuring unique investment opportunities and strategies that aim to enhance portfolio returns while managing the risk of tax expenses. Core to this effort is addressing the traditional challenges facing active equity strategies: high fees, tax erosion, single-manager risk, over-diversified portfolios, and delivering differentiated portfolio returns. Providing clear value through unique strategies and after-tax alpha has become critical to justify costs and competitively position for growth.
To explore innovative solutions to these challenges, we reached out to Co-Founders Paul Ahern and Jeff Seiple, along with Stephen Beinhacker, Chief Investment Officer of NextFolio – an asset management firm pioneering the application of Ensemble Methods to active portfolio management. Ensemble Methods are a branch of machine learning used to improve forecasting accuracy in complex challenges, like hurricane tracking, where multiple expert models (think of those spaghetti lines you see from the meteorologists) are combined to deliver a single, more accurate landfall forecast.
As applied to investment management, NextFolio uses Ensemble Methods and unique machine learning technology to identify the real-time high-conviction ideas from multiple top institutional managers and blends them into a single portfolio. This creates a smarter, data-driven foundation for portfolio construction by eliminating “diversification ballast” and targeting high active share.
NextFolio has also recently expanded their investment offerings from a series of turnkey SMA strategies across all nine domestic equity and thematic/factor style boxes to add the option of tax-managed portfolios across their strategies through a partnership with Quorus – an asset management tech platform focused on delivering customizable, tax-efficient investment solutions.
Their entry into the Schwab Managed Account Marketplace and Fidelity Separate Account Network enhances advisor-friendly access to their high-conviction portfolios, scalability, and tax efficiency for today’s competitive marketplace.]
Can you explain how Ensemble methods have been used successfully in other industries and complex challenges, and how you apply them to investment management?
This technology has had a revolutionary impact on many industries with more than 250,000 applications today, including facial recognition, self-driving cars, MRI tumor detection and hurricane tracking.
As applied to investment management by NextFolio, key innovations of Ensemble Active™ portfolios are the ability to apply machine learning replication technology to estimate and access real-time daily fund holdings, identify compelling investment ideas among 10-15 hand-picked top fund managers, and combine these insights in a way that increases predictive accuracy versus each individual manager’s stock selection “prediction.”
This ‘ensemble modeling’ approach aims to address the key challenges of traditional active management: the inconsistent performance, the high fees, the performance drag from ‘ballast’ bets on lower-conviction benchmarks, and especially the dependence on the insights of a single manager.
Since it is such a new investment option, how do you apply NextFolio SMAs into a broader asset allocation strategy?
NextFolio’s Ensemble Active™ platform offers a suite of solutions across the market that enable more effective and transparent asset allocation and portfolio construction. Using the Morningstar 9-box grid for reference, each NextFolio strategy is purely focused on its target, investing only in stocks included in its benchmark. This means that there are no foreign securities and no style or capitalization deviations.
This purity allows effective focus on the alpha of stock selection against a common benchmark, and gives asset allocators greater confidence that what they allocate to will actually be obtained.
How have you responded to investors’ growing desire for tax-managed SMA portfolios?
Through our new partnership with Quorus – a technology-driven wealth management platform focused on delivering personalized, tax-efficient portfolios at scale – financial advisors can now offer NextFolio strategies in a tax-smart format customized to each client’s tax profile. Their tax-efficient overlay process provides parcel-level optimization, tax loss harvesting, capital gains deferral, and aligns revenue with tax-sensitive customers. This adjustment provides enhanced post-tax benefits for taxable investors.
Tax management capabilities at SMAs are essential due to changing regulations, growing investor demand for personalized solutions and the expectations of high-net-worth individuals. Offering tax-managed SMAs in client portfolios provides scalability for advisors who can deepen client relationships, differentiate services, and effectively engage high-net-worth investors.
Can you provide a case study to illustrate the benefits of a tax-managed SMA versus a traditional SMA portfolio?
For taxable customers, there are two sets of returns: before-tax returns and after-tax returns. Pre-tax returns are returns generated before short-term or long-term capital gains are applied. After-tax returns are what taxable investors are “allowed to keep” after accounting for them and form the basis for constructing the wealth generated from investment portfolios.
We recently completed a hypothetical evaluation of a taxable client who wants a high-conviction tax-managed US large-cap SMA portfolio. Working with our partner Quorus, we ran a simulation where we took real-time positions from a representative large-cap core SMA portfolio (which we have been managing since Q4 2019), rebalanced them monthly and applied a series of tax optimization heuristics to maximize after-tax returns. In the simulation, pre-tax and pre-optimization returns for the strategy were 15.85% over the period 1/1/20 – 12/31/24. After accounting for the impact of short- and long-term capital gains, the strategy’s returns fell from 15.85% to 12.79% over the period 1/1/20–12/31/24. This underlines how meaningful the tax burden can be when portfolios are not explicitly designed for tax efficiency.
However, when we applied our tax management algorithms to the same simulated portfolio, the picture improved significantly. After-tax returns and optimization increased to 15.13%, almost restoring the strategy’s original pre-tax profile. By intelligently adjusting revenue, sequencing gains and losses, and optimizing the timing of transactions, the tax management process was able to maintain 95% of the original pre-tax return after tax.
What are the implementation considerations and purchasing process of NextFolio SMAs for financial advisors?
In terms of the onboarding process, we provide advisors with a structured due diligence checklist covering holdings transparency, tax overlay capabilities, custodian connections, reporting standards and operational workflows to ensure seamless underwriting.
In terms of client suitability, we help the advisor identify clients who will benefit most from NextFolio’s tax-managed SMAs – typically clients with taxable accounts, higher-turnover portfolios, long-term wealth plans that require customization, or clients seeking more efficient after-tax results.
Our partnership with Quorus – fully integrated with Schwab and Fidelity – gives advisors a streamlined, end-to-end implementation experience. Account setup, ongoing execution, and automated, tax-conscious rebalancing are built right into the platform. This makes it easy to deliver NextFolio’s compelling, style-consistent Ensemble Active™ portfolios with an advanced tax management overlay, all within existing advisor workflows and at scale.
Do you have any other thoughts you would like to share with financial advisors?
NextFolio offers something that is rare in today’s market: an asset manager capable of redefining all active equity investments. Our proprietary Ensemble Active™ approach combines data science, machine learning and the real-time stock selection insights of leading institutional managers to build compelling, style-consistent stock portfolios.
Our value proposition lies in addressing the shortcomings of traditional active management – such as over-diversification, reliance on a single manager and high fees – by delivering scalable, transparent and cost-efficient SMA solutions that help investors navigate today’s dynamic markets with more confidence.
From a tax efficiency perspective, advisors can now also combine that edge with Quorus’ embedded tax-efficient SMA capabilities for maximum client impact. In today’s market environment – where increased capital gains taxes and concentrated equity positions can quietly erode long-term wealth – the pursuit of alpha must go beyond pre-tax performance. Advisors are increasingly focused on delivering after-tax alpha – the most accurate measure of client success, allowing them to keep more of what they earn.
We invite financial professionals learn more and discuss with us the benefits of our Ensemble Active™ approach for your customers and your business, and an opportunity to Meet NextFolio.
This article was originally published here and is republished on Wealthtender with permission.
About the author
Bill Tooth
Founder Institute for Innovation Development
Bill Hortz is an independent business consultant and founder/dean of the Institute for Innovation Development, a platform and network for business innovation in the financial services industry. With over 30 years of experience in the financial services industry, including expertise in asset manager sales/marketing/branding, as well as creatively restructuring and developing internal/external sales and strategic account departments for 5 major financial firms including OppenheimerFunds, Neuberger&Berman and Templeton Funds Distributors. His broad experiences have led Bill to a strong belief, passion and advocacy for strategic thinking, innovation creation and strategic account management as the nexus of business skills needed to meet a business environment challenged by an increasingly rapid pace of change.
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