High net worth investors often have unique tax considerations and expect holistic wealth management from their advisors. According to a survey by the U.S. Department of Labor Statistics, personal taxes are the largest expenditure for high income households.
Lack of tax management can impact investors’ long-term results and limit their spending power in retirement. The below chart shows that during a period of over 30 years, a non-managed account lost over $6.8 million due to taxes.
One way that advisors can deliver better client outcomes is by identifying and implementing the right tax management strategies. Below are five strategies to help you maximize tax alpha for your clients:
1. Tax Transition Strategies
High net worth investors often own securities with low-cost basis. Utilizing a personalized tax transition strategy can help move clients out of low basis holdings over time, without having to take a big tax hit upfront. By spreading out tax consequences over time, your clients’ assets can be thoughtfully reinvested into the right long-term strategy.
2. Capital Gains Management
Clients may be surprised to learn that capital gains can occur even during down years. One way to minimize the impact of capital gains is to use a separately managed account structure in place of mutual funds. Separately managed accounts are only taxed on realized gains in the individual investor’s portfolios, and capital gains may be partially offset through tax-loss harvesting.
3. Asset Location
Consider the tax status of every client account registration (qualified and non-qualified) to identify which strategy is appropriate for the corresponding registration. Planning for optimal asset location across household accounts may help generate higher after-tax returns for clients.
4. Municipal Bond Strategies
For residents of higher tax states such as California, New York and New Jersey, tax-exempt municipal bonds may be an efficient way for investors to shield their taxable income.
5. Tax-Loss Harvesting
Mutual funds and ETFs only harvest losses when the entire account is down. Within a separately managed account structure, portfolio managers can opportunistically harvest investment losses throughout the year to offset gains and reduce ordinary income.
By creating a personalized tax management plan for your clients, you may be able to help them raise cash flow, reduce risk, and increase the long-term value of their portfolios, so they can stay focused on their financial goals and objectives.
Contact your Investment Consultant to learn how our Client Portfolio Management Team can work with you and your high net worth clients to create a personalized tax management plan.
Important Disclosures: The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. There is no guarantee of the future performance of any Clark Capital investments portfolio. Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Nothing herein should be construed as a solicitation, recommendation or an offer to buy, sell or hold any securities, other investments or to adopt any investment strategy or strategies. For educational use only. This information is not intended to serve as investment advice. This material is not intended to be relied upon as a forecast or research. Investors must make their own decisions based on their specific investment objectives and financial circumstances. Past performance does not guarantee future results.
This document may contain certain information that constitutes forward-looking statements which can be identified by the use of forward-looking terminology such as “may,” “expect,” “will,” “hope,” “forecast,” “intend,” “target,” “believe,” and/or comparable terminology (or the negative thereof). Forward looking statements cannot be guaranteed. No assurance, representation, or warranty is made by any person that any of Clark Capital’s assumptions, expectations, objectives, and/or goals will be achieved. Nothing contained in this document may be relied upon as a guarantee, promise, assurance, or representation as to the future.
Tax loss harvesting is a strategy of selling securities at a loss to offset a capital gains tax liability. It is typically used to limit the recognition of short-term capital gains, which are normally taxed at higher federal income tax rates than long-term capital gains, though it is also used for long-term capital gains. The utilization of losses harvested through tax loss harvesting will depend upon the recognition of capital gains in the same or a future tax period, and in addition may be subject to limitations under applicable tax laws. Losses harvested through the strategy that are not utilized in the tax period when recognized (e.g., because of insufficient capital gains and/or significant capital loss carryforwards), generally may be carried forward to offset future capital gains, if any.
Investors should confer with their personal tax advisor regarding the tax consequences of investing with Clark Capital. Clark Capital does not represent in any manner that the tax consequences described herein will be obtained or that Clark Capital’s tax-loss harvesting strategies, or any of its products and/or services, will result in any particular tax consequence. Past performance is not indicative of future results. Clark Capital Management Group, Inc. reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security, sector or industry.
Clark Capital Management Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Clark Capital’s advisory services and fees can be found in its Form ADV which is available upon request. CCM-726