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Tax-managed investing for advisors
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Can a focus on taxes
invigorate your practice?

As an advisor, if you weave a tax-managed approach into your practice, you stand to potentially help your clients increase their fair share of after-tax wealth. And you have the potential to increase your share of client assets under management. But this is complicated stuff. We're here to help.

As an advisor, if you weave a tax-managed approach into your practice, you stand to potentially help your clients increase their fair share of after-tax wealth. And you have the potential to increase your share of client assets under management. But this is complicated stuff. We're here to help.
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Managing taxes - easier said than done?

Efficient tax-management for advisors can require a significant level of infrastructure, organization, and time. Do you have enough resources? Can you balance the fiduciary responsibilities of managing taxes well against the business need to serve clients well?

We asked several members of our tax-managed team at Russell their thoughts on this. The interactive chart below helps illustrate what we heard regarding how complex, how scalable, and potentially how impactful these seven tax-managed principles can be for an advisor's practice. Of course, your clients' situations and experiences may be different, and managing individual securities is different from managing mutual funds.

That said, consider a hypothetical advisory practice with $200M in Assets Under Management across 150 clients. This firm works to reduce their clients' tax burdens through individually managed accounts. But these accounts each have about 100 holdings (with the potential for multiple tax lots per holding). Impactful tax-managed strategies like tax loss harvesting and selecting tax lots may be too complex to scale for this practice.

An option for this hypothetical practice is to find help with some (or all) of these tax-management activities by using tax-managed and/or tax-exempt mutual funds. You'll find these products at Russell Investments, where we've been helping advisors serve their tax-sensitive clients for more than 30 years.

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  • Reduce
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  • Defer
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  • Eliminate
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Complexity
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Full opportunity of tax efficiency

Marginal impact if you do it well

Impact
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Scalability
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Interact with the chart to find out more about these tax-managed principles.

Harvest losses: Security values fluctuate somewhat randomly over short periods of time, while ideally trending upwards over the long run. During these random fluctuations, selling a position that drops below its cost basis creates a loss that can potentially be carried forward. Depending on the specific tax situation, this loss may be used to offset a gain elsewhere or at another time. As long as the overall composition of the portfolio is materially unchanged, harvesting losses can help improve after-tax performance.

Holding periods: Under current U.S. IRS rules, selling investments prior to holding them for over 1 year will generate short-term gains which can significantly affect the tax bill. Short-term gains are taxed as ordinary income, which can be as high as 43.4% of the gain, after accounting for the recent 3.8% Medicare tax on net investment income. Long-term gains for the highest tax bracket are taxed at a maximum tax rate of 23.8% including the Medicare net investment income tax. Tax-managed strategies should avoid short-term gains, and even limit realizing long-term gains.

Manage portfolio yield: Dividends generate a potential tax liability in the year they are paid and can be taxed as ordinary income. These taxes reduce the principal to which investment returns accrue. Reducing dividends helps defer taxes paid, which promotes a larger principal amount with greater compounding potential. In managing dividend yield, desired portfolio exposures need to be considered.

Select tax lots: When a partial sale of a position is made, the tax impact of selling different lots needs to be evaluated. If there is an ability to sell lots with a higher cost basis, then gains can be deferred relative to a naïve approach. By reducing immediate taxes, potential gains are deferred, which can help improve after-tax return.

Reduce turnover: Depending on an investor's individual situation, capital gains taxes are typically only paid when an investment is sold at a gain. High turnover strategies that cause the selling of positions at a gain can erode after-tax return. For example, if a position is sold for a 10% gain after one year, and 20% tax is assessed on the gain, the return is reduced to 8%.

Defer realized gains: Deferring the realization of capital gains allows any future returns to compound on a potentially higher base. Keep in mind that taxes will likely be due at some point and tax rates could be higher once they are due. Future capital gains taxes could potentially be avoided if assets are passed through death or given to charity.

Eliminate wash sales: If a security is sold for a loss, a tax benefit may be obtained that could be used to offset a gain elsewhere. This tax benefit is negated if the same—or a substantially identical—position is repurchased within 30 days of the sale date. Systematically avoiding wash sales is an important step in constructing an efficient after-tax strategy.

Serious about taxes? We're here to help.

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Tax-managed tactics: access our expertise

Get tax-savvy insights from some of Russell Investments' leading thinkers.
On subjects you and your clients may care about the most.

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Serious about taxes? We're here to help.

If you're like us—and believe a focus on taxes can potentially help your clients while growing your practice—we should talk. Learn how outsourcing tax-managed investing solutions to Russell Investments can help make a difference to you and to your clients.

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© Russell Investments 2015. Russell Investments is a trade name and registered trademark of Frank Russell Company, a Washington USA corporation, which operates through subsidiaries worldwide and is part of London Stock Exchange Group.

Russell Financial Services, Inc., member FINRA, part of Russell Investments.

First Use: November 2015     RFS - 16067

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The information, analyses and opinions set forth herein are intended to serve as general information only and should not be relied upon by any individual or entity as advice or recommendations specific to that individual entity. Anyone using this material should consult with their own attorney, accountant, financial or tax adviser or consultants on whom they rely for investment advice specific to their own circumstances.

This material is not an offer, solicitation or recommendation to purchase any security.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

Income from funds managed for tax-efficiency may be subject to an alternative minimum tax, and/or any applicable state and local taxes.

This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an "as is" basis without warranty.

The Russell logo is a trademark and service mark of Russell Investments.

 

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