New tax laws and the unwillingness of most clients to talk about tax implications of investments create an opportunity for advisors to engage clients in more and deeper planning discussions, says Russell Investments.
Russell Investments on Tuesday announced the results of a survey, Financial Professional Outlook, that show most advisors’ clients are not talking about taxes, despite wanting to reduce their tax bills as much as possible.
Only 18 percent of advisors say their clients are proactive in talking about the tax implications of investment strategies, says the survey. Thirty-five percent of advisors have clients who ask about strategies to reduce or avoid taxes. The survey was conducted among 173 advisors with Russell Investments, a global asset manager.
This void in discussions creates an opportunity for advisors to engage clients on taxes, as well as to connect with clients’ accountants and tax attorneys to provide integrated advice and planning, Russell says.
“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,” says Frank Pape, director of consulting for Russell’s U.S. advisor-sold business. “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 experts on taxes, according to Russell’s definition, which means they are fully engaged on the subject, have a firm grasp of tax-aware strategies and know how to implement them effectively. Seventy-five percent of the advisors make tax-managed investments available to most clients and are interested in learning more about tax-aware investing.
Advisors who can become experts will reap the greatest rewards, while also providing a valuable service to clients, says 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.”
According to the survey, advisors use a variety of products to gain tax efficiency for their clients, with the most popular being tax-advantaged mutual funds (31 percent), municipal bonds (25 percent) and separately managed accounts (16 percent). Only 10 percent use or recommend passive investments through index funds or ETFs as a tax-managed strategy.
Fifty-one percent of the advisors reported that portfolio rebalancing was the most common conversational topic initiated with clients during the prior three months. However Pape explains, “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.”
Russell has posted a blog entry on taxes entitled “Do you know how to calculate after-tax returns?” designed to help educate advisors.