As investor needs become more holistic, advisors must provide the products and services to help their clients reach all their financial goals.
This is especially true as the advisor landscape continues to grow and become more competitive. According to a Cerulli report on the U.S. RIA marketplace, there were over 14,000 independent RIAs that managed $4.2 trillion in client assets across over 44,000 advisors in 2022. Advisors need every tool at their disposal to differentiate their services and deliver exceptional value that enables them to retain and deepen relationships with existing clients while growing their business.
One service advisors can provide to set themselves apart from others, but that has long been elusive in the marketplace, is tax management. Tax management services are not only important for a wide range of investors on their financial journeys but also for advisors looking to illustrate their unique value to current and potential clients.
Why Tax Management Services Are Important Now
Tax considerations play a prominent role in most wealth management activities. However, advisors have long been prevented from providing these services to their clients for several reasons, including not having the resources to do so or not fitting it into their larger business plan. For many advisors, tax management can be labor intensive, and tax is often complicated to discuss with some clients. Additionally, large minimum investments are typically required for high-net-worth strategies and tax overlays and can limit the accessibility of the service to all investors.
However, now may be the time for advisors to consider providing these services to clients. The HNW and UHNW market is large and growing and they expect their advisors to grow with them. According to Capgemini’s World Wealth Report, the overall HNW population in North America grew 13.2% in 2021, while the UHNW segment grew 14.2%. According to a 2022 PwC HNW Investor Survey, nearly half of HNW investors are looking for proactive tax-planning support from their financial advisors.
And while they are an important segment, tax management is not only for the UHNW or HNW investor. Mass affluent investors can also benefit from tax services by accumulating capital losses over time for use to offset future capital gains. And, with younger generations standing to inherit trillions of dollars over the next 20 years through the “Great Wealth Transfer,” many of these investors may eventually find themselves in the HNW category.
Differentiate Yourself From the Competition
Providing tax management services can help differentiate and illustrate advisor value to clients and prospects seeking comprehensive wealth solutions.
Tax management services help advisors deliver solutions that respond to unique client needs and circumstances. These services include tax transitions, tax-efficient rebalancing and loss harvesting, which all help moderate the detrimental impact of capital gains taxes on performance returns and investing outcomes. Engaging with clients in the tax and investing decision-making process helps advisors better understand their unique needs, financial goals, tax sensitivities and investment preferences.
They can also help advisors win and retain more clients while deepening current client relationships. For example, implementing a tax management solution could lead to better management of potential taxable events like transitioning taxable assets from another advisor or moving assets from commission to a fee-based model. This is especially important for UHNW/HNW and emerging affluent clients.
Further, advisors can show their value by providing comprehensive reporting on income and savings resulting from tax management solutions, an added step that can illustrate the benefits of these services in clear terms.
Benefits for Your Clients
Tax management services can unlock tax efficiencies that benefit clients on their financial journeys. When advisors help clients invest with tax efficiency in mind, they can increase the potential to keep more of their client’s money to invest toward their long-term financial objectives. In fact, studies find that tax management may improve after-tax returns by over 1% annually over full market cycles.
The most obvious benefit for investors is the ability to blunt the impact of taxes, which can take a bite of clients’ portfolios and impact long-term results. Investors can work with their advisors to create a comprehensive tax-management strategy to help keep more of what they earn and invest it toward improving after-tax results over time.
Advisors can also help their clients pursue better outcomes. Investors can make informed investment decisions, capturing “tax alpha” (incremental return due to tax optimization) on non-qualified investments over time, and manage unrealized capital gains and losses that impact future tax liabilities.
Lastly, advisors can leverage tax services to enhance estate planning outcomes. Tax management, when paired with estate planning, can result in the permanent reduction of deferred tax liability. When the tax deferral is paired with estate planning techniques like gifting low-basis securities or passing those securities to heirs eligible for a cost-basis step-up to fair market value, the tax benefits are amplified.
Overall, tax management benefits investors at every step of the financial journey and as their wealth grows. The same can be said for advisors, who can use these services to set them apart in the growing competitive RIA landscape.
David McNatt is the EVP of Investment Solutions for AssetMark and is responsible for leading AssetMark’s product and investment strategy.