More On Tax Planningfrom The Advisor's Professional Library
- Taxation of Real Estate Real estate may be used to shelter income and may offer certain tax benefits. However, the type of real estate investment may result in different tax treatment. Learn how to use these investments to help your clients.
- Annuities: Variable Annuities Annuities are hot. The tax rules vary with the circumstances. Advisors must be aware of these intricacies when discussing annuities with clients.
A survey of financial advisors finds 87% of them are optimistic about where the stock market is headed for the next three years, according to Russell Investments. This tops the previous high of 86% set back in February 2011.
Their clients, however, are more sanguine. Just 30% of advisors say investors they work with are optimistic, down from 36% in the December survey.
Investor uncertainty about the markets now stands at 55%, compared with 50% in the previous poll. This puts the optimism gap between advisors and clients at 57%, up 14 points from the prior quarter.
Russell’s Q1 Financial Professional Outlook survey also reveals a disconnect between advisors and their clients on taxes: 35% of advisors say clients ask about strategies to reduce or avoid taxes, but only 18% have clients that “proactively want to discuss tax implications” of their investment strategies.
“In tandem with new federal tax laws taking effect in 2014, the survey findings point to a clear opportunity for advisors to engage clients in deeper planning discussions that include tax-aware investment strategies, as well as to connect with their clients’ CPAs or tax attorneys to provide integrated advice and planning,” said Frank Pape, director of consulting, private client services, in the group's April report published Thursday.
Of the 173 financial advisors polled, the vast majority — 86% — acknowledge the importance of these strategies. Just 11% of advisors, though, are considered to be “experts,” which Russell defines as being fully engaged on the subject and having a firm grasp of tax-aware strategies amd how to implement them effectively.
Many, 75%, are “believers,” who make tax-managed investments available to most of their clients and are interested in learning more about tax-aware investing.
When it comes to how advisors help clients become more tax efficient, appropriate mutual funds are advisors’ top choice, 31%, followed by municipal bonds, 25%, and separately managed accounts, 16%.
The recent poll finds that relatively few, 10%, use or recommend passive investments through index funds or ETFs as a tax-managed strategy.
“As more investors build wealth, tax sensitivity becomes an even more prominent issue, because taxes can detract in a meaningful way from an investment portfolio’s return if not managed effectively,” Pape pointed out.
“We believe that developing a strong understanding of how after-tax returns are calculated is a worthwhile exercise and one that many advisors might not be approaching in an optimal way, or at least not with confidence,” the private-client consultant explained. “After-tax return information is powerful to know and share in client reviews, particularly with high net-worth investors.”
Russell Investments’ opinion is that it’s time for advisors to step up to the plate.
“In our view, advisors can choose to gripe along with clients about political issues and uncertainty, or they can focus on something more productive,” stressed Pape. “In this case, we believe educating clients about tax-aware strategies may be one of the best ways to add value to client relationships and, ultimately, investment outcomes.”