by Douglas S. Rogers, CFA
Reviewed by Jon Ford, CFP®
Tax-Aware Investment Management: The Essential Guide should be read and understood by anyone who purports to provide comprehensive financial planning. It is one thing to view tax consequences in terms of cash flow over the years, as planners do so well, and quite another to take a look in terms of investment advice, pre- and post-tax savings entities, and tax consequences.
In the author's words, "Tax-aware investment management refers to the application of sound judgment that results in optimal results after all taxes and fees have been paid." It involves using after-tax assumptions in the asset allocation process; allocating asset classes and specific investments according to the characteristics of each investment entity (401(k), IRA, or taxable account); tax-aware equity manager positioning; and identifying tax-aware managers/funds. Whether a client's portfolio is valued at $100,000 or $10,000,000, the author argues that implementing these four elements has the potential to increase bottom-line performance up to 2.5 percent. Impressive!
The book is evenly written, all 19 chapters providing useful and often novel information. Part one of four parts lays the historical groundwork for the author's message. He reports related research and describes the tax-aware practitioner. He tries to develop what he calls the "Triumviarate of Qualified Professionals," which seemed to be an appeal to establish competency among those working in a trusting relationship with a client. Knowing one's own limits is a defining characteristic of comprehensive financial planners and the author's appeal seemed unneccessary.
At various locations in the book, lists of questions are included for investors to ask as they seek qualified professionals. I wondered if most investors, even after reading the book, would know how to fathom the meaning of a question like, "To what degree can my financial services provider deliver the four key elements [see above] of tax-aware investment management?" Most of the questions are more aptly answered by qualified investment advisors, and I believe they would be largely incomprehensible to the vast majority of lay investors.
Part two describes the importance of after-tax reporting and measures of tax efficiency. The author provides very useful formulas, including one for calculating a client's anticipated overall tax rate, given federal, state, and local tax rates. He also reminds readers that clients' actual tax rate will be a combination of expected tax rates for ordinary income, short- and long-term capital gains, and qualified dividends. It is in part two that I came to understand the author's perception that the reality of implementation is an art form. It certainly helps having the right information and a list of procedures, but it is much more than that. I wonder if the knack can be taught to the average investment advisor.
For readers who are not average, parts three and four hit the mark. Tax-aware portfolio management and the challenge to traditional asset allocation models are so well written that the gestalt begs closure. I believe the author should have unmistakably identified his intended reader as a financial planner professional. The book was clearly written for, and should be a valuable resource for, comprehensive planners and professional investment advisors alike, but not potential clients.
Jon Ford, CFP®, is president of CF Financial Planning Solutions Inc. in Cedar Falls, Iowa. He writes a weekly Financial Fundamentals column for the Cedar Falls Times.
$79.95 U.S., $107.95 Can.