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Financial Planning > Tax Planning > Tax Loss Harvesting

Are You a Tax-Savvy Advisor?

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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.

Consider outsourcing

By building a portfolio of suitable tax-managed funds, advisors can can use professional money managers to assist with tracking and managing tax lots and balancing losses with gains in the underlying funds. This can save valuable time for you, which you can then spend in front of clients instead.

Finally, consider taking an objective look at how you manage taxes for your client base as a whole. Some clients may be significantly more exposed to tax issues than others, and very often these clients may reap immediate benefits by taking a tax-managed approach. Your practice may see immediate benefits as well.

The bottom line

Over the long-term, using strategies to reduce the impact of taxes on your clients’ returns may help them achieve better outcomes. And that’s what being a tax-savvy advisor is all about.

— Read more from 22 Days of Tax Planning Advice on ThinkAdvisor.

– Check out Russell’s Helping Advisors blog for more information and full disclosures.


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