Many of your clients may be somewhat agitated when you meet with them to discuss their 2015 tax returns. Most will be jittery about current market volatility, and many will also have sustained meaningful losses in their equity portfolios, yet have big tax liabilities from mutual fund capital gains distributions. The apparent injustice of that juxtaposition is a perfect opening for a discussion of portfolio tax efficiency, in the context of a comprehensive financial plan.

“Many of the funds have used up their capital loss carry-forwards to offset imbedded capital gains in their portfolios,” said Chad Smith, a wealth management strategist at HD Vest Financial Services®. “Clients with incomes high enough to be hit by the 3.8 percent Medicare net investment income surtax who live in states like New York and California could be paying around a 30 percent combined tax rate on those gains, without having seen a dime of appreciation in 2015,” he added.

Turning that lemon into lemonade can involve addressing a variety of topics with clients. Here are a few suggestions.


1. Optimizing allocation of financial assets between taxable and tax-deferred accounts. Has the client taken advantage of all the qualified retirement plan opportunities available? If the client is self-employed, have they considered sponsoring a defined-benefit pension plan? DBs allow for higher deductible savings amounts than defined-contribution plans, like 401(k)s, particularly for middle-aged and older clients. If the client has access to a health savings account at work, has that opportunity been fully exploited?

2. For taxable investment accounts, could the client benefit from investing more in exchange-traded funds and less in mutual funds to have the benefit of diversification or sector allocation, while maintaining the ability to decide when to incur gains or losses? And for the same reason, could the client benefit from owning more non-ETF individual securities, without incurring excessive risk of non-diversification?

3. Is there a role for an annuity contract or “permanent” life insurance contract to take advantage of the tax benefits they provide, along with the longevity or mortality risk management features?

4. Should municipal bonds become a component (or a larger one) of the non-retirement plan portfolio?


It may turn out that examining the possible advantages of pursuing these options leads to a decision not to move forward with any of them. However, the point of the exercise is both to make sure you are covering your bases in looking out for your clients’ financial welfare, and to demonstrate to them that you have many tools in your tool chest.

That can be particularly advantageous in the case of clients who you currently are only serving by providing tax and accounting services. It’s fair to ask, “Has your advisor discussed any of these ideas with you?” If the answer is no, the door has been opened wide for you to say, “I can help you with these if you like.”


It’s also important to remind clients that tax considerations aren’t the exclusive drivers of personal finance decisions -- and that you can look at their financial picture holistically.

Before diving too deeply into the tax-efficient investing conversation, building a broader and deeper client relationship begins with helping clients think through the financial goals they’re aiming for. The investment strategy and associated funding requirements, of course, flow from the clients’ goals, risk tolerance, and other factors. But since your clients already accept your authority as a tax expert, tax-efficient investing is a good way to start the conversation.

Taking your clients a few steps down the road towards a tax-efficient investment strategy might turn out to be a necessary confidence-building measure the client needs before turning all his financial planning needs over to you. But it’s a good beginning.

Published in partnership with HD Vest.

For more information about HD Vest Financial Services and how they can help you transfer a client’s wealth, visit or contact a Business Development Consultant at (800) 742-7950.

HD Vest Financial Services® and its affiliates (collectively, “H.D. Vest, Inc.”) do not provide tax or accounting services. You should consult your tax professional regarding the tax implications of any investments.

The views and opinions presented in this article are those of Chad Smith and not of HD Vest Financial Services® or its subsidiaries.

HD Vest Financial Services® is the holding company for the group of companies providing financial services under the HD Vest name.

Securities offered through HD Vest Investment ServicesSM, Member SIPC, Advisory services offered through HD Vest Advisory ServicesSM, 6333 N. State Highway 161, Fourth Floor, Irving, TX 75038, 972-870-6000.