Tax-efficient investing: completing the investment advice puzzle

Financial institutions are battling for the loyalty of an ever more discerning and demanding client base and cannot afford to ignore their desire for ultra-tailored advice and precisely targeted investment products. 

While it hasn’t historically been the easiest lever to pull, forward-thinking firms have seen that providing tax impact information as an integral part of client advice is an unmissable opportunity to add value in highly tangible ways. In our “Portfolio Optimisation Survey” for 2021, 31% of participants see tax-efficient investing as a crucial proof-point when delivering customised, value-added services and investment products all year round.

What is tax-efficient investing? 

Making investors feel like they are always being treated, holistically, as an individual is certainly crucial. Yet the bottom line is, as ever, the client’s bottom line (and in turn that of the institution itself).

Tax-efficient investing involves choosing the right investments to optimise clients’ portfolios for after-tax returns. Almost a third (31%) of survey respondents cite performance as a key reason why tax impact information should be leveraged, and experience seems to have taught them that the difference this makes can be very significant indeed. From the participants, 23% see that paying tax-efficiencies the attention they so clearly warrant can boost annual returns by a considerable 51-75 basis points, whilst another 23% believe the dividend will very likely be beyond 75 basis points.

Investment management costs have been rising in clients’ consciousness for some years now and it is increasingly common for them to think of performance net of all fees which also includes the consideration of tax as a cost item. 

Tax impact information is not yet systematically measured

It seems fair to say that virtually any client today would see building tax-efficient portfolios as foremost among an advisor’s responsibilities. We may even say duty, given how heavy a drag on returns taxes on investments can prove to be and how doable it is to mitigate the impact with the right knowledge and tools in place. 

The drivers to make after-tax returns the lens through which portfolios are seen could hardly be more compelling, which must make the lack of this kind of advice all the more disappointing to investors so in need of it. Our survey found that a shocking share of 53% of respondents are not taking taxation impact into account at the investment instrument level when optimising client portfolios. Worse still for investors’ financial objectives, 65% do not measure tax information systematically at all.

To address this gap in the investment management puzzle, 41% of institutions are referring to external parties like tax consultants and lawyers, while 26% can call on the expertise of internal tax teams. Yet both of these will typically know far less about the client’s portfolio structure and risk profile than the investment manager. When it comes to tax rules, the information advantage is not sitting where it ought to be: with those who are running portfolios hands-on.

Why tax impact information is not systematically measured

The result of this deficit is that clients are seldom empowered with the tax impact information they need to make well-informed choices—or at least not efficiently and, crucially, without additional expense.

The majority of institutions are under no illusions that after-tax investment returns aren’t on clients’ minds. Only 30% of our survey participants said a lack of demand is the reason why they aren’t considering tax information in client advice. 

For the remaining 70%, it is a mixture of technological factors and information sourcing (and reliability) concerns which are standing in their way. For 30%, a lack of integration in portfolio management/client advisor tools is their biggest barrier to systematically measuring tax impact information, while for 17% it is lagging availability of country-specific tax intelligence. Others feel they need more certainty over the legal reliability of tax information (11%) or insights at the instrument level (3%) before they can tackle tax-efficient investing in a meaningful way.

Embedded compliance: a true solution to after-tax investment return

Our research confirms that after-tax investment return is yet another area of wealth management which represents a compelling use case for embedded compliance. Just as with other use cases, digitising verified knowledge on tax rules can be a game-changer. Instead of an operational burden and a source of both costs and risks, we have turned a complex area of compliance into a competitive differentiator.

The ability to understand the tax implications of each investment for each client in real-time and without recourse to specialists has the potential to transform the way the investment management sector operates. Making this missing piece of the advice puzzle finally fall into place can add value in a host of ways, but naturally the most important of them all is in increasing after-tax returns. From the point of view of those who matter most – clients — our tax information capabilities might be the most powerful addition to the Apiax embedded compliance suite yet.

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Apiax helps financial institutions to expand their business opportunities with compliance automation. Welcome to our blog!