Adding 1% To Your Portfolio

It’s tax season. Actually, tax season is year-round, but this is the time of year people think about their taxes as they gather up documents to file last year’s returns. You know I spend a lot of time focusing on taxes with my clients. I figured this week’s article would be a good time to touch on some tax-related themes. I am calling this Adding 1% To Your Portfolio. It will be a quick two-minute read in my favorite bullet-point format. Let’s get to it.

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Tax Alpha:

·???????? I was on a tax planning webinar last week and once again it came up how studies show proper tax planning can add 1% (100 basis points) to your portfolio annually. In my world this is referred to as Tax Alpha.

·???????? Just to compare other measures of return to a portfolio:

o?? Investment Selection - 0.64%

o?? Asset Selection and Location – 0.52%

o?? Systematic Rebalancing – 0.30%

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Tax Planning Wants and Reality:

·???????? Over 90% of clients want their financial advisors to review taxes and do some tax planning.

·???????? 90% of advisors agree this is important.

·???????? Sadly only 1/3 of advisors even ask for their client’s tax returns yearly.

·???????? I started in this industry at Merrill Lynch. We were never trained to discuss taxes. I even had a CPA start with me and he was not allowed to do anything related to taxes.

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Things I’m Talking To Clients About Now (Hopefully Your Advisor Is Doing Something Similar):

·???????? Tax planning is a year-round activity and not something to be looked at once or even twice a year (tax time and end of year are the popular times).

·???????? When filing their 2023 returns I remind them to let their tax preparer know they did Backdoor Roths.

·???????? Also, as soon as their 23 returns are filed, I need a copy so I can start the tax planning for 2024.

·???????? Clients have also started their 2024 Backdoor Roths.

·???????? Tax loss harvesting is always being looked at. February is typically a slower month in the market and if there are some tax loss harvesting opportunities we are trying to take advantage of this sluggishness. ?

·???????? Are withholdings set up properly. We try and walk that fine line between paying too large of a payment and not having big refunds (interest-free loans to Uncle Sam).

·???????? Finally, we are also looking at how to fill up tax brackets for this year.

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Adding More Alpha:

·???????? You know I run under a Flat Fee scenario where my clients pay me based on my knowledge, experience and service model.

·???????? That fee is $10,000 a year.

·???????? There is no separate fee from me for investment management either.

·???????? Based on my fees, my average client adds another 0.65% a year to their portfolio vs. the average old school advisor, who also probably doesn’t even review your tax return.

·???????? I don’t know about you, but the opportunity to increase your annual returns by roughly 1.65% year after year might be a good thing.

·???????? Especially when we consider that Einstein said the most powerful force in the universe is compound interest (supposedly said this, which I doubt, but the compounding is still true).