RBC advisors say they are fielding more questions from clients on how to make their investments as tax efficient as possible, prompting the firm to spend more time on education about these strategies.
Greg Steiger, manager of retirement income planning, describes how RBC is arming its advisor force with guidelines, tips and best practices in order to assist clients.
How have retirement planning and the use of asset allocation evolved recently?
Most advisors have done some form of asset location over their careers. Not placing muni bonds in an IRA account or putting dividend-paying stocks in taxable accounts are a few examples.
Now we have clients with much larger IRAs than in the past, and more investors who have Roth accounts with growing balances. There are many more products used today, and they are all taxed differently.
The more investments and account types a client has, the more complicated their tax picture can become. Add to that the variations between state and federal tax laws, and the complexity increases further.
What areas are your advisors focusing on?
Advisors are paying more attention to the tax bracket their clients fall into (or will be in), the type of accounts they have (taxable, tax-deferred, tax-free) and the amount of assets they have in each of these accounts.
Once advisors have a handle on these factors, the advisors then adjust their investment recommendations accordingly.
For example, if the client is in a high tax bracket, yet all or a majority of their assets are in IRAs, the advisors likely won't recommend municipal bonds.
How do you train advisors on asset location?
We have provided training on retirement income for the past two years.
But, when it comes to ensuring a client's investments are as tax efficient as possible, asset location is just one piece of the puzzle.
Strategically, they must consider the overall asset allocation and the investments that fit within that allocation and the accounts where these assets fit best.
From a tactical perspective, advisors must also manage distributions from these different accounts, taking into consideration the client's current tax situation, cost-basis of the investments, and gains and losses, all while maintaining the overall asset allocation.
What kind of guidance have you provided advisors on this approach?
We generally try to give them an idea of what assets typically fit best in each type of account.
Going a bit deeper, we use work that financial commentator and Financial Planning contributor Michael Kitces recently shared that suggests advisors should look at the return expectation (high or low) and the tax-efficiency (most or least) of the investments.
With these assumptions, the advisor can then prioritize where different assets should be located based on the level of assets that the client has in each of these different accounts.
Describe the tips and best practices you've suggested advisors adopt.
First, we recommend getting a better understanding of the client's tax situation, either by getting a copy of the client's tax return and/or working with their CPA. Next, we advise them to think about the different models they can use for both taxable and tax-deferred accounts.
This makes it easier to tailor their investment recommendations based on the accounts the clients have, along with not having to recreate the wheel every time they put recommendations together.
It's about advisors educating the client on how the location of assets can affect the taxes they pay, not just now, but over their lifetime.
Most clients want their investments to make money, but they also want the income they generate, either through interest, dividends or capital gains, to be as efficient as possible.
By understanding how holding certain types of investments in specific accounts can provide more after-tax income in retirement (up to 52 bps of after-tax income according to Morningstar's report "Alpha, Beta, now Gamma"), they can achieve that goal.
Regardless of the market environment, this strategy can add to a portfolio by maximizing the tax advantages that are inherent in various account types and matching those advantages with the characteristics of the underlying assets.