Why table-stakes tax planning is still elusive at many firms

Despite the frequent M&A deals, rhetoric and research focused on tax planning, the wealth management industry is still lagging behind clients' expectations, according to experts.

"We work so hard on investment alpha and security selection," said Scott Smith, the senior director of advice relationships at consulting firm Cerulli Associates. "All of the time we spend on security selection would probably be better spent on tax optimization in many cases."

Or, to put it another way: "Taxes aren't sexy, but taxes are actually sexy. It's reliable outcomes," Smith added. "It's not as exciting, but, in many cases, it can be more impactful."

To be sure, financial advisors have heard the message that tax savings strategies represent one of the greatest numeric drivers of their value to clients a lot. And wealth management firms have invested heavily in internal technology or M&A transactions that bring more capabilities. 

But Smith shared some surprising numbers from a survey last year of managed account sponsors — the fee-based advisory arms of large wealth management firms — suggesting that the industry hasn't come close to reaching the stated goal of accounts that act as a "unified managed household" implementing tax savings in every aspect of portfolio management. 

Just as in 2020, half of the firms admitted that they were trying to consolidate their managed accounts into a "single-account architecture but are not there yet," according to the study, "The Cerulli Report — U.S. Managed Accounts 2025." Only 19% of the firms had reached that goal, compared to 14% in 2020. Another 23% said they were content last year "to allow various programs to exist on different platforms," while 8% said they anticipated their custodian or external turnkey asset management program provider to complete the move to unified accounts.

"Pretax returns are great. They make the headlines. It's ultimately after-tax returns that matter to clients," Smith said. "If we want to actually impact those outcomes, this tax optimization is one of those levers we have yet to fully utilize."

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The good, the bad and the ugly

Cerulli's report identified eight "core" aspects of tax efficiency in large wealth management firms' advisory accounts. After speaking with those firms, Smith and other Cerulli researchers rated three of them as "rare" in the industry (planning integration, Social Security optimization and multiaccount rebalancing); three as "growing," (tax-smart client transitions, asset location and tax-efficient customer withdrawals) and just two as "common" (forms of tax-loss harvesting, other than long/short portfolios and Section 351 conversions) or "established" (tax-savings documentation). And, in anonymous interviews, executives with at least some of the firms agreed with those assessments.

"The ocean will be boiled, but it will take a few years," a senior vice president of advisory platforms at a regional brokerage firm told Cerulli.

But it's not as if advisors haven't been talking about this competitive problem.

"One thing we do very well is educate, and the conversations that we're having with advisors are that tax optimization is table stakes," a managing director of advisory programs at "a major national" brokerage firm told Cerulli. "Everyone in the industry is doing it. And based upon our clients, surveys and external surveys, clients are expecting if you're talking about wealth management that you're incorporating taxes into that conversation."

Even the technology vendors who are leading the charge or, perhaps more accurately, the slog into tax-smart portfolios across the industry say that it is a long, difficult process. When Michael Camp, the head of client solutions at 55ip, a tax-focused investment management and technology firm owned since 2020 by JPMorgan Chase, came to the company that year, it had about $330 million in client assets under its supervision, he noted. It now has over $138 billion, with more than 4,000 individual advisors and 600 RIAs or other advisory practices using its tech.

But the industry is going through "the earlier innings of this ballgame," Camp said, citing barriers to the flexibility necessary for delivering those tax planning strategies across each client household and a greater range of tools over "letting the vehicle or the product wag the tail of the outcome." Wealth management firms can't rely on a single answer to the many questions.

"The clientele is more informed and has higher expectations than ever, and, as a result, that is putting the pressure on for advisors to continue to evolve to meet the needs of their end clients," Camp said. "It is taking a long time for these solutions to manifest. … Even though you have the technology, that doesn't mean that the advisor is going to embrace it and adopt it immediately."

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Understanding the obstacles

More than a third of the managed account sponsors, 36%, told Cerulli that training advisors on the use of a unified managed household account was acting as an obstacle to achieving that aim last year. But a greater share named technology complications (88%), data aggregation (52%) and budget limitations (40%) as factors. And a substantial portion mentioned challenges communicating the savings to clients (20%), insufficient knowledge of clients' external holdings (16%) and lack of customer demand (12%). Zero percent believed "advisor resistance" was holding the firm back.

Rather, the companies are doing a poor job of turning the tax planning in portfolios into "the path of least resistance" for advisors, according to Smith. Often, the companies' executives are opting to "do one thing at a time" that would cost, say, $1 million, instead of trying to "do the whole thing" by converting every tax tool into a unified managed household account available to each advisor at an expense of, hypothetically, $1 billion over five years. 

"Unless it's built into the system and automated, they're not going to change how they've been doing business for the past 10, 20, 30 or 40 years," he said. "The challenge is getting this to the top of the priority list."

Cerulli's research and interviews suggested, however, that "any expectation of less than two years is likely to result in disappointment" for firms trying to eliminate the technology friction, the report said. They did at least claim to be seeking to deliver solutions. For three straight years worth of surveys of managed account sponsors, the largest share of firms put "providing better portfolio construction support for advisors" on their list of technology goals. But last year, Cerulli added "improving tax management capabilities" to the possible responses. And 82% named that as a technology goal for 2025, with the prior lead item coming in a distant second at 43%.

"Wealth managers' most reliable source of relative portfolio alpha is the tax optimization of clients' investments," Cerulli's report said. "While wealth managers may look fondly upon the portfolio return figure they are able to post, the returns themselves must be a secondary consideration to the net buying power actually experienced by clients. Outperforming a benchmark by 100 basis points is an accomplishment that can easily more than be offset by exposing the gains to 35% income tax rates rather than a 15% capital gains rate. Wealth managers that have not prioritized platform-wide automated tax optimization processes are underserving both their clients and advisors and will need to reconsider their strategies if they aim to remain competitive."

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Big business and client ramifications

That lesson could apply to many firms throughout the industry, whether among the giants studied in Cerulli's report or among registered investment advisory firms that display a "bell curve" of some companies that have succeeded in implementing the tools, some that have adapted a portion of them and others that have yet to get started, according to Smith.

The shift could entail many different areas of portfolio management, though. For example, one aspect may revolve around simply notifying clients of the strategy and results from harvesting losses after volatility in stocks' values. Another could demand a more comprehensive approach to finding tax savings or avoiding a big hit when incoming clients join the firm. And still others could involve asset location, which Smith said is "one of the most basic" forms of tax planning. But it's nevertheless very valuable to clients — particularly in a business that "was built on a single-account view" decades before digital tools became the norm, he noted.

"The original system was not built with tax optimization in place," Smith said. "The systems that we grew up with weren't able to accommodate that. For 50 years, we've been planning around the edges with ways that we can improve the tax optimization."