The passage of the Tax Reform and Jobs Act in late 2017 represents the most dramatic change to the tax code in nearly three decades. While many clients may benefit from lower tax rates, important deductions and other items were scaled back or eliminated altogether—making planning more uncertain and the true impact of these new reforms unclear. Be proactive, to understand these changes and manage through the complexity of these new reforms, so that you can maximize the benefits for your clients, and create greater value for your practice. Technology is key today, and will become more valuable in the future.
Two Sides Of Tax Reform
According to findings from our 2018 Advisor Authority study of more than 1,700 Registered Investment Advisors (RIAs), fee-based advisors and individual investors nationwide, taxes were rated as investors’ second biggest financial concern—and were rated the number-one concern by the Ultra High Net Worth (individuals who have investable financial assets of $5 million or more). Taxes continue to be one of the single biggest investment expenses investors will face—especially the more affluent—with rates of more than 40 percent or 50 percent when Federal and state taxes are combined. Given the many unknowns still surrounding the new reforms, it should come as no surprise that little more than half (56 percent) of investors believe they will end up benefitting.
But where investors see uncertainty and cause for concern, RIAs and fee-based advisors see opportunity. Though tax reform complicates financial planning—as nuances of the new law are still being decoded—the vast majority of RIAs and fee-based advisors (79 percent) believe their clients will benefit from the new tax law, and an equal number are taking action by adapting their approach to tax-advantaged investing. Even as the Internal Revenue Service issues updated guidance to provide greater clarity in the final months of this year, advisors continue to take proactive measures while prudently moving clients’ financial strategies forward to ensure their success.
Tech-Enabled Tax Optimization
This year’s Advisor Authority study revealed that six in ten RIAs and fee-based advisors (60 percent)—and nearly three-fourths of the most successful advisors (74 percent) who earn annual income of more than $500,000, or individually manage AUM of $250 million or more —say tax reform will provide an opportunity to expand their services and generate more business related to tax planning. To capitalize on this opportunity, advisors are looking to implement more tax optimization tools. In fact, RIAs and fee-based advisors say that tax-optimization tools are among the top four technologies they planned to integrate into their practice this year—and the most successful advisors rate tax-optimization tools among their top three.
Tax optimization tools typically help advisors manage client portfolios in the most tax-efficient manner. They can continually monitor client holdings and perform pre-trade analysis to identify tax-loss harvesting opportunities, minimize the tax implications of trading activity and increase after-tax returns. But just as portfolio management is only one part of holistic financial planning, this type of tax-optimization is only one part of tax planning.
As advisors become more focused on holistic planning and guided advice, true tax-focused financial planning platforms are an area that is still ripe for technological disruption. Many financial planning platforms already have the capability to input clients’ tax rates as one of the factors used to analyze current planning decisions and generate Monte Carlo analyses of future outcomes. But most of these platforms are just beginning to include a more comprehensive level of tax planning capabilities to ensure that every stage of the client’s financial lifecycle—from wealth accumulation, to retirement income distribution, to legacy planning—receive the best possible tax treatment.
Integrating Tax-Planning With Financial Planning
In many cases there are separate tech solutions to address specific tax planning needs. Ideally, these would be fully integrated into the financial planning platform of your choice—and fully integrated into your clients’ holistic financial plans. You should expect the ongoing integration of tax planning and financial planning to evolve rapidly and merge seamlessly in the near future, to meet your clients’ demands and your unique needs.