Are You a Tax-Savvy Advisor?

With tax season upon us, I wanted to talk about how taking a tax-managed approach to investing could potentially benefit your clients and your practice.

First off, it’s important to acknowledge that anxiety levels can run pretty high for all parties this time of year. Clients are on edge because of the uncertainty that accompanies tax time. Advisors know they can face an onslaught of calls and questions up to and through the April 15th deadline. So here are a few ideas that might help lower everyone’s blood pressure and actually strengthen your client relationships.

Be proactive

The taxable world presents a very different environment for investors than that of tax-sheltered IRAs and 401(k)s. And clients don’t normally think about taxes until they have a reason to. So I encourage advisors to be proactive and initiate meaningful discussions about taxes on a more routine basis – especially with high net-worth investors. This way you can stay ahead of potential problems and build a stronger rapport with your clients.

Avoid surprises

Chances are you’ve encountered some folks who were surprised, unhappy, or both, by an unexpected distribution that resulted in a large capital gain at the end of 2014. This isn’t uncommon for clients who hold regular mutual funds in taxable accounts. But tax-managed mutual funds may help reduce the impact of taxes on after-tax returns.

Tax-managed funds can also present opportunities for advisors whose clients hold individual securities in taxable accounts. There’s a lot of legwork tied to managing tax lots, tracking purchase prices and dates, and using tax-loss harvesting to seek to offset large capital gains. With a tax-managed approach, you may be able to manage a lot of these time-consuming tasks. You also may be able to reduce those unpleasant tax surprises.