Year over year, investors say that taxes and saving enough for retirement are among their top three financial concerns according to our fourth annual Advisor Authority study of more than 1,700 RIAs, fee-based advisors and individual investors. This year, managing taxes and planning for retirement may become further complicated as advisors and their clients must navigate the nuances and changes related to the Tax Cuts and Jobs Act (TCJA), the most dramatic tax reform package in nearly three decades.

Roughly eight in 10 RIAs and fee-based advisors (79 percent) are adapting their approach to tax-advantaged investing in response to tax-reform and the same number say that the majority of their clients will benefit from tax reform—while less than six in 10 investors (56 percent) believe they will benefit—according to our most recent Advisor Authority study.

Whether clients win or lose as a result of these reforms, taxes will remain one of the biggest investing expenses your clients can face, especially for the HNW and Ultra HNW, who may owe as much as 40 percent or more on income and investment earnings every single year, when Federal and State taxes are combined.

Clients’ Concerns Create Opportunity

Taxes can be a drain on the performance of portfolios you’ve designed to help clients accumulate for retirement and generate retirement income. In fact, investors say taxes are the number-one macro factor that will most adversely impact their portfolio, and advisors say it is the number-two factor, according to Advisor Authority.

Reinforcing this point, a recent Nationwide Retirement Institute survey found that more than one-third of retirees (37 percent) say they did not consider the impact of taxes when planning for retirement, potentially losing the ability to save for six or more years of additional retirement income. The survey also revealed that the overwhelming majority of those nearing retirement (82 percent) want to learn more about the impact of taxes on their plans to prepare for and live in retirement.

Where your clients see uncertainty, you have an opportunity to differentiate your services and expand your practice by addressing their top concerns through tax-efficient retirement planning. Research including Advisor Authority has shown that advisors who serve clients using a more holistic approach such as tax-efficient retirement planning may have a greater opportunity to create a competitive advantage that will attract new clients and retain current clients.   

The Foundation Of A Tax-Efficient Retirement Plan

Tax-efficient retirement planning begins by determining where you should invest different types of assets in order to maximize long-term wealth creation during the accumulation phase and provide increased control and flexibility for generating income in retirement. While there are many solutions, the foundation for helping clients minimize the impact of taxes and maximize accumulation potential is using asset location. This simple but effective strategy leverages tax deferral to potentially increase returns by 100 bps or more—without increasing risk (Source: Ernst & Young, Asset Location Strategies: A key to tax-efficient investing, 2014).

Just as asset allocation is fundamental to diversify a clients’ portfolio across various asset classes to meet long-term goals based on their risk tolerance and time horizon, asset location is fundamental to diversify a clients’ portfolio across taxable, tax-deferred and tax-free accounts to help control how much they pay in taxes—and when those taxes are paid. Locating assets to minimize taxes and maximize after-tax returns not only increases accumulation potential—it can also help a client generate more income, possibly extend the life of their retirement income plan for more years and potentially leave a larger legacy. 

The first step of asset location is to identify tax-inefficient assets which can increase the out of pocket costs for clients and decrease the performance of their portfolios. Certain assets are inherently tax-efficient—such as tax-free muni bonds, ETFs, index funds, and buy and hold equities which are taxed at lower long-term capital gains rates. Certain assets are inherently tax-inefficient—such as fixed-income, commodities, REITs, liquid alts and actively traded strategies—which generate ordinary income or short-term gains that are taxed at higher ordinary income rates. When evaluating assets, key indicators of tax-inefficiencies include yield, the use of active management verses buy and hold strategies, and the tax cost ratio, which measures the impact of taxes on a fund’s annualized return.

Next identify the right combination of tax-deferred, taxable and tax-free accounts to offer clients greater flexibility and improve retirement savings potential. Locate tax-efficient assets in taxable accounts and locate tax-inefficient assets in tax-free and tax-deferred vehicles, to preserve all of the upside without the drag of higher taxes. Start by maxing out qualified plans. But for high earners and the high-net-worth, who can easily surpass the low contribution limits of 401(k)s and IRAs, a category of investment-only variable annuities (IOVAs) are designed to maximize the power of tax deferral. Simple and transparent, with low fees, or even flat-fees, no commissions, no surrender charges, and an expanded lineup with hundreds of underlying funds, low-cost IOVAs can be used as a tax-advantaged investing solution with virtually no contribution limits.

The integration of smart technology is one more way to improve your approach to tax-efficient retirement planning and provide a more holistic approach for your clients. Efficient and intuitive tax-optimization tools can help you manage client portfolios in a tax-efficient manner by continually monitoring client holdings and performing pre-trade analysis, to identify tax inefficiencies and tax-loss harvesting opportunities, minimize the tax implications of trading activity and increase after-tax returns. According to Advisor Authority, the most successful advisors—those who earn annual income of more than $500,000 or individually manage AUM of $250 million or more—say tax-optimization tools are among the top three new technologies they will integrate into their practice over the next 12 months

Adapt—Or Be Left Behind

Change continues at an unprecedented pace. As Americans are living longer while pensions plans disappear, health-care costs increase, and the future of Social Security remains unclear, the “Retirement Income Challenge” is real—and growing. As the most dramatic tax reform package in nearly three decades takes hold, it has the potential to impact every client, from the least affluent to the highest net worth. Advisors and clients alike must adapt—or be left behind.

In a complex world, one of the top reasons that investors work with an advisor is to feel more confident in their financial future. Preparing for a retirement that could last for 20 to 30 years or more, while facing uncertainties in an age of tax reform, there are many unknowns. More investors will seek your holistic and unbiased advice as this ongoing cycle of change and uncertainty impacts their ability to reach long-term goals.

So control what you can. Take a holistic approach to tax-efficient retirement planning based on the foundation of asset location. Keep costs low and maximize the power of tax deferral over the long term with solutions such as innovative IOVAs. Leverage smart technology to manage complex tax challenges and potentially protect clients from losing out because of tax-inefficient portfolios. The value proposition is simple and powerful. There’s a clear relationship between minimizing taxes—and increasing returns without increasing risk. This could mean a more secure retirement for your clients—and a more secure future for your firm.

Craig Hawley is the head of Nationwide Advisory Solutions.