WEALTHTECH INSIDER How Timing And Tax Management Fit Into The Bigger Picture For Your Clients


By Andy Rosenberger, CFA

When advisors look for ways to reduce their clients’ tax exposure, they establish exactly why a financial professional’s guidance is so valuable. Over time, finance has only become more complicated, and the uncertainty of markets isn’t getting any more predictable. Alternatively, when advisors demonstrate to an investor that they take tax management seriously, we address their deepest fears of outliving their money and not supporting their loved ones.

Below are additional ideas advisors should consider in their hunt for greater tax efficiency.

FIFO, reconsidered

When it’s time to sell tax lots, sequencing matters more than ever. Many advisors and investors follow a first-in, first-out standard: the first securities invested are typically the first ones sold. When capital gains are limited, it is a straightforward and sufficient approach. But with 12 years of potentially large, embedded capital gains, FIFO sets up investors to sell off tax lots that are likely to be laden with high tax bills.

Instead, consider a “best tax” depletion approach, using tools that will identify tax lots that can be reduced with the lowest possible tax impact. Timing counts, too: ongoing monitoring and evaluation will create better tax outcomes for clients, over time, than ad hoc work.

Look closely at the ‘vintage’ of your funds

The tendency for older securities to have more unrealized capital gains has implications for the funds you choose for your clients. Mutual funds may fulfill specific needs and play important roles in an investor’s portfolio, but tax liability adds a new dimension to choosing the best investments for clients.

Compare a 30-year-old mutual fund with a fund that has only been around for a few years. All other things being equal, the 30-year-old fund will have decades of large, embedded capital gains that a newer fund will lack. As investors move to retirement or fund performance turns downward, those legacy gains can suddenly become a problem for existing clients. Does this mean venerable funds are not appropriate for clients? Absolutely not. But looking at embedded capital gains within funds may be just as important to the due diligence process as historical performance.

Don’t lose sight of the bottom line

To that end, it’s worth stating that tax exposure is just one consideration advisors must weigh for their clients, though it is a very important one. Don’t lose sight of an investor’s goals: what do they actually want? Tax management is not a goal, but it is one of many variables which can be controlled to improve an investor’s outcomes. Tax management needs to work in conjunction with risk evaluation, cost, and an investor’s willingness to commit to a plan over the long term and adapt as needed.

Andy Rosenberger, CFA, is Head of Tax Managed Solutions at Orion.