Strategic tax-investment strategies just not top-of-mind, say advisors
April 30, 2014- SEATTLE–(BUSINESS WIRE)–While 35 percent of financial advisors say that clients ask about strategies to reduce or avoid taxes, only 18 percent of advisors say that clients proactively want to discuss tax implications of investment strategies, according to the Financial Professional Outlook (FPO), a quarterly survey of U.S. financial advisors from global asset manager Russell Investments. In tandem with new federal tax laws taking effect in 2014, the survey findings point to a clear opportunity for advisors to engage clients in deeper planning discussions that include tax-aware investment strategies, as well as to connect with their clients’ CPAs or tax attorneys to provide integrated advice and planning.
“As more investors build wealth, tax sensitivity becomes an even more prominent issue because taxes can detract in a meaningful way from an investment portfolio’s return if not managed effectively,” said Frank Pape, director of consulting for Russell’s U.S. advisor-sold business in a report on the survey results. “The topic will clearly gain even more attention this year as advisors aim to understand – and communicate with clients about – the increase in taxable distributions from many mutual funds and the full impact of the new tax laws.”
Eighty-six percent of advisors recognize the importance of tax-managed strategies, saying that they are important – or critical – to their businesses. Among survey respondents, 11 percent of advisors are what Russell calls ‘Experts.’ These advisors are fully engaged on the subject, have a firm grasp of tax-aware strategies and how to implement them effectively, and likely have a greater number of high net-worth clients interested in the topic. Seventy-five percent are ‘Believers’ who make tax-managed investments available to most clients and are interested in learning more about tax-aware investing.
“We believe that advisors who can move along the continuum from Believers to Experts will reap the greatest rewards for their businesses, while also providing a valuable service to their clients,” said Pape. “Making this shift requires advisors to learn more about tax-aware investing, communicate more actively with clients on the topic, and develop stronger relationships with clients’ CPAs and tax attorneys in an effort to help clients reduce future tax bills and retain more after-tax wealth.”
Top tax-aware products favored by advisors
Advisors use a variety of products to try and gain tax-efficiency for their clients, with the most typical being tax-advantaged mutual funds (31 percent), municipal bonds (25 percent) and separately managed accounts (16 percent). Surprisingly, relatively few (10 percent) use or recommend passive investments through index funds or ETFs as a tax-managed strategy.
“Beyond the new tax laws, last year’s big equity market gains with increased distributions and bond market underperformance are likely driving the increased need for tax-aware investment solutions,” explained Pape. “Investors may have begun 2014 with their taxable portfolios out of balance from their target allocations. For these taxable accounts, rebalancing has the potential to be costly as equity gains are realized (and taxed) and those assets are then reallocated to fixed income investments.”
More than half (51 percent) of the advisors surveyed reported that portfolio rebalancing was the most common conversation topic initiated with clients during the prior three months.
Calculating after-tax returns
An open-ended survey question asking advisors how they calculate after-tax returns yielded a broad range of responses and prompted development of a Helping Advisors Blog post entitled Do you know how to calculate after-tax returns? The blog post covers some of the basic information that advisors need to know about their clients’ tax status and outlines the necessary steps in calculating after-tax returns, including the importance of focusing the calculation on the actual distribution for that year, not the rate of return.
“We believe that developing a strong understanding of how after-tax returns are calculated is a worthwhile exercise and one that many advisors might not be approaching in an optimal way, or at least not with confidence,” said Pape. “After-tax return information is powerful to know and share in client reviews, particularly with high net-worth investors.”
More about Russell’s Financial Professional Outlook
The current iteration of the FPO survey includes responses from 173 financial advisors working in nearly 100 national, regional and independent advisory firms nationwide. The survey was fielded between February 27, 2014 and March 7, 2014.
More information about the FPO survey, as well as a full report of findings, can be found here.
About Russell Investments
Russell Investments (Russell) is a global asset manager and one of only a few firms that offers actively managed multi-asset portfolios and services that include advice, investments and implementation. Russell stands with institutional investors, financial advisors and individuals working with their advisors—using the firm’s core capabilities that extend across capital market insights, manager research, portfolio construction, portfolio implementation and indexes to help each achieve their desired investment outcomes.
