Bill Cass

Measuring the value of advice

Bill Cass , 9/21/2017


A financial plan can be more than a basic roadmap for investors, especially if they work with a financial advisor.

Many investors seek financial advice to build an effective, long-term financial plan. Professional advice can make a difference in meeting individual goals. Some recent studies estimate that investors working with advisors may see an increase of 1.55% to 4.00% in excess returns annually. According to a study by the Center for Interuniversity Research and Analysis of Organizations (CIRANO), a household working with an advisor for 15 or more years accumulated an average of 2.73 times more assets than a household without an advisor. The CIRANO work and other studies identify several areas where advisors can add value to their clients’ portfolios, including tax efficiency.

Mitigating the tax bite

Research studies on the value of advice have affirmed that significant value can be added by focusing on tax-smart strategies. Even the most dedicated saver may find that taxes can undermine savings over time. It’s important for investors to understand the potential of utilizing efficient investment vehicles and making strategic withdrawals to lessen the impact of taxes. As people live longer, there is a growing need for savings to last longer, and an expert advisor can help craft a plan.

Here are some strategies that focus on tax efficiency.

1. Asset location: Allocating assets by tax position

Allocating assets in a portfolio according to tax status can help investors implement a tax-efficient strategy in retirement. Assets can be organized as taxable, tax deferred, and tax free. Using these accounts against a backdrop of tax efficiency may help savings last longer. For example, some investors may consider holding a larger percentage of stocks outside of traditional retirement accounts to benefit from lower long-term capital gain and dividend tax rates. Withdrawals from retirement plans are generally taxed as ordinary income.

2. IRA charitable rollover: Donating assets to charity

IRA account owners over the age of 70½ may take a required minimum distribution and direct it to a qualified charity. Under a special provision, investors may donate up to $100,000 annually to a public charity. Investors can support a charity as well as potentially save on their Medicare B premiums, which may increase at higher income levels.

3. Strategic withdrawals in retirement

The sequence of withdrawals in retirement can also make a difference as investors seek tax efficiency. In retirement, investors will need to understand how much they can safely withdraw, what accounts they should draw on first, and the role of Social Security benefits in generating income in retirement. An advisor may help provide guidance on a tax-efficient withdrawal strategy in retirement based on an individual’s financial situation. Retirees in lower tax brackets may want to consider drawing funds from traditional retirement accounts first, such as 401(k)s or IRAs. As income needs grow, retirees may need to draw from taxable savings or brokerage accounts. Retirees facing the highest tax bracket in retirement may want to tap into Roth accounts to avoid reporting additional income.

A look at the value of advice

For more information on how advice can enhance an investor’s financial plan, read Putnam’s investor education piece, “Financial advice adds value.” The piece examines recent research on how advisors are influencing strategies in the areas of portfolio construction, tax efficiency, and behavioral discipline. Starting with an advisor early and using many of the strategies for higher efficiency can make a difference in saving for the long term.

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