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Financial Planning > Tax Planning > Tax Loss Harvesting

Report: Advisors Should Emphasize Tax Efficiency

By Marcella De Simone

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NU Online News Service, Nov. 26, 2:43 p.m. – The Money Management Institute, Washington, has published a report on tax strategies that top sales and marketing directors can “weave into the education of sales reps in the field who deal directly with clients,” says Executive Director Christopher Davis.

This year many investors suffered losses, some of which they can recoup on their 2002 tax returns.

But “they’ll need a strategy for using losses to reduce their overall tax liabilities,” according to the tax relief report. “Their ability to do this–without incurring sizable transaction costs or disrupting their long-term investment plans–will depend on their choice of investment vehicles, and their understanding of the portfolio management process.”

Because federal tax laws allow investors to use capital losses to shelter taxable gains, 2002 ought to be a great tax year for many. After all, the S&P 500 lost 28% of its value in the first nine months.

“Unfortunately,” MMI says, “many investors may find it’s too late to develop an effective 2002 tax plan. Investment decisions they made earlier ?have made it harder for them to reduce their tax liabilities now.”

Investors should understand that tax planning should be part of their investment strategy from the beginning, and not when little or nothing can be done to reduce a substantial tax bite, according to MMI.

Financial advisors understand that the tax laws treat mutual funds and separately managed accounts very differently. But advisors have to make sure that their clients, even high-net worth investors who have an air of sophistication, also understand that how they invest is as important as what they invest in, according to MMI.

“By working with an experienced financial advisor or portfolio manager, and with their accountants or other tax professionals, investors can avoid the pitfalls of do-it-yourself tax planning,” MMI says.

Advisors can show clients, for example, how a $100,000 investment by a taxable and a tax-exempt investor can result in far different returns. MMI assumes for this example that the taxable investor is in the top federal income bracket.

Assuming both are fully invested for 30 years in a stock portfolio earning an 11% annual return, the tax-exempt investor would see her $100,000 investment grow to $2.3 million, while the taxable investor would see the same investment reach only $1.1 million, MMI says.

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