Skip to content
4 min read

A Wealth Management Horror Story

This is repost of our favorite (not actually so scary) story of an IRS audit.

REAL halloween blog post, scary story of wealth management

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...

Postscript: it’s worth noting that the portfolios in question had something in common (besides being managed with the Smartleaf system): they held individual equities rather than mutual funds or ETFs for U.S. large cap exposure. It’s not a coincidence. It’s an illustration of the tax advantage of direct stock ownership and the principal reason direct indexes are getting so much attention (which, as long as we’re on the general subject of fright, really is scary to mutual fund and ETF companies; we wrote about this in one of our most-read posts: Mutual Funds and ETFs are Dead.)

 

avatar
President, Co-Founder

COMMENTS