Advisors are facing more competitive pressures than ever before, making the ability to offer value-added services focused on tax planning increasingly critical. After all, managing tax implications is a compelling way for advisors to attract and retain clients, adding value to their portfolios.
While some mistakenly think of tax planning as an annual event, there are strategies, processes and technologies that can be leveraged to enhance tax efficiencies year-round. In order to effectively enhance tax outcomes, advisors must prioritize optimizing asset location, harvesting tax losses and strategically realizing capital gains.
Optimizing Asset Location
The allocation of various financial assets that are established in a client’s initial investment plan may no longer be the most beneficial as time goes on and assets grow or market conditions and personal circumstances shift. Periodic reviews and adjustments can help realign assets while minimizing tax consequences. After all, not all asset classes are created equal.
By optimizing the location of assets across taxable, tax-deferred and tax-exempt accounts, tax implications can be significantly reduced across the portfolio.
Harvesting Tax Losses or Gains
Amid market volatility, clients often have losses that can be harvested to offset capital gains while still maintaining their desired portfolio allocations. Regular portfolio monitoring can help identify losses that may be harvested without disrupting investment objectives. Similarly, recognizing when to realize capital gains can improve tax outcomes.
Strategically Realizing Capital Gains
Strategically addressing capital gains can help mitigate the tax consequences that come with portfolio growth. For example, consider a client who has had a lower-than-usual income year (maybe they donated a substantial amount to charity or took a sabbatical). In this case, it might make sense to realize capital gains during that year instead of a year when income is typically higher. Or, they might choose to spread the sale of an investment with substantial gains over a couple of years. There are many options that advisors can help clients explore and evaluate to minimize tax consequences.
Another effective strategy is setting capital gains budgets. This can help reduce clients’ annual tax burdens by allowing advisors to set parameters for short-term, long-term or combined capital gains based on either a dollar value or as a percentage of the total portfolio.
The Importance of Year-Round Tax Management
More than ever, clients expect their advisors to be able to expertly maximize wealth while minimizing tax liabilities. Such efforts seem especially timely as the Great Wealth Transfer gets underway, with baby boomers set to pass trillions of dollars to their children, causing significant tax consequences. Advisors that can’t manage such a shift in a tax-efficient way will be left behind.
Instead of an isolated annual event centered solely on tax season, advisors can and should apply tax-sensitive strategies and rebalancing approaches throughout the year. Rebalancing with a focus on tax efficiency can enable advisors to harvest their clients’ material losses during the year, avoid material capital gains and adjust the location of assets to maximize tax benefits and improve client outcomes. Those advisors that prioritize these tax optimization strategies will be able to differentiate and forge lasting client loyalty.
Jennifer Valdez is president of intelliflo for the Americas. Intelliflo is a ThinkAdvisor Luminaries 2024 winner for innovation in rebalancing.
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