As we close the books on a tumultuous year, it's hard to predict what lies ahead. A new president, changing economic conditions, major industry evolution--the list goes on. It's safe to say, however, that coming off of a volatile 2008, most clients would be thrilled to hear their advisors are exploring different ways to increase portfolio value in 2009. Reducing taxes on investments is one way to do it.
But while taxes often represent the biggest detractor from performance of any investing factor, it seems advisors still are not taking advantage of all their opportunities to minimize their clients' tax liability. For example, in July 2008, we surveyed 293 advisors and asked how often they evaluate client portfolios for tax efficiency. About half of the responding advisors (49.5%) said they only do so at year-end, while 15% said they rarely (if ever) do so.
Let's face it: In any market, particularly when negative performance is an issue, it's critical that advisors explore ways to add overall portfolio value--however possible. Taxes have always existed, but the challenging market conditions of 2008 have made the pain even sharper as the likelihood for capital gains distributions becomes a reality--in spite of significant negative returns.
Additionally, with the outcome of the presidential election, many experts (and almost all of the advisors we polled) agree that this favorable tax environment will soon be a thing of the past. Some predict that the highest income tax rate could go to nearly 40%; others state that capital gains rates could climb as high as 28%. But these conditions won't change overnight, so it's time for advisors to take advantage of the window of opportunity before it closes.
Enter the "tax-aware advisor."
The tax-aware advisor knows that there's value to be found through ongoing analysis. He or she recognizes that tax management is an important part of the wealth management process that, if practiced throughout the year, not only helps reduce the impact of taxes and increase the overall value ofclients' portfolios, but can also serve to differentiate the advisor through sound advice that saves clients money.
Although tax management may seem to be a cumbersome and complex process, positioning oneself need not create a burden of time most advisors don't have. Instead, understanding the basic tenets of tax management, along with selecting an array of tax-efficient managers, overlay technology and advice-centric service can help strengthen this position. Here are a few tips to get you started:
Make tax management proactive, not an afterthought. By harvesting taxable accounts for losses to offset gains on a regular basis, you can create ongoing opportunities to increase portfolio value, potentially even offsetting ordinary income (up to $3,000).
Incorporate a tax management process, not just products. Many funds and products claim to deliver tax management, but "true" tax management takes more than the insertion of a few products. Explore a variety of solutions and providers to determine the best fit for your client and your investment process.
Look at the total picture. Effective tax management considers how taxes affect the client's total portfolio, including investments managed by other advisors. By practicing this, you'll not only recognize tax efficiencies your competitors might not, you'll also strengthen the client relationship by demonstrating concern for his overall financial well-being--not just the assets your firm manages.
In the end, it's not what you earn--it's what you keep. Tax management gives advisors another way to help their clients keep more. And what client wouldn't want that?
Kevin CroweSolutions LeaderSEI Advisor NetworkOaks, Pennsylvania 19456
Neither SEI nor its affiliates provide tax advice.