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Creative Planning CEO: Biden’s Capital Gains Tax Plan Could Kill Model Portfolios

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What You Need to Know

  • A capital gains tax hike could dramatically change the investment decisions advisors make.
  • Consider the diminished role of bonds in portfolios.
  • The world wants a reliable cryptocurrency.
Peter Mallouk Creative Planning CEO Peter Mallouk.

Peter Mallouk, CEO of Creative Planning, says an increase in the capital gains tax, which President Joe Biden is considering, could “dramatically change” investment decisions and “drive a stake through the heart of model portfolios” many advisors use.

Biden campaigned on a variety of plans to increase government revenue, including raising the marginal tax rate for those earning more than $400,000 from 37% to 39.6% and raising the tax on long-term capital gains and qualified dividends from 20% to 39.6% for those taxpayers earning more than $1 million.

The president has not yet proposed these and other tax changes as he is focused first on getting the coronavirus pandemic under control and providing relief to families, businesses and communities affected by its economic fallout. But Treasury Secretary Janet Yellen, in her written responses to questions for her confirmation hearing, affirmed Biden’s plans to increase the capital gains tax for wealthy investors and tax their unrealized capital gains — both designed to “remove biases on the tax code that favor wealth over work.”

At the hearing, Yellen said in response to a question about taxing unrealized gains, “capital gains at some point should be taxed,” noting that a “mark-to-market approach is one method but not the only method.”

Impact of Higher Capital Gains Taxes

If capital gains taxes are increased for wealthy investors, advisors will no longer be able to get away with taking the portfolio of a new client, converting it to cash and then investing the proceeds, Mallouk says. “There will be more demand for customization that didn’t exist before,” affecting advisors that pitch model portfolios in particular, he says.

“Clients want advisors to work with the positions they bring to the table. They want advisors to work around the positions they bring, around capital gains.”

Mallouk adds that an increase in capital gains taxes will also bring mergers and acquisitions to a halt and affect the holding periods for private equity funds.

The Creative Planning CEO, who has expanded the firm from just $34 million in assets in 2004, when it he took it over, to close to $70 billion today, has some interesting things to say about bonds.

Replace 60/40 with 70/30 or 80/20?

Investors should hold only enough bonds to meet their income needs during a long-term bear market when they shouldn’t be selling stocks, according to Mallouk. Bonds are earning next to nothing now, less than most dividend-paying stocks, he says. “Do I really think I will earn zero in stocks for the next 10 years?”

In a recent podcast, he declared the traditional 60/40 asset allocation model “dead,” favoring 70/30 or 80/20 mix. He tells ThinkAdvisor that Creative Planning clients are holding 20% to 40% of their portfolios in foreign stocks, both emerging markets and developed markets, tilting toward the latter.

ESG and Crypto

Mallouk says environmental, social and governance focused investing is becoming more mainstream as an increasing number of investors, especially millennials, want their investments to match their values, but advisors shouldn’t necessarily bring up the subject directly. Rather, they should “find out what a client’s goals are.”

He says more and more clients are asking about cryptocurrencies, which are acquiring an aura of legitimacy that they didn’t have before. ”The world definitely wants there to be a cryptocurrency they can rely on … [but] “Bitcoin may or may not be the one that prevails.

“Look at AOL or Yahoo or Excite,” he says, referring to the once-hot internet companies that faded. “It will be interesting to see how the government regulates it all.”


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