Help Clients Keep More: Managing the Impact of Taxes in a Personalized Way

June 26, 2023
Courtesy of BlackRock

When it comes to managing a client’s overall tax situation, advisors face challenges. Tax-loss harvesting is a manual and time-consuming process and often only a focus for top-tier clients. Tax-efficient strategies offer tax-saving opportunities but not in a personalized way. With sophisticated tax optimization technology and outsourcing solutions and taxes top of mind for so many investors, we believe there is a new opportunity for advisors to help manage the impact of taxes in a personalized and differentiated way.

Research shows that investors expect their advisors to consider taxes when managing their portfolios, with 92% expecting tax planning advice but only 25% receiving it.1 It’s essential to align services with what today’s investors want and need. An advisor’s ability to meet client expectations and provide greater customization can help differentiate and grow their practice.

In a recently refreshed Sharing Perspectives whitepaper from Envestnet and BlackRock, we offer insights on the increasing importance of tax optimization and why a personalized approach matters.

There are four trends we see taking shape in the evolving world of tax management:

1. After-Tax Wealth Takes Center Stage

While many advisors intuitively understand the importance of after-tax wealth, focusing on it will be essential as we look to the future. It’s critical for advisors to help clients understand the impact taxes can have and to maintain a focus on after-tax wealth. We see more interest in tax-efficient vehicles that put advisors in a position to help deliver better after-tax returns and to do so in a way that is still efficient for their business.

Taxes can be an enormous drag on portfolio performance, especially after this year’s market challenges, and therefore, even more important to solve. For example, if a client were invested in a 50% stock and 50% bond portfolio in a year when pre-tax returns were 4.0%, the after-tax return would be only 2.3%. That’s a tax drag of 1.7%, represented by income from the bond portfolio and capital gains distributions from the equity portfolio, with 44% of the portfolio’s gains going to taxes over time.2

2. Personalized Solutions Matter as Our Tax System Becomes More Complex

Tax considerations are integral to the wealth management process. With a trend toward even more personalization through tax management technology, advisors can help their clients save money while customizing portfolios in a scalable way.

For many advisors, tax-loss harvesting is the best approach for helping clients minimize taxes. For other advisors, tax-smart investing strategies include incorporating tax-efficient vehicles into client portfolios. While both approaches have their merits, partnering with a tax management technology specialist helps you leverage solutions that look at an entire portfolio in the most comprehensive way.

Especially in challenging markets, new tax management technology and outsourcing solutions can help advisors offer clients better outcomes (without putting the burden on their shoulders) and to allow them to better scale their practice for future growth. Tax optimization algorithms are much more available today than ever before, and with this availability, investors have come to expect a more sophisticated approach to tax management.

3. Tax Conversations Deepen Client Engagement and Empower Advisors

While taxes may not be a clients’ biggest worry given the turbulent markets, it’s critical to help them maintain a disciplined process. For example, some investors spend more time thinking about taxes in today’s environment, especially those sitting on significant unrealized capital gains. They may be questioning whether to hold onto these positions, so they don’t take the tax hit, but then worry about the impact on their asset allocation strategy and portfolio returns.

Taxes can often be a client’s biggest expense. And this creates an opportunity for an advisors to provide value and deepen relationships by proactively identifying ways to help clients save money. If you’re not having tax planning conversations with your clients today, the chances are that someone else will be educating them about opportunities to manage their overall tax burden.

4. Risk Management and the Search for Tax Alpha Demand Greater Focus

While risk management is always a critical consideration, when combined with a focus on tax alpha, you can manage risk, monitor tax exposure, and customize tax-efficient portfolios. Top advisors are increasingly leaning toward sophisticated services that optimize risk and help ensure portfolios are aligned with a client’s risk tolerance, preferences, and tax sensitivities.

At a time when tax concerns are paramount, we are committed to helping advisors create better tax-aware outcomes for their clients and uncover more opportunities to add more value. With investment vehicles and sophisticated technology solutions, you can broaden your value proposition, especially critical in turbulent markets, and add more scale to your practice.

1 Spectrem August 2018 Defining Wealth Management. Neither Envestnet, Envestnet | PMC nor its representatives render tax, accounting, or legal advice.
2 Morningstar data. U.S. Stocks represented by Morningstar U.S. Equity Mutual Funds. U.S. Bonds represented by Morningstar U.S. Taxable Bond Mutual Funds. Tax Drag is the Morningstar Tax Cost Ratio.

Neither Envestnet, BlackRock, or their representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties.
Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor. This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This material is strictly for illustrative, educational, or informational purposes and is subject to change.
BlackRock through a holding company subsidiary, BlackRock, Inc. (“BlackRock”) owns a non-controlling interest in Envestnet’s parent company, Envestnet, Inc. (NYSE: ENV).
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