Tax planning: Clients don’t ask, advisers don’t tell

If you saved your clients a bundle on their taxes last year, you should start telling them about it, said Kevin Crowe, solutions unit leader for SEI.
SEI, which provides an operating platform for independent financial advisers, regularly polls the more than 6,000 with whom it deals. Most recently, it asked them about taxes and how advisers do or don’t manage their clients’ money with tax considerations in mind. The surprising conclusion from the nearly 1,000 responses was that clients rarely ask about taxes, and advisers rarely tell them about them.
“We think financial advisers need to start communicating with clients about what they do in terms of tax management,” Mr. Crowe said.
According to the poll, more than 90% of financial advisers said their clients rarely or only occasionally ask about ways to minimize taxes on their investments. More than two-thirds of those advisers, however, said they could save their clients more than 3% of their wealth through tax management strategies. One-third said they could save clients 6%. And 79% of the advisers polled said they “proactively managed for taxes” when managing clients’ money.
Among the strategies that advisers said they are currently using to minimize taxes for their clients are the use of tax-managed mutual funds (40%), tax-efficient separate accounts (27%), tax-exempt investments (13%) and harvesting investment losses at the end of the year (10%).
“It’s clear that tax management is ingrained in the relationship between advisers and clients, but it’s also clear that advisers are not shining enough light on the fact,” Mr. Crowe said.
Why would investors currently not seem to care much about tax issues when it comes to their investments? Mr. Crowe surmises that the volatility in investment markets over the last several years may have made them more worried about the preservation of their capital rather the return they make on it.
However, advisers should make sure their clients understand how significant an impact taxes can have on their investment returns. “It’s not what you make; it’s what you keep,” Mr. Crowe pointed out.
And just as importantly, investors need to know how their advisers are minimizing those impacts.