It’s cliché, yet critically important; investing is never about what you earn, but what you keep. If returns are sacrificed on the altar of tax-inefficiency, what’s the point? This is especially true after a lifetime of saving in a 401(k), only to harvest incorrectly and fall far short of retirement goals.
With that in mind, Russell Investments reports disturbing findings from a recent survey; more than half of advisors (53%) said that clients saw a larger tax burden in 2014 than the prior year, yet dialogue about tax strategies decreased in 2014.
The results of the latest Financial Professional Outlook (FPO) survey of U.S. financial advisors found 22% say that taxes were one of the most common conversation topics this year versus 29% in 2014. Additionally, advisors have yet to align on tax strategy best practices, with only about a quarter of advisors (27%) currently encouraging clients to use tax-deferred strategies within their investment portfolios. In general, opinions vary on the types of advice to provide, as one in five advisors (19%) recommend implementing tax-loss harvesting while 14% simply recommend paying the taxes.
“Given clients’ increasing tax burdens, one would expect tax strategies to be a major focus for advisors,” Frank Pape, director of consulting in Russell Investments’ U.S. advisor-sold business, said in a statement. “Right now, many advisors and clients don’t fully appreciate the drag on returns caused by taxes, which adds up quickly, especially in a low return environment. Reducing this drag and providing clients with a more complete plan for implementing a tax-managed approach is a significant way for advisors to add value, not only to their own clients, but also their businesses.”
Advisors missing opportunities to differentiate themselves by not addressing tax strategies
Advisors surveyed claim that a significant majority of clients (81%) are concerned with after-tax returns, reaffirming the importance of tax-aware investing. And yet, more than a third of taxable assets (37%) are held away (i.e. not managed by their advisor), indicating that advisors who focus on tax-managed strategies could open the door to these assets. Given the whole portfolio must be considered when developing a tax-aware plan, advisors who make the decision to incorporate a tax-aware approach and include tax strategies stand to potentially increase their clients’ overall wealth as well as their own assets under management.
Explained Pape, “Tax management could represent a key growth opportunity for advisors. Over the past few years, many investors have been keenly aware of government policy and market volatility, and those remained popular topics of conversation in this year’s survey. Advisors can use these concerns as a way to discuss the potential advantages of a tax-managed approach, which can use market volatility to help balance losses against gains. An investor’s personal tax policy is much easier to control than government policy.”
More education and support needed
Nearly a third (32%) of advisors polled were not satisfied with the level of support and education they received from asset managers on tax-managed investing, while an additional quarter were unsure. Myths continue to persist regarding who can best benefit from tax-aware investing and the range and capabilities of products available to support this approach. Advisors still need to gain a better understanding of the products available for use in tax-managed investing, yet half of them were satisfied with the products available, while only 20 percent were unsatisfied.
“Many advisors and their clients don’t yet realize that there is more to tax-aware investing than muni-bonds and index funds,” Pape noted, “As advisors gain a broader knowledge of the tax-aware strategies available to them they often find themselves better able to advise and aid not only high net worth investors but also those in the middle income brackets. The first step is making sure advisors receive adequate product education, and the second is educating clients.”
Read the full FPO report and view an infographic featuring survey highlights.
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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
