Introduction

The investment success of an investor — his return — is made up of many elements. In recent years, investors have become increasingly aware of the importance of cost-adjusted returns in addition to absolute returns. However, the tax-adjusted return still receives little attention, despite its importance for customers. The reason for neglecting the tax burden in the investment context is in particular the lack of simple availability of tax information that can be used for this purpose.

Digital tools can help investment professionals at each point in the value chain, for example to develop an investor profile, or to produce promotional material, or develop an asset allocation. They can also help to maximise returns and improve investment services. Due to the complex nature of investing and tax laws, many investors fail to grasp how to manage their portfolio in a way that minimises their tax burden. Digital tax rules can remedy this and bring important advantages for customers and financial service providers.

Modern customers want bespoke, transparent investment advice along with tailored, value-added investment products that work for them. To meet that need, financial service providers have an opportunity to utilise tax-impact calculations to stay ahead of the competition.

Tax-adjusted return: an important performance metrics

The return of an investor is the increase in the value of his investments over a certain investment period, usually in a year-on-year comparison. You can differentiate between different key figures:

  • The absolute return shows the development of the invested capital without taking other factors such as costs into account. The absolute return is the most obvious indicator that investors or media reports like to discuss.
  • The cost-adjusted return (or return net of fees) subtracts the costs incurred by the investment from the absolute performance. Costs such as management fees, custody fees or transaction fees can have a significant impact on an investor’s investment performance. The cost-adjusted return therefore gives investors a much more realistic picture of their investment performance than absolute performance.
  • The tax-adjusted return deducts the tax burden arising from an investment from performance and shows an investor how his investments have developed after he has paid his taxes. In combination with the cost-adjusted return, it provides the most accurate approximation of an investor’s actual performance.
  • Other key figures such as relative performance or risk-adjusted performance provide investors with further information on their investments.

These different key figures provide very different information. The absolute return is a good starting point for assessing the investment expertise of the committed investment specialists. Can my bank’s investment specialists keep up with industry standards? How do they compare to the competition? This is important information.

The cost-adjusted return says something about the cost structure of the respective financial institution. However, it should be noted that price differences can be balanced out with more or less service quality and that the cost structure can also vary depending on the portfolio. Active, tactically oriented portfolios incur significantly more costs than strategic, passive portfolios.

Tax-adjusted return says quite a lot: is a financial service provider up to date and committed to its customers?

Finally, the tax-adjusted return says something about the client focus of the committed bank. It shows whether a financial service provider is technically and content-wise up to date and is committed to creating full transparency and control for its customers.

Investment advice: investors demand transparency

The topic of cost-adjusted returns has been discussed prominently in recent years. There are various reasons for this, such as the loss of confidence in financial service providers associated with the financial crisis or the increasing transparency in today’s market environment. It has never been easier to compare the fees of different providers than today. This has not least given rise to an industry of its own in which providers are vying to offer comparative services to private and institutional investors.

The topic of tax-adjusted returns has not yet received this attention, but is dealt with only cautiously. This has nothing to do with the complexity of the matter. Of course, only a few specialists can reliably name the tax burden of an investment instrument or product. But with the right digital tools, these same specialists could easily make their knowledge available to interested stakeholders. The problem is not the available knowledge, but the processing of this knowledge at company level. Digital RegTech tools and solutions can help here.

Tax-efficient investing: digital tax rules offer benefits for investors and financial service providers

With the right digital tools, tax experts can now digitalise their expertise at instrument- or ISIN-level and make it easily available. This allows client advisors, for example, to compare investment proposals directly in advisory meetings on their tax burden. Product specialists can use tax calculations to structure market-specific products. Portfolio managers can put together tax efficient portfolios. The application possibilities are almost limitless, as we explain in our whitepaper on the topic.

With the right tools, tax experts can digitalise their expertise on ISIN-level and make it available to an entire institution, creating benefits for both customers and financial service providers.

From the investor’s perspective, this is an exciting development because it can increase his actual investment success. There are also important advantages for providers. Information on the tax burden can be used in the investment process, in product design or in portfolio construction. The focus on tax-efficient investing also allows providers to differentiate themselves in an increasingly complex market environment.

Digital tools have changed the game. Financial institutions can now improve investment services, delighting clients in the process. They can use digital tax regulations to create new touch-points and activate clients, offer tax-efficient recommendations and engage a new investment narrative tied to performance and value-added services.

Tax impact information gives portfolio managers the edge through tax-efficient investment advice and integration, tax considered instrument selection and improved, tax-efficient product structuring.

Investment product managers can use tax calculations to easily structure tax-efficient investment products and create market-specific customised offerings. They will now be able to reach and attract new customers and activate existing clients by offering the latest finely tuned products.

Switch proposals are a possibility with tax impact calculations. Client advisors have another string to their bow by offering tax-efficient alternatives for clients who may have buyer fatigue. Open a dialogue with clients by framing the discussion about how they can improve performance with new added tax refinements.

New business can be created by offering market-specific, differentiated products structured from tax impact calculations. Financial institutions can take the position of first-to-know innovators by providing tax calculations to prospective clients that will give them market leading service quality.

Digital tax regulations are a game-changer. Financial providers can now improve investment services, delighting clients in the process.

Upshot

Tax-efficient investing is a topic in which clients and providers can find each other. Real added value is generated for customers. Providers can position themselves with a topic that focuses on the customer but never loses sight of performance. Where else can investment performance, product offering and positioning as a transparent, client-focused institution be so easily reconciled?