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Focus clients on after-tax returns

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Taxes are paramount for financial advisors.

“Considering taxes is vital in investment planning and financial planning,” says Bob Phillips, managing principal of Spectrum Management Group, a wealth management firm in Indianapolis. “The resources an individual or family have to work with are only what is left over, after-tax.”

Tax planning, however, may be only half the battle. To build and maintain a practice, clients should realize what an advisor is doing to leave them with more dollars, net of tax.

“We make clients aware of actions we take with their investment portfolios and financial plans to maximize after-tax returns,” Phillips says. “We spotlight tax moves we’ve made in client communications and let clients know what we have done to save taxes.”

For example, monitoring their income shortly after retirement may allow advisors to show savvy tax planning to clients.

“There generally is an opportunity between the ages of 65 and 70 ½ -- when a client must start required minimum distributions -- when people can be in a very low income tax bracket,” Phillips says.

“Distributions might be taken from traditional individual retirement accounts and rolled into Roth IRAs at no or very low incremental income tax rates,” he says. “That effectively places funds in an income tax-free environment, possibly for more than one generation.”


Although clients may want “tax-advantaged” investments, educating them on efficient tax tactics might be a challenge.

“People need to realize that increasing after-tax returns is done with investment strategy, not particular products,” says Allan Katz, president of Comprehensive Wealth Management Group LLC in Staten Island, N.Y.

“For instance, some clients wanted to buy only municipal bonds, so the income would be tax-free,” he says. “They thought it was the best way to invest because this is what their parents did.”

Katz communicated that this probably wasn’t a sound portfolio by mentioning the chance that inflation will outpace the growth of such a portfolio.

“After a long stretch of time, that would make it more difficult to create the necessary income,” he says.

Holding some assets with growth potential could improve returns, pre-tax and after-tax.

To illustrate this idea, Katz used their home’s value.

“They bought their house 40 years ago for $80,000, and now it’s worth $700,000. If they had kept that $80,000 in municipal bonds until maturity, over the same time, and they had spent the interest payments, they would still have that $80,000,” Katz says.

“They wouldn’t be able to purchase their house today. Even if they had reinvested the interest payments, the amount in that account wouldn’t be close to the home’s value now,” Katz says.

“Thus, diversification is the key for long-term, after-tax returns,” he says.

Donald Jay Korn is a New York-based financial writer who contributes to Financial Planning and On Wall Street.

This story is part of a 30-day series on how to prosper as an advisor.

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