It will take years to fully unpack the extent 2020 changed what investors expect and how advisors work. Beyond the pandemic, political and economic headlines, the biggest shift in our business is the embrace of dealing with personal finance enemy #1—taxes.
In light of these headlines and the market volatility that comes with it, more and more advisors are talking with clients about tax-loss harvesting, tax-smart asset location, tax-wise transitions between portfolios, tax-aware household-level management and rebalancing, and tax-efficient sequencing of withdrawals from multiple accounts and income sources. Strap yourself in. The number and importance of these conversations will become more frequent in 2021. Why? The biggest impact in pursuit of improved financial outcomes is managing investment taxes at the household level.
Advisors Will ‘Land The Plane’ In A Cost-Smart, Risk-Smart And Tax-Smart Way
In our new reality, advisors will increasingly operate like airline pilots with a cockpit full of dials and switches. And like pilots, advisors will manage the complexity of a household portfolio supported by sophisticated algorithms and software that are integrated and coordinated on advanced platforms. Advisors will “land the plane” in an optimized and coordinated fashion that is cost-smart, risk-smart and tax-smart, and importantly, where financial benefits are quantified so the next best actions can be prioritized and recommended.
Most Important Lever To Improve After-Tax Returns And Income: Minimize Taxes
Cost, risk and tax are the only levers advisors and clients can control to improve outcomes. We are seeing more and more advisors optimize results using these levers by combining data, algos and tools that determine the step-by-step approach of next best actions. As those steps are quantified and prioritized, investors will understand the importance of taking the appropriate sequence of steps to improve outcomes, and their future. As studies show, managing taxes is the single most important lever in improving after-tax returns and income on the full portfolio.
The recent acquisitions of Personal Capital by Empower, and 55ip by JP Morgan Asset Management on top of the significant work underway at behemoths like Morgan Stanley, Goldman Sachs, Ameriprise and many others herald a massive change in the way our industry thinks about tech and taxes.
When Did Fear Of ‘Tax Advice’ Turn Into The Embrace Of Tax Efficiency?
There are many firms across the industry addressing portfolio taxes in a comprehensive way. Not long ago, this would be unthinkable. As a fintech focused on tax efficiency since 2008 and working with the industry’s biggest names on tax-smart household portfolio management, we know there was a time when advisors would backpedal from “tax advice” and the attendant compliance headaches. What changed?
Tax Efficiency Is Not Tax Advice
Advisors have come to know tech-driven tax efficiency isn’t tax advice. It’s a matter of automating the delivery of tax optimization. While quite complex due to different account registrations and tax treatments, product designs and tax lot level data, fintechs have found ways to wring out every last dollar of tax efficiency in a household portfolio. Simply, it’s what software is designed to do—help investors avoid paying unnecessary taxes. Advisors are finding they would have a bigger problem if they didn’t protect investors from undue tax exposure.
Advisor Value Stems From Your Guidance As The Pilot On Top Of Advanced Household Ecosystems
The pandemic hastened this trend. As advisors have moved away from “beating the market” conversations to helping investors reach long-term financial goals across all holdings, the focus is now centered on managing cost, risk and tax. No two clients have the same vision of what their best possible outcomes look like… but no matter who you are, taxes are the single biggest investment cost incurred on your financial journey.
On the flip side, advisors and investors have control over their tax exposure. Greater tax efficiency leads to wealthier clients and growing assets, revenues and advisor practices, regardless of what the market is doing. Beyond the dollars-and-cents value of tax tech, its use leads advisors organically into client conversations around what they can control—instead of panicking about what they can’t.
Comprehensive Platforms Can’t Exist Without Tax Tech
Creating meaningful tax efficiency for investors is complicated work. Doing so at scale without software is basically impossible. This has not escaped the notice of leaders, such as Morgan Stanley, Goldman Sachs, Empower/Personal Capital, Ameriprise and other heavyweights who are building comprehensive wealth management platforms. They want the advantages of tax tech available to their advisors, clients and participants, whether that means outright acquisition or relying on API connections from third-party vendors. And the tech is all the more effective when it can render complex work into simple suggestions of next best actions that clients and advisors can understand at a glance, act on and benefit from.
The recent acquisitions and ongoing build out of comprehensive ecosystems are just the start. And it is encouraging that firms and advisors no longer fear the tax efficiency conversation. The bigger fear is around missing out on the opportunity to help more clients manage their full portfolio while improving financial outcomes for investors, advisors and firms.
Jack Sharry is co-chair of MMI's Digital Advice Community, on the The Next Chapter Advisory Council, host of the podcast WealthTech on Deck and executive vice president of LifeYield. Learn more at www.LifeYield.com.