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More dialogue needed on best practices for tax-aware portfolios, says survey


More than half of advisors (53 per cent) said that clients saw a larger tax burden in 2014 than the prior year, yet dialogue about tax strategies decreased in 2014, according to the latest Financial Professional Outlook (FPO). 

The results of the latest quarterly survey of US financial advisors from global asset manager Russell Investments found 22 per cent of advisors saying that taxes were one of the most common conversation topics this year versus 29 per cent in 2014. Additionally, advisors have yet to align on tax strategy best practices, with only about a quarter of advisors (27 per cent) currently encouraging clients to use tax-deferred strategies within their investment portfolios. In general, opinions vary on the types of advice to provide, as one in five advisors (19 per cent) recommend implementing tax-loss harvesting while 14 per cent simply recommend paying the taxes.

“Given clients’ increasing tax burdens, one would expect tax strategies to be a major focus for advisors,” says Frank Pape (pictured), director of consulting in Russell Investments’ US advisor-sold business. “Right now, many advisors and clients don’t fully appreciate the drag on returns caused by taxes, which adds up quickly, especially in a low return environment. Reducing this drag and providing clients with a more complete plan for implementing a tax-managed approach is a significant way for advisors to add value, not only to their own clients, but also their businesses.”

Advisors missing opportunities to differentiate themselves by not addressing tax strategies
Advisors surveyed claim that a significant majority of clients (81 per cent) are concerned with after-tax returns, reaffirming the importance of tax-aware investing. And yet, more than a third of taxable assets (37 per cent) are held away (i.e. not managed by their advisor), indicating that advisors who focus on tax-managed strategies could open the door to these assets. Given the whole portfolio must be considered when developing a tax-aware plan, advisors who make the decision to incorporate a tax-aware approach and include tax strategies stand to potentially increase their clients’ overall wealth as well as their own assets under management.

Pape says: “Tax management could represent a key growth opportunity for advisors. Over the past few years, many investors have been keenly aware of government policy and market volatility, and those remained popular topics of conversation in this year’s survey. Advisors can use these concerns as a way to discuss the potential advantages of a tax-managed approach, which can use market volatility to help balance losses against gains. An investor’s personal tax policy is much easier to control than government policy.”

Nearly a third (32 per cent) of advisors polled were not satisfied with the level of support and education they received from asset managers on tax-managed investing, while an additional quarter were unsure. Myths continue to persist regarding who can best benefit from tax-aware investing and the range and capabilities of products available to support this approach. Advisors still need to gain a better understanding of the products available for use in tax-managed investing, yet half of them were satisfied with the products available, while only 20 percent were unsatisfied.

“Many advisors and their clients don’t yet realise that there is more to tax-aware investing than muni-bonds and index funds,” Pape says, “As advisors gain a broader knowledge of the tax-aware strategies available to them they often find themselves better able to advise and aid not only high net worth investors but also those in the middle income brackets. The first step is making sure advisors receive adequate product education, and the second is educating clients.”

Russell Investments recently expanded its lineup of tax-managed mutual funds with the introduction of the Russell Tax-Managed International Equity Fund and the Russell Tax Exempt High Yield Bond Fund. Both funds were incorporated into the Russell Tax-Managed Model Strategies in June 2015 as part of an overall strategic asset reallocation of the five model portfolios, resulting in each model portfolio’s reallocation to tax-aware funds exceeding 90 per cent.

“As advisors examine their tax-managed options, Russell Investments is excited to provide tools to help them best assist their clients.” Pape says, “We see tax management as a vital differentiator for the future and expect to see continued efforts among advisors to better educate and aid their clients.”
Russell Investments also regularly publishes insights on tax management strategies for advisors on its Helping Advisors Blog. 

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