Embracing collaboration

Why wise investors want legal, financial, risk and tax advisors to work together

Taxation is a dry, yet critical, topic for any investor who seeks maximum risk-adjusted and net after-tax returns in the low-return investment environment that many of us – including the IMF and World Bank – anticipate in the future.

It is no coincidence that in recent years, as investment instruments have become more complex, so has the tax code. A cynic could ask if this is a conspiracy.

Tax efficiency is not the sexiest topic, but it is of enormous importance. Families and investors would be best served by focusing on their risk-adjusted returns net after taxes. It is an important concept which only recently received coverage in the financial press due to the number of boomers entering the distribution phase of their lives.

The wisest and most sophisticated investors, institutions and families embrace the collaboration between legal, financial, risk and tax advisors. It can mean everything for the long-term health and success of any family or organization.

The wealthy create a formula of checks and balances to protect and enhance their resources. The Rothschilds accomplished this through their evolving model of a “family office,” which survives today. This collaboration and the checks and balances that it fosters often go unappreciated. It has also led to the rise of what some believe is a troubling trend: one-stop shopping for investment, legal or tax advice.

Back in the boom days of the 1980s and 1990s, a few accounting and law firms sought to grab some low-hanging revenue by taking a leap into tax, legal or investment counsel for a less sophisticated clientele. At the end of the last big bubble in 2000, a one-stop shop model proved to be a costly mistake for some professionals who deviated from their core competencies in search for additional revenue.

A number of families and investors were ill-served by tax and legal professionals who chose not to collaborate but to compete. As market structure issues, volatility and compliance costs soared after the meltdowns in 2000 and 2008, most went back to their licensed profession.

The public is typically not aware that attorneys and accountants are exempt from filing under the SEC’s 1940 Investment Advisor Act, which established the rule for investment fiduciaries after the Great Depression.

Our nation’s imperfect union was based on three branches of government: the executive, legislative and judicial branches. As imperfect humans, we might also wish to seek a collaboration and coordination between our financial, tax, risk and legal advisors as well. If you believe your financial advisor is also a tax code savant or your CPA fully grasps the dynamics in the current global marketplace or the tracking error of last week’s “hot” ETF, it could be a costly miscalculation.

A revealing survey of financial advisors last year by Russell Investments shows why this collaboration of specialists is important.

It found that while 35 percent of financial advisors say that clients ask about strategies to reduce or avoid taxes, only 18 percent say that clients proactively want to discuss tax implications of investment strategies.

“I think many advisors don’t appreciate how big a deal this is,” said our Russell colleague Frank Pape, author of the survey.

We were particularly surprised to learn that only 12 percent of Russell’s survey respondents have even a modest relationship with the majority of their clients’ accountants. The survey found some advisors also seemed to be unsure about the concept of after-tax portfolio returns.

Almost 40 percent failed to answer an open-ended question about ways to calculate after-tax returns, according to Pape, and the remainder either said they don’t do it, or offered a smattering of different answers including some incorrect ones.

“It seems many advisors are not connecting the dots between actual return and how much the client has after taxes,” Pape said.

Our job is to collect dots so that we might connect dots. Advisors do this best by collaborating with each of our clients’ tax, legal and risk experts. Though we all enjoy a healthy competition, we don’t think it should ever be done at a client’s expense.

Tom Sedoric, managing director-investments of the Sedoric Group of Wells Fargo Advisors in Portsmouth, can be reached at 603-430-8000 or thesedoricgroup.com.