The Subtle Switch From Investment Advisor To Tax Advisor

investDavid Fabian:  It’s begun. This week I have found my email inbox inundated by tax strategies designed to convey a sense of tremendous savings or value for readers. This was a real subject line that left me shaking my head: Generate tax alpha for your clients.

Really? Who comes up with this stuff?

“Tax alpha” sounds just like “active beta”. Good for some and completely useless for many. There is no doubt the phrasing is clever and it’s intended to give you a sense that certain lesser known tax strategies are really going to boost your net return.

Robo advisors and other automated platforms have typically touted “tax loss harvesting” as one of the key value points of using their system. Unless of course you are investing in a retirement account like an IRA, in which case, this is of no benefit at all.

If you want to learn more about the actual process of tax loss harvesting, this article at Investopedia does a decent job of explaining it. Those that are managing a taxable account north of $1 million may reap some worthwhile benefits, as long as you are aware of the restrictions. But for the majority of investors who are saving money in their 401(k)’s, IRA’s, and other tax-deferred vehicles, this doesn’t apply to you.

Want to know the real reason you are hearing this tax strategy now? The superficial answer is that there are only 30 trading days left in 2015 and it’s an appropriate time to start thinking about last-minute tax ramifications. Yet more realistically, many of these investment services are underwater for the year and are looking for ways to shift your focus away from the negative performance figures.

So basically they are saying – “We are down 5% this year, perfect time to switch gears from being your investment advisor to being your tax advisor.” *wink wink*

I’ve always been skeptical about taking sophisticated tax advice from professionals who should be focused on another job – like managing your money. Much of this information is readily accessible online, but if you have the need and wherewithal to implement a tax-focused strategy in your investment account, then you should probably consult with a CPA on your specific situation.

They will be the ones that can assess the impact of certain changes to your sitting investments that would make a positive impact on your tax bill. In addition, they can work with your advisor to ensure that you aren’t needlessly churning holdings or getting caught in the trap of a wash sale rule.

Furthermore, if you are going to be selling positions and looking to reinvest the capital, make sure that you aren’t plowing money back in to underperforming mutual funds or asset classes that don’t fit your risk profile. Low cost ETFs with nominal turnover and qualified (or tax-free) dividends may be the best option to minimize your tax impact in subsequent years.

An advisor that is truly looking out for your best interests should be able to devise a portfolio with appropriate holdings that meets these needs.

This article is brought to you courtesy of David Fabian.

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