how to marry investment strategy with tax planning€¦ · how to marry investment strategy with...
Post on 05-Jun-2020
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Stephen Curley, a CFA charterholder and chief investment
officer (CIO) at WaterOak Advisors in Winter Park, Fla., says
investors should be wary of any adviser who tries to be the
“jack of all trades.” An investment adviser who takes a course
in taxes may learn just enough to understand when to loop in
an experienced tax attorney or CPA on a technical matter—but
probably not enough to handle all tax issues for a client.
Curley says his firm doesn’t have an in-house tax professional;
its investment pros work closely with clients’ CPAs to help
achieve objectives. “There has to be a relationship with the
tax professional to understand your best moves,” he says.
“For example, you don’t want to be aggressively harvesting
losses for your client if they have a half a million dollar loss
carry forward.”
One of the biggest challenges firms face in creating an
effective, collaborative culture between experts is also the
least tangible: Who’s in charge?
Investors may have a primary point person within an advisory
firm—typically the financial planner—whom they deal with
most frequently. But they should get a sense of teamwork
within the advisory firm, too. The most effective advisers
understand the limits of their expertise, and aren’t hesitant
to loop in another pro, says Gerry Herbison, assistant profes-
sor of management at the American College of Financial
Services. “The smart advisers understand they need to
be part of a team rather than compete to be in charge of
the team,” he says.
Investors should demand an expert be included in a
conversation if they feel their questions aren’t sufficiently
answered. Even better, ask for regular meetings with
both tax and investment experts to become proactive in
meeting goals.
“Knowing the clients and their goals, knowing the structure
of their accounts and their plan, is essential to what we do,”
says Laufer, whose firm has such team meetings with clients
on a quarterly basis.
Collaborative sessions were vital after the recent passage
of the U.S. Tax Cut and Jobs Act, which went into effect last
year and is chock-full of new provisions that wealthy clients
can benefit from with savvy planning.
This content was paid for by CFA Institute and created by the Penta advertising department. The Penta news organization was not involved in the creation of this content.
Traditionally, the primary providers of comprehensive
services for wealthy families were the private banking
arms of large commercial banks. As wealth boomed
through the 1990s bull market, many advisers began
to switch from commission-based structures to fee-based
ones. Multi-family offices cropped up as one-stop wealth
management options. Their aim was to appeal as a
better cultural fit for high-net-worth folks than the staid,
buttoned-up banks.
Through the latest wealth boom since the financial crisis
in 2008, assets managed by multi-family offices have
ballooned 140%, according to the Family Wealth Alliance,
a Chicago-based group that tracks the industry. Meanwhile,
financial planning and investment firms increasingly have
adopted the “wealth adviser” moniker as they broadened
services to appeal to the high-net-worth market.
However, adding the tax component to services isn’t a simple
transition. “The idiosyncratic needs of wealthy families vary,
so you can’t just hammer the same nail with one client as
the next,” says Jamie McLaughlin, a wealth management
consultant based in Darien, Conn. “The conversation that
was already complicated with the $5 million or $10 million
client gets a lot harder with the $25 million and $100 million
client when you start talking about dynastic matters and
family governance.”
So investors should size up the credentials and experience of
the tax experts within an advisory practice, making sure they
have a track record of handling wealth transfer, charitable,
and other needs of high-net-worth clients, McLaughlin says.
Even removing estate planning and broader financial planning
issues, managing wealthy clients’ investment portfolios for
the best tax result is a massive undertaking.
Wealthy families’ investment portfolios aren’t your typical
stock and bond mix, and include a range of investments,
each with different tax implications.
A 2016 survey by UBS and Campden Wealth Global Family
Office found that just 37% of wealthy families’ portfolios
were made up of traditional stocks and bonds. Among other
asset classes were private equity and venture capital, hedge
funds, agriculture and commodities, real estate, and real
assets, such as art and collectibles.
The two disciplines are often intertwined in the financial plans of high-net-worth families
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How to Marry InvestmentStrategy With Tax Planning
Strong investment returns traditionally have been enough to
warrant bragging rights, but advisory firms are increasingly
touting what they believe is an even greater strength: the
ability to provide sophisticated tax advice alongside
investment expertise.
The two disciplines are so tightly woven through wealthy
families’ financial plans that integrated services are
becoming the new gold standard in the high-net-worth
advisory business.
“There’s so much more involved with trying to hit financial
planning goals than generating strong returns,” says Adrian
Conje, chief executive officer and a Chartered Financial
Analyst® (CFA®) charterholder at Balentine, an Atlanta firm
specializing in planning for high-net-worth entrepreneurs and
business owners.
With a range of in-house experts on tax and investing
matters, the goal is to collaborate to produce the best after-
tax returns and preserve assets. Beyond basic tax-loss
harvesting, strategies range from carefully locating assets
for the best after-tax returns and arranging for the best after-
tax income streams, to creating trusts and tax-favored
entities to transfer assets to next generations.
“It’s not what you make that’s important, it’s what you get to
keep,” says Alan Laufer, director of financial planning and a
certified public accountant at Silvercrest Asset Management
Group, a New York firm made up of investment experts,
financial planners, and tax specialists.
Consider newly-created Opportunity Zone Investments.
These are private investments in projects intended to revitalize
communities, and they allow investors to defer and possibly
avoid capital gains.
The potential capital gains savings would make any tax expert
salivate: By investing capital gains in these opportunity zones,
investors can reduce their cost basis by up to 15% if they hold
the investment for seven years. If they hold it for 10 years, all
gains on the investment are shielded from taxes.
But investment experts are needed to sift through options
and determine the potential value and outlook for the
opportunity zones, which can be difficult to assess,
given their locations in some economically neglected
areas of the country.
Investment expertise is critical in many aspects of both
estate planning and charitable giving, as well, which are
typically a tax adviser’s domain. For example, to fulfill
charitable intentions, an investor may decide to donate
appreciated stock—a preferable way of giving because it
removes taxable gains from a portfolio. The cost basis of
the gift gets bumped up to its value when it is made, so
the gain is effectively wiped out from a tax standpoint. To
decide which shares to donate, an investment manager
must comb through a portfolio and weigh the benefits of
donating different stocks. Possibly a client has overlapping
exposure due to holdings both in a mutual fund and
individual stock portfolio. Or, the fundamentals of a stock
with massive gains may have shifted, making it a prime
candidate for a gift. The charity can sell out of the position
without a tax hit.
On these issues and all aspects of investment and financial
planning, “our investment and tax professionals work hand-in-
hand,” says Jason Price, a CFA charterholder and CIO at
Philadelphia-based Glenmede. “It’s the best route to get the
best results.”
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