Individual Investors and Tax Management By: Gabriel PotterMBA, AIFA®

Tailored Articles for the Fiduciary Audience

From our firm’s inception until 2017, Westminster Consulting had limited our consulting services solely for institutional clients.  More specifically, our clients are the institutions – the retirement plan or charity organization – but their interests are represented by fiduciaries – the dedicated men and women who sit on investment and plan committees to act on behalf of the institution.  

As a result, our past writing tackled topics that catered to those fiduciaries and the institutions they represent.  Our December 2011 article was about the Stable-Value marketplace; this article is primarily relevant to defined benefit plan sponsors, like a 401(k), and their committee members.  Our August 2012 article, “Pension Fund Relief from MAP21” was all about changes to pension plan funding through new legislation; that article was chiefly for defined benefit plan sponsors.  In August 2013, we wrote a blog post for charities, about how inflation baselines affect endowment and foundation return and spending targets.  Similarly, our collaborative quarterly magazine, Confero, has frequently targeted different institutional client types.  Confero issue 7 was all about automatic features for defined contribution plans. Issue 10 was the endowment-and-foundation issue while, Issue 14 was all about pension plans.  

Our New Audience:  Retirement Plan Participants and Individual Investors

As we noted in our previously monthly article, “Westminster Consulting Expands,” our clientele has recently expanded to include individual households as part of our effort to increase fiduciary coverage at a personal level to defined contribution plan participants and others.  

Our new clients, both individuals and institutional, may investigate our online presence and review our work in years past.  Curious readers can go online and peruse past years of weekly blog posts, monthly articles, and Confero issues.  Individual investors may find our writing insightful, but not relevant to their experience.  We aim to change that.  Moreover, institutional representatives must learn about the topics relevant to their duties as fiduciaries, but they may also appreciate insights into their personal experiences as individual investors with independent interests.  Going forward, we will remove our self-imposed limitations and address issues that speak to us as personal investors.  This should greatly expand our potential topics and relevance.  After all, everyone has to deal with his or her own finances.

A Concern That Primarily Challenges Individual Households:  Taxes

There is an aspect of financial health where corporations and individuals frequently have greater sensitivity than institutions and their fiduciary representatives – taxes.  Many institutional clients, like a qualified retirement plan or a tax-exempt charitable organization, are largely defined by their favorable tax treatment, presuming they comport with the necessary legal requirements.  Most individuals do not have the same luxury.  
At first glance, tax consideration is not the primary concern of investment consultants.  However, consultants, while not providing direct tax advice, are certainly aware of the impact of taxes on their individual client portfolio and tailor solutions while cognizant of the tax consequences of their recommendations.  After all, so many investment strategies and products are clearly designed around tax efficiency, including exchange funds, municipal bonds, tax-efficient ETFs, and the variety of legally sanctioned tax-deferred accounts (e.g., Roth IRAs, 529s, Coverdells).  

Don’t Wealth Managers Handle Taxes?


There is a type of investment consulting that promotes itself as an integrated approach of investment advice, estate planning, insurance, and, yes, tax management – is often described as wealth management.  However, key financial firms that are ostensibly providing this fully integrated approach will repeatedly warn clients through disclosures their consultants do not provide tax, legal, or accounting advice.  In practical terms, most reasonably sophisticated consulting firms offer commensurate levels of advice, once normalized against the constraints of their business practices.

Why Financial Institutions Can Ignore Client Wishes

While there is clearly a demand for a truly integrated, all-in-one advisor, the financial industry is not eager to provide a solution.  Why?  Part of the problem is due to a lack of standardized qualifications, either in terms of education or professional designations, for consultants, compared with other professionals like accountants or attorneys.  Creating a standard degree or examination requirement costs money to enforce and could shut out existing, hitherto profitable, advisors.  It is easier to stick with the minimal testing and licensing requirements from FINRA.  

Another obstacle is the lack of a universal, meaningful code of conduct.  Without the code of conduct, certain types of business practices common for the financial industry are incompatible with other duties and ethical standards common to adjacent professions.  The largest players in finance and investments are loath to change the status quo.  We have documented through our blog posts and articles over the past year, the high degree of resistance from the established financial industry towards adopting a higher code of conduct – the fiduciary standard – even when it only applied to the limited scope of U.S. retirement assets.  

Taxes Are a Moving Target

In general, consultants cannot technically provide tax advice, and for good reasons:  They lack standards in their approach and qualifications.  So, whether you work with an investment-focused consultant or a wealth manager, it is likely they will both be sensitive to tax issues, and possibly to the same degree, but it isn’t typically their primary area of expertise.  Compounding this problem for investors utilizing a consultant is that the tax-code is a moving target, both from a legal perspective and in terms of best practices.  The best response may change over time.   

From a legal perspective, the Trump administration and Republicans in Congress are trying to push tax reform, although there aren’t yet many public details.  These details come with huge potential consequences.  The Republicans’ primary goal is a large cut in tax-rates for corporations with a secondary goal of simplifying, and lowering, household tax brackets.  How to pay for that goal?  There may be structural changes to offset the loss in corporate tax revenue such as the loss of mortgage deductions, tax deferral accounts, the AMT, estate taxes, international tax shelters, additional tariffs, and so on.  Understanding and utilizing investments that protect investors inside the new legal landscape, whatever it ends up being, is going to a be an additional concern for today’s consultants.

In the meantime, best-practice evolution continues to generate novel solutions in regards to tax management strategies for investors.  New investment products and portfolio-construction techniques are available to protect investor gains.  For instance, many individuals have multiple account types –  ordinary taxable and tax-deferred.  A tax-sensitive investor can allocate specific investments to those account types to maximize tax efficiency.  This practice is common enough, but new trends include refinement of this technique.  Which investments might benefit most by placement in a tax-deferred account?  The previously reigning dogma had been to place most aggressive investments with highest growth potential inside tax-deferred accounts, on the theory that the largest gains should be realized last.  New refinements, tools, and investment products allow consultants to separately allocate individual securities and investments.  Consultants can now individually evaluate securities that yield highly taxable dividend-income or bonds with short-term taxable payments to maximize tax efficiency.

Other factors, beyond security income generation, can be included in this analysis.  For instance, it may be most advantageous to place the most active trading strategies (or securities) within a tax-advantaged account.  When investments are held less than one-year, gains are often taxed at higher short-term capital gains rate.  

There are a variety of legal requirements and hazards to acknowledge when utilizing and evaluating such tax-management strategies.  For example, when investors attempt tax-loss harvesting to offset realized gains in a taxable account, they need to be cognizant of wash-sale rules to avoid trouble with the IRS.  Work with qualified professionals when considering these strategies to see which approach might be best for you.

Future articles for individual investors


There are other trends and concerns which primarily affect individual households which we considered including in this article.  For instance, we would ultimately like to provide a comparison of individual retirement readiness calculators available online.  We also considered an examination of a new trend rattling up the financial brokerage industry – robo-advisors.  We would provide insights into what robo-advisers are, how they work, and a comparison of some of the most common ones available.  However, to keep the size of our monthly article from being too onerous, we will save these discussions for a future article or blog post.  Going forward, we will feel free to address these topics that affect individual households; we encourage you to reach out to us and let us know which topics most interest you.  

Gabriel Potter is the Senior Research Analyst at Westminster Consulting, LLC.

He can be reached at gpotter@westminster-consulting.com or 585-246-3750.

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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