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Investing without considering tax ramifications

Advisors should be aware of and sensitive to your tax situation, but sometimes problems may be hard to detect unless you know where to look. For example, the client may not disclose all the accounts he or she has, so an advisor won't know how other accounts are invested, or more importantly, what the gain or loss landscape may reveal. An advisor who is fluent in the tax strategy will ask about other accounts in order to avoid realizing a gain or loss in error thus creating an unanticipated tax issue. Simply put, a financial advisor with tax experience has the mindset to always be on the lookout for ways to save on taxes. Even if they switch careers, they likely don't lose that instinct. On the other hand, financial advisors are usually investment professionals first. They are looking to grow your assets, and tax consequences may not be a priority, particularly if that advisor is paid on a commission basis. Combining the long-term investment planning mindset of an advisor and the tax-savings mindset of a CPA, however, can be a great thing for your investment strategy.

Managing risk and tax-efficient investing

With long-term investing, investors must be comfortable taking more risk to potentially realize higher returns. And as their wealth increases, many investors begin to shy away from taking risk. This is where tax-efficient investing can be critical. By combining proactive tax planning and estate planning strategies, you can feel more confident about the management of your wealth and the risks you are taking to grow your legacy. It is possible to realize a better return with the same amount of risk by efficiently managing the tax burden. Whether it be simple management of positions in the right accounts, or harvesting gains and losses in a strategic way, almost every investor can benefit from a tax-smart investment review. In other cases, there are opportunities to create interesting estate planning strategies that can serve your legacy. When you employ several different firms for these critical tasks, you may sacrifice potential tax saving opportunities. A tax-smart advisor can often identify these opportunities or deficiencies during the financial planning process. Awareness is paramount. An advisor on your team that looks for ways you can pay less in taxes should increase your returns over long periods of time. The tax-savvy wealth manager is a great asset for any investor.

You will be well served to search for financial advisors with tax and accounting experience. Ensure that the advisor in question is a fiduciary, and check out their compliance record at BrokerCheck.

Managing tax impact of gains

You might have experienced this before: Your advisor encourages you to take some profits. Suddenly you've got a tax bill on your hands you weren't expecting and your cash flow is going to suffer. Your CPA should always be looking for ways to lower your taxes in the current year. Your financial advisor should be seeking prudent avenues to grow and protect your wealth, based on long-term financial planning discussions during the investment planning process. However, these goals of saving tax and growing wealth can sometimes conflict if the efforts are not coordinated. This is where a strategy such as proactive tax-loss harvesting can make sense. You can still take the profits, but you can offset the potential tax bill. By including tax planning along with your investment planning, you can smooth those situations and minimize surprises.

How to find a tax-smart advisor