Tax Day has come and gone.
As advisors to high-net-worth individuals and families, tax planning is a year-round priority for our team. Our clients have wide-ranging objectives that include everything from transferring large amounts of money to younger generations to minimizing their portfolio’s correlation with the overall market. So you can imagine the urgency with which we get asked about tax risk and implications.
This is what I tell them to assuage their anxiety: Taxes are not something to be afraid of; they’re something to be aware of. If your clients are feeling stressed about reckoning with the tax exposure in their portfolios, here are some basic considerations you can make now and throughout the year to guard against any lingering fears of unseen liabilities or unclaimed benefits before Tax Day rolls around.
Remember the Bigger Picture When Advising Clients
Most investors don’t think about their taxes too deeply outside of tax season. But the downside is that the sudden onset of tax season can leave your clients vulnerable to making irrational portfolio investment decisions.
A U.S. Trust Insights on Wealth and Worth survey found that 55% of high-net-worth investors say “it’s more important to minimize the impact of taxes when making investment decisions than it is to pursue the highest possible returns regardless of the tax consequences.” In my professional view, this is irrational.
It’s important to tell your clients to remember that taxes are but one aspect of their portfolio. You should point out that they should not sacrifice their asset allocation to protect themselves from potentially paying more in capital gains taxes. More importantly, the reason they’re investing in the first place is to generate after-tax returns. They should not let their after-tax returns suffer simply because they’re afraid of paying taxes.
As one of my partners likes to say, “It’s not what you make, it’s what you keep.” If you are keeping more after paying taxes, improving the asset allocation and diversification of your portfolio, that seems like a no-brainer. In most scenarios, paying taxes means you made money.
Reducing Your Client’s Tax Exposure Is Not Actually That Hard
On the equity side of the market, one common way investors minimize their tax exposure is by owning passive ETFs instead of actively managed mutual funds. Mutual funds are naturally the less tax-efficient vehicle of the two due to their creation of more taxable events.