With eyes focused on year-end tax moves, more advisors are considering the importance of tax optimization and a personalized approach. Many are looking for an easy and effective way to help manage clients’ tax exposure without becoming tax experts themselves.
Research shows that investors expect their advisors to consider taxes when managing their portfolios, with 92% expecting tax planning advice but only 25% receiving it.1 It’s essential to align your services with what today’s investors want and need. Your ability to meet client expectations and provide greater customization will allow you to differentiate and grow your practice.
In a recently refreshed Sharing Perspectives whitepaper from Envestnet and BlackRock, “Helping clients keep more: Managing the impact of taxes in a personalized way,” we offer insights on the increasing importance of tax optimization and why a personalized approach matters. We believe advisors with data and technology-driven innovations have a greater ability to help deliver better outcomes for their clients.
Our whitepaper defines four trends we see taking shape in the evolving world of tax management:
1. After-tax wealth takes center stage
While many advisors intuitively understand the importance of after-tax wealth, focusing on it will be essential as we look to the future. It’s critical for advisors to help clients understand the impact taxes can have and to maintain a focus on after-tax wealth. We see more interest in tax-efficient vehicles that put advisors in a position to help deliver better after-tax returns and to do so in a way that is still efficient for their business.
Taxes can be an enormous drag on portfolio performance, especially after this year’s market challenges, and therefore, even more important to solve. For example, if a client were invested in a 50% stock and 50% bond portfolio in a year when pre-tax returns were 4.0%, the after-tax return would be only 2.3%. That’s a tax drag of 1.7%, represented by income from the bond portfolio and capital gains distributions from the equity portfolio, with 44% of the portfolio’s gains going to taxes over time.2
2. Personalized solutions matter as our tax system becomes more complex
Tax considerations are integral to the wealth management process. With a trend toward even more personalization through tax management technology, you can help your clients save money while customizing portfolios in a scalable way.
For many advisors, tax-loss harvesting is the best approach for helping clients minimize taxes. For other advisors, tax-smart investing strategies include incorporating tax-efficient vehicles into client portfolios. While both approaches have their merits, when you partner with a tax management technology specialist, you can leverage solutions that look at an entire portfolio in the most comprehensive way.
Especially in challenging markets, new tax management technology solutions can allow you to offer clients better outcomes (without putting the burden on your shoulders) and to better position the value your practice can bring clients in tough times to help them keep more of what they earn. Tax optimization algorithms are much more available today than ever before, and with this availability, investors have come to expect a more sophisticated approach to tax management.
3. Tax conversations deepen client engagement and empower advisors
While taxes may not be your clients’ biggest worry given the turbulent markets, it’s critical to help them maintain a disciplined process. At this time of year, that means thinking about taxes. For example, some investors spend more time thinking about taxes now, especially those sitting on significant unrealized capital gains. They may be questioning whether to hold onto these positions, so they don’t take the tax hit, but then worry about the impact on their asset allocation strategy and portfolio returns.
Taxes can often be a client’s biggest expense. And this creates an opportunity for you to provide value and deepen your relationship by proactively identifying ways to help them save money. If you’re not having tax planning conversations with your clients today, the chances are that someone else will be educating them about opportunities to manage their overall tax burden.
4. Risk management and the search for tax alpha demand greater focus
While risk management is always a critical consideration, when combined with a focus on tax alpha, you can manage risk, monitor tax exposure, and customize tax-efficient portfolios. Top advisors are increasingly leaning toward sophisticated services that optimize risk and help ensure portfolios are aligned with a client’s risk tolerance, preferences, and tax sensitivities.
Learn More: Resources to help you minimize the tax drain
Whether you’re already helping clients with tax planning techniques or looking to expand your service offering, we believe in the power of tax management and are committed to helping advisors uncover opportunities and add more value. With investment vehicles and sophisticated technology solutions available from Envestnet and BlackRock, you can broaden your value proposition, especially critical in turbulent markets, and add more scale to your practice.
To learn more about the array of sophisticated tax management solutions at your disposal, read our whitepaper and connect with us at envestnet.com.
1. Spectrem August 2018 Defining Wealth Management. Neither Envestnet, Envestnet | PMC nor its representatives render tax, accounting, or legal advice.
2. Morningstar data. U.S. Stocks represented by Morningstar U.S. Equity Mutual Funds. U.S. Bonds represented by Morningstar U.S. Taxable Bond Mutual Funds. Tax Drag is the Morningstar Tax Cost Ratio.
Neither Envestnet, BlackRock, or their representatives render tax, accounting or legal advice. Any tax statements contained
herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax
penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.
This information should not be relied upon as research, investment advice, or a recommendation regarding any products,
strategies, or any security in particular. This material is strictly for illustrative, educational, or informational purposes and is
subject to change.
BlackRock through a holding company subsidiary, BlackRock, Inc. (“BlackRock”) owns a non-controlling interest in Envestnet’s
parent company, Envestnet, Inc. (NYSE: ENV).