By Bob Oros
When advisors meet for their quarterly or annual meetings with clients, the discussion typically revolves around core issues like financial planning, investment returns or retirement. These meetings usually involve a review of developments over the previous year or quarter, what impact they have had on each client’s long-term goals, and guidance on an approach for the upcoming year or quarter. However, what is too often missing is any discussion of taxes—even though taxes, and how we deal with them, have an inescapable impact on every person’s financial health.
If your clients haven’t bothered to ask how you incorporate their tax situation into the advice you’ve provided in the past, they probably will now. Although the Republican majority in Congress finally got a tax reform package to President Trump’s desk, your clients are still probably unsure about just what the implications will be for them personally. A story in The Washington Post noted the day the legislation passed, “Workers will see the first glimpse of a tax cut in February at the earliest, but it won’t be until 2019—when people file their taxes for next year—that most will know whether they will pay more or less to the federal government.”
Usually, taxes only became front of mind in the last couple of weeks of December and the first couple in April, but with the first rewriting of the tax code in several decades, that’s likely to change this year. Your clients are going to have a lot of questions, and you need to be able to answer them to the best of your ability, both intelligently and without hesitation.
Advisors need to be able to make an educated assessment of the potential tax implications of each of their investing or wealth planning recommendations. Advisors should assess all of their clients’ assets, from retirement savings accounts to life insurance plans, to ensure that they are managed in a way that will help generate the greatest amount of tax savings. For example, if an investor has an IRA, which will be more tax-efficient—a Roth IRA or a standard one? Are their insurance policies set up in a tax-efficient way? Which types of mutual funds and investments carry the lowest capital-gains and income taxes? These are examples of tax-smart strategies and approaches that advisors need to be discussing in meetings and calls with clients.
Doing this homework and understanding the tax implications of their clients’ holdings is integral for advisors to be positioned to help their clients make intelligent decisions that will contribute to their overall financial well-being.
A Year-Round Effort
A tax-smart approach to wealth management isn’t something where you can “set it and forget it,” as if it was a Ronco rotisserie oven. That would totally defeat the purpose of creating tax-smart strategies in the first place.
Incorporating taxes into your strategic planning involves far more than just conducting tax-loss harvesting during the rebalancing process every December or scrambling to file a return in April. It requires year-round attention.
Advisors need to continually evaluate their financial decisions to make sure they are tax-efficient. They need to revisit the tax-conscious financial plans they’ve created whenever client goals or tax rules change. When necessary, plans need to be updated to ensure they continue to allow clients to lower their tax bills as much as possible.
That entails actions like determining if it’s appropriate to invest in a master limited partnership, which is subject to lower taxes, instead of a mutual fund with a similar strategy when constructing a client’s investment portfolio. It also involves advising clients on how changes in the tax code, such as the elimination of the tax penalty for not having health insurance, which will take effect in 2019, will affect their overall financial arrangements.
Tax-Smart Advice Presents a Promising Opportunity for Advisors
As you consider the new tax regulations and how they will affect your clients, make a conscious effort to shift your thinking from focusing on the transactional aspects of taxes—I have to file them, I have to write a check to the government, maybe I’ll get a little refund—to how they fit into your client’s overall financial plan and retirement goals.
When an advisor brings a tax-smart perspective to their work with clients, they can obtain a holistic view of every client’s wealth. This gives advisors the opportunity to bring more personalized and impactful advice that clients can apply to their financial—and life—decisions, which helps enhance the clients’ investment portfolios as well as strengthening the advisor/client relationship.
As Ben Franklin pointed out so eloquently, taxes are unavoidable. But that doesn’t mean advisors shouldn’t do everything they can to minimize the impact of taxes, and tax code changes, on their clients.
Bob Oros is CEO of HD Vest Financial Services.