Issue link: https://resources.envestnet.com/i/1527484
3 Four emerging tax management trends: After-tax wealth takes center stage While many advisors intuitively understand the importance of after-tax wealth, focusing on it will be essential as we look to the future. It's critical for advisors to help clients understand the impact taxes can have and to maintain a focus on after-tax wealth. We see more interest in tax-efficient vehicles that put advisors in a position to deliver better after-tax returns and to do so in a way that is still efficient for their business. Over the last year, the number of accounts using customized tax services on the Envestnet platform grew 32% to over 9,500 accounts. 1 In fact, taxes can be an enormous drag on portfolio performance. For example, if a client was invested in a 50% stock and 50% bond portfolio in a year when pre-tax returns were 4.0%, the after-tax return would be only 2.3%. That's a tax drag of 1.7%, represented by income from the bond portfolio and capital gains distributions from the equity portfolio, with 44% of the portfolio's gains going to taxes over time. 2 Tax cost 44% of the portfolio's gains going to taxes over time Likewise, when we look at the hypothetical growth of $500,000 at 7.5% annually over 20 years, the potential for tax drag can make a real difference in returns. 1 It's not what you make, it's what you keep Hypothetical growth of $500,000 over 20 years at 7.5% per year 20-year hypothetical impact of taxes, assumed annual return: 7.5% 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 $1,762,000 1% tax drag No tax drag 2% tax drag $2,124,000 Years $1,459,000 Ending wealth difference in 20 years: $665,000 Initial investment: $500,000 This is a hypothetical illustration and not meant to represent an actual investment strategy. Tax drag is the reduction of potential investment returns due to taxes. Taxes may be due at some point in the future and tax rates may be different when they are. Investing involves risk and you may incur a profit or loss regardless of strategy selected. 1 Envestnet, as of June 30, 2023. 2 Morningstar data. U.S. Stocks represented by Morningstar U.S. Equity Mutual Funds. U.S. Bonds represented by Morningstar U.S. Taxable Bond Mutual Funds. Tax Drag is the Morningstar Tax Cost Ratio. MKTGM1123U/S-3208539-3/12