Tax-loss harvesting means not leaving money on the table

Return. It may be the most exciting word in the investment world—at least to less-sophisticated investors.

Knowledgeable investors, on the other hand, focus on a more multifaceted and meaningful measure of return we'll call "true return." True return measures the amount of money an investor keeps after fees, taxes and inflation. In other words, it measures what really matters.

Steven Puetzer | Getty Images

And since you can't control inflation, smart investors attempt to boost true return by using low-cost investments and by taking steps such as tax-loss harvesting to minimize taxes.

Tax-loss harvesting refers to the act of selling positions with an unrealized loss and replacing them with similar securities in order to utilize embedded losses to reduce taxes. It's a proven strategy embraced by most financial advisors.

Read MorePlan now to save on taxes later

But there's a problem: Most advisors are stuck using 20th-century tax-harvesting solutions, and they're leaving a ton of their clients' money on the table as a result.

Most financial advisors implement tax-loss harvesting just once a year—usually in the fourth quarter. The main reason is that they don't have the resources to do it more frequently. Tax-loss harvesting has traditionally been a labor-intensive, time-consuming process. When an advisor oversees hundreds of portfolios, once-a-year rebalancing is about all he or she can realistically handle.

21st-century tax harvesting

Twenty first-century technology is changing all that, however. Advisors can vastly improve their tax-loss harvesting results by using technology services from digital advisors (also known as robo-advisors) that search for loss-harvesting opportunities throughout every minute of every trading day without any human intervention.

Read MoreStressed over money? Join the club

As any equity investor familiar with the market's volatility can attest, such opportunities abound. The intrayear ebb and flow of the markets presents a sheer number of loss-harvesting opportunities that cannot be captured through a typical end-of-year strategy.

And while a human advisor can't identify all of those opportunities, a robo-advisor will and then can execute on these opportunities—typically at no cost to the consumer. Imagine the robo technology as a sentry that constantly monitors your portfolio. When markets decline, it spots opportunities to realize a loss without changing your investment strategy or allocation. Unlike your advisor, it never sleeps, gets sick or goes on vacation.

Fewer missed opportunities

The case for using robo-advisors to optimize tax-loss harvesting becomes evident when you consider that most human advisors miss out on at least 80 percent of each year's loss-harvesting opportunities. Here's an overview of the past 15 years, according to S&P 500 Index return data from research firm Morningstar (as of Q3, 2015):

• The S&P 500 index ended the year with positive returns 78 percent of the time.
• However, 34 percent of quarterly returns within that period were negative.
• Of those negative quarterly returns, 80 percent occurred in a quarter other than the fourth quarter, meaning an end-of-year rebalancing strategy would have missed out on 80 percent of the loss-harvesting opportunities within the year.

Read MoreWhen do muni bonds make sense?

Further analysis from leading robo firms Wealthfront and Betterment suggest that this difference can lead to between 0.77 percent and 1.55 percent in additional return each year.

If your financial advisor is still using a legacy year-end strategy, the benefits of robo technology can (or should) be enough to pay most, if not all, of an advisor's fee for the technology. Compound those savings over an investor's working career, and the impact on a portfolio can be significant.

Now for the fine print: There are a host of rules to navigate in order to successfully execute a loss harvest and replace the security. The 30-day "Wash Sale" rule, for example, can disallow or defer the loss if not followed properly.

Additionally, it's important to note that tax-loss harvesting does not eliminate taxes but rather defers them into the future. That does not diminish the value of the strategy, though.

As long as money stays in your account rather than going to the Internal Revenue Service, you have the chance to compound that money rather than Uncle Sam having his way with it.

That is the true value of the strategy when executed over the long run: More money working for you to earn more money.

Investing is never an exact science. For that reason, the exact benefits that a tax-loss-harvesting strategy will have to any individual's portfolio will depend on their portfolio, tax bracket at the time they are taxed, future tax law and overall market performance, among other considerations. However, today's technology delivers clear value all year-round.

The math is clear: Tax-loss harvesting is a strategy that is as close as you can get to a free lunch. And by leveraging the power of robo technology, you may be able to earn more of that all-important true return than ever.

— By Steve Lockshin, a founder and principal of AdvicePeriod. He is also an investor in digital advisory firm Betterment and partner in Betterment Institutional.