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Portfolio > Mutual Funds

Advisors’ top investment pick: tax-advantaged mutual funds

By Warren S. Hersch

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While 35 percent of financial advisors say that clients ask about strategies to reduce or avoid taxes, only 18 percent of advisors say that clients proactively want to discuss tax implications of investment strategies, according to new research.

Global asset manager Russell Investments discloses this finding in its first quarter Financial Professional Outlook survey, a quarterly survey of U.S. financial advisors. The survey includes responses from 173 financial advisors working in nearly 100 national, regional and independent advisory firms nationwide.

“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,” says Frank Pape, director of consulting for Russell’s U.S. advisor-sold business. “The topic will clearly gain even more attention this year as advisors aim to understand — and communicate with clients about — the increase in taxable distributions from many mutual funds and the full impact of the new tax laws.”

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.

Among the survey’s additional findings:

  • Some 86 percent of advisors recognize the importance of tax-managed strategies while 11 percent of advisors are knowledgeable of tax-aware strategies and how to implement them effectively;
  • Three-quarters (75 percent) avail most clients of tax-managed investments and are interested in learning more about tax-aware investing;
  • Advisors recommend and use many products, the most typical being tax-advantaged mutual funds (31 percent), municipal bonds (25 percent) and separately managed accounts (16 percent). Comparatively few (10 percent) use or recommend passive investments through index funds or ETFs as a tax-managed strategy; and
  • More than half (51 percent) of the advisors surveyed reported that portfolio rebalancing was the most common conversation topic initiated with clients during the prior three months.

More information about the FPO survey is available.

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