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Topics: Blog, Tax Management

A Wealth Management Horror Story

One year later this Halloween wealth management horror story is still relevant — and (a little) scary.

REAL halloween blog post, scary story of wealth management

Update: Last Halloween we told the chilling true story of portfolios whose taxes were managed so well, using simple tax-management techniques, that they caught the attention of the IRS. The tax-efficient portfolios at the center of the story all held individual equities rather than mutual funds or ETFs for U.S. large cap exposure. It’s not a coincidence. Direct stock ownership, when managed well, is much more tax-efficient than mutual funds and ETFs. That’s one of the reasons why Schwab’s recent announcement of $0 commissions and fractional shares is so important. When combined with rebalancing automation, it means that all investors, regardless of the size of their portfolio, can replace their mutual funds and ETFs with tax-optimized SMAs that offer superior after-tax performance. (We wrote about this last week in our most-read post of the year: Mutual Funds and ETFs are Dead.) Good for investors, but, well, scary for mutual fund and ETF companies. Keep reading, if you dare...


In celebration of Halloween, we thought we’d share a scary story. It’s about — are you ready? — IRS audits. Not just any audits, but audits of investors who hired wealth advisors to manage their accounts. The cause? Suspiciously low taxes…

It’s a true story— we know because (shameless self-promotion) these advisors are our clients. It seems they were doing such a good job with tax management that they triggered IRS audits. We’re not talking about complex tax shelters here, just simple gains deferral and loss harvesting — done consistently and well. We’re glad to report that the story is actually not that scary. The investors in question passed their audits with ease — and, we’re pleased to report, viewed being audited as the ultimate endorsement of their advisor’s skill and value. 

While this story has a happy ending, it does reveal a disconcerting truth about the wealth management industry. If simple tax management done well causes an IRS alert, what does that tell us about typical wealth management? How bad must “average” be? The principles of tax management are well understood, and the process can be almost entirely automated. It should be “table stakes” — something every manager offers as a matter of course. And yet it’s not. The aspirational words are there — it’s hard to find any wealth management firm that doesn’t talk about the importance of tax management —  but for many wealth managers their commitment to tax management is belied by their results.

And that, we think, really is scary...



Topics: Blog, Tax Management

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