There are few sure things in the money game, but one thing everyone agrees on: You can juice your return on an investment if you cut down the government’s take on its profits.
Maybe that’s why there’s a growing awareness of asset location—strategically placing assets in different accounts with different rules on tax treatments and then making tactical adjustments through time to earn higher after-tax returns. The financial industry is increasingly focused on this so-called “tax alpha,” developing increasingly sophisticated analytics to lift an investor’s after-tax performance.
That presents an opportunity for investors, though it still has a long way to go before catching on with the general public. Although people instinctually want to cut their taxes, formal strategies that tightly integrate their investments and tax strategies don’t naturally capture their imagination.
Byrke Sestok at Rightirement Wealth Partners says his new clients often aren’t aware of the strategies. “Most retail investors are not familiar with the concept of asset location, including those who have come to us from other investment advisors,” Sestok says.
Those financial planners who can explain the concept to clients will find an opportunity to stand out and strengthen their relationships. Asset location can be a powerful marketing tool that helps them differentiate themselves and show their value to clients and prospects.
Better Tax Management Through Software
The ability to market those complicated analytics has helped firms like LifeYield set themselves apart. The firm offers software that optimizes asset location decisions and quantifies the results in an overall score to help advisors and clients make easy, intuitive comparisons.
That means advisors can reframe discussions, talk less about market outperformance and move on to the more productive subject of how a client can outperform after taxes, says Bill Martin, chief investment officer at Forme Financial, a new advisory shop that recently signed up to use LifeYield. “Another benefit is that the technology does the work rather than someone behind a desk.”
Eventually, an advisor can help a client see that it’s more productive to look at tax efficiency instead of investment outperformance, and the subject will likely better resonate with clients once it’s explained how it affects their wealth. “The investing public and advisors realize more and more that it’s hard to beat the market,” says Sheryl Rowling, who created Total Rebalance Expert (TRX), a rebalancing software product that she sold to Morningstar, where she’s now editorial director for financial advice. “The best way to add alpha that’s risk free is increasing tax efficiency.”
Professional grade asset location analytics can be complicated and time consuming, especially when the clients have large portfolios with disparate holdings strewn across multiple accounts and management shops. It can be even more onerous when advisors must wade through a mix of accounts in a household with multiple investors.
One survey about advisors’ use of software, the “2022 T3/Inside Information Technology Survey” by Joel Bruckenstein and Bob Veres, found that only a minority of planners use tax management and rebalancing products. That means most of them aren’t running sophisticated asset location analysis for clients. Those who are (sans software) are leaving more than a small amount of tax alpha on the table.
Searching For The Sweet Spot
David Hultstrom, co-founder and chief investment officer at Financial Architects, says “most advisors are pretty unsophisticated” on the finer points of asset location analytics, so there’s plenty of room for them to improve their game for clients. In the grand scheme of wealth management, “they’re hardly doing anything at all,” he says. “They do whatever’s easier.”
He came to that conclusion after teaching classes and hosting seminars for CPAs and advisors on strategies for improving after-tax returns. And it’s likely they aren’t motivated to change, since clients will probably never know whether their advisors are actively running tax-alpha strategies, Hultstrom adds.