As investors' needs become more holistic, advisors must provide products and services to help their clients achieve all of 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 US RIA market, there were over 14,000 independent RIAs managing $4.2 trillion in client assets to over 44,000 advisors in 2022. Advisors need every tool available to differentiate the services of and to deliver exceptional value that enables them to maintain and deepen relationships with existing customers while growing their business.
One service that advisors can offer to set themselves apart, but that has long been elusive in the marketplace, is tax management. Tax management services are not only important to a wide range of investors in their financial journeys, but also to advisors looking to illustrate their unique value to current and potential clients.
Why tax management services are important now
Tax considerations play an important role in most wealth management activities. However, advisors have long been prevented from offering these services to their clients for a number of reasons, including a lack of resources to do so or not fitting into their larger business plan. For many advisers, tax management can be labor intensive and tax is often complicated to discuss with some clients. Additionally, high net worth strategies typically require large minimum investments and tax overlays and may limit the service's accessibility to all investors.
However, now may be the time for advisors to consider offering 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 one PwC HNW 2022 Investor Surveynearly half of HNW investors are seeking proactive tax planning support from their financial advisors.
And while they are an important segment, tax management is not just for the UHNW or HNW investor. Mass affluent investors can also take advantage of tax benefits by accumulating capital losses over time to be used to offset future capital gains. And, with younger generations set 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
Offering tax management services can help differentiate and illustrate the advisor's value to clients and prospects seeking comprehensive wealth solutions.
Tax management services help advisors provide solutions that respond to a client's unique needs and circumstances. These services include tax transition, tax-efficient rebalancing and loss harvesting, all of which help mitigate the detrimental impact of capital gains taxes on performance returns and investment results. Engaging with clients in the tax and investment decision-making process helps advisors better understand their unique needs, financial goals, tax sensitivities and investment preferences.
They can also help advisors win and keep more clients while deepening current client relationships. For example, implementing a tax management solution can lead to better management of potential taxable events such as the transfer of taxable assets from another adviser or the shift of assets from commission to a fee-based model. This is particularly important for UHNW/HNW and emerging affluent clients.
Further, advisors can demonstrate 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 customers
Tax management services can unlock tax efficiencies that benefit clients in 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 goals. Actually, studies reveal that tax management can improve after-tax returns by over 1% annually over full market cycles.
The most obvious benefit for investors is the ability to mitigate the impact of taxes, which can take a bite out of clients' portfolios and affect 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 affect future tax liabilities .
Finally, advisors can use tax services to improve estate planning outcomes. Tax management, when coupled with estate planning, can result in the permanent reduction of deferred tax liability. When tax deferral is combined with estate planning techniques, such as donating low-basis securities or passing these securities to eligible heirs for a cost-based increase in 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 themselves apart in the increasingly competitive RIA landscape.
David McNatt is EVP of Investment Solutions for AssetMark and is responsible for leading AssetMark's investment product and strategy.