It seems there is something else financial advisors and clients aren’t talking about: taxes.
According to an SEI Quick Poll released on Monday, over 90% of financial advisors say their clients rarely or only occasionally ask about how to minimize taxes on their investments, even though advisors can save clients over 3% through tax-management strategies.
“It’s clear that clients aren’t frequently asking their advisors about tax management as it impacts their investments,” said Kevin Crowe, Solutions Unit Leader of the SEI Advisor Network, in a press release. “On the other hand, the majority of advisors have said they can preserve significant amounts of tax savings for their clients. As a result, advisors should proactively communicate with their clients and discuss the advantages of deploying tax-management techniques. It’s not enough to only provide tax-efficient strategies, advisors need to communicate these strategies to clients and demonstrate the positive impact it has on the investors’ total wealth and meeting their goals. Ultimately, this will provide additional value in building the client-advisor relationship.”
Those who have advisors seem to be winning out. Seventy-nine percent of advisors say they proactively manage for taxes when making investment decisions for clients, while 98% are using tax-management strategies. About 1 in 3 advisors say they can preserve more than 6% of their clients’ wealth annually, which is the equivalent of more than $60,000 on a $1 million portfolio. Some of the tools advisors are using for tax management are tax-managed mutual funds, tax-efficient separate accounts, tax-exempt investments, and harvesting losses at the end of the year.
“It’s not surprising that investors aren’t thinking as much about tax management right now, but within the next few years that is likely to change,” said Todd Moll, Director and Chief Investment Officer of Provenance Wealth Advisors, LLC in Miami, Florida. “Advisors should use this as an opportunity to discuss the benefits of tax management with their clients and highlight specific opportunities realized for tax savings. It is a good way for advisors to differentiate their practice by seamlessly integrating tax management considerations into every investment decision and walking their clients through the process on an ongoing basis, not just at the end of the year.”
Meanwhile, SEI identified five steps every advisor can take to help their clients increase their tax savings:
- Gift appreciated securities instead of cash
- Investment vehicles that provide tax-free income
- Fund qualified accounts (IRAs, 401K’s, 403B’s, and others) to the maximum amounts, including catch-up provisions
- Maximize loss harvesting opportunities within taxable (non-qualified) accounts
- Pay attention to “asset location” by placing less favorable securities in qualified accounts and more tax-efficient securities in non-qualified accounts
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