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Tax management can add significant value
An Envestnet | PMC study shows that advisors can add value to client portfolios by focusing on tax
management. Because efficient tax management in an all-equity portfolio can add approximately
100 basis points of value annually, it's a component of advisor-value add that can't be ignored.
Tax management adds value
Capital Sigma is our term of the sum total of advisor-created value. We have found 5 sources of measurable value:
Source Description Annual value-add
Financial planning Retirement planning; tax planning; asset location; behavior coaching > 50 bps
Asset selection &
allocation
Diversification contributes positively over the long term 52 bps
Investment
selection
Active management 67 bps
Passive management 61 bps
Systematic
rebalancing
Annual rebalancing helps control risk and can enhance return 30 bps
Tax management Tax optimization of taxable accounts is a significant contributor 100 bps
Total ~ 300 bps
Source: Envestnet; Morningstar; Vanguard. Francis M. Kinniry Jr., CFA, Colleen M. Jaconetti, CPA, CFP®, Michael A. DiJoseph,
CFA, and Yan Zilbering, "Putting a value on your value: Quantifying Vanguard Advisor's Alpha," March 2014, Vanguard.
David Blanchett and Paul Kaplan, "Alpha, Beta, and Now...Gamma," Morningstar, 2012.
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