Beyond Investments

How a Solid Financial Plan Adds Value to Your Portfolio

Investment managers who are also holistic financial planners add value in a significant way that goes well beyond pure investment management.  Morningstar recently attempted to quantify the value added by “Gamma”, the value obtained from making intelligent financial planning decisions during retirement.  Morningstar’s estimate was that a little over 1.5% in real after tax returns could be added by intelligent financial planning decisions.1  We are not sure what the “number” is, but we do know that smart, client centered, tax sensitive decisions add to the after tax return of our portfolios. 

Here are just some of the ways we routinely add value (and after tax return) to our clients’ portfolios:

                Smart asset location decisions.  Placing tax efficient investments in taxable accounts and investments that provide ordinary income in tax deferred accounts.  This practice can enhance the after tax return of your investment portfolio.

                Goal focused, stable investment strategy.  By carefully connecting your portfolio choices with your lifetime financial goals, you are relieved of the need to make reactionary changes to investment strategy based on recent market performance or your own emotions.  Significant permanent losses can occur when strategy changes occur at market peaks or valleys.  Consistent strategies work.

                Tax aware withdrawal source decisions.  Taking regular withdrawals from an investment portfolio adds both complexity and opportunity.  Balancing taxable income from IRA’s or annuities with tax efficient or tax free distributions from after tax accounts can help to control or reduce your tax bill.

                Appropriate Roth conversions.  In years where your income may be very low, you may be able to convert part of your IRA to a Roth IRA and pay very little in taxes.  This will mean that a part of your money will never be taxed again and can grow tax free for you, and for your heirs.

                Total Wealth Asset Allocation.  Looking at your “total wealth” — and not just your investable assets — may increase your capacity to take portfolio risk.  A client with a large pension or reliable income from rental real estate can typically withstand more market volatility than a client whose entire income must come from his portfolio.  A more growth- oriented investment policy may be appropriate.

                Flexible Withdrawal Schedules.  Making decisions about “safe” withdrawal rates on an annual basis can result in more resilient portfolios.  Taking a larger distribution when the market is up, and reducing your distributions in down years can add important resiliency to your retirement portfolio.

               Tax Loss Harvesting.  Selling positions that have losses and repurchasing similar positions later on allows you to capture tax losses now, and use them later to offset tax effects of future gains.  This is a low or no cost way to reduce capital gains taxation, and to keep more of what you earned.

                Managed monthly income via a “perpetual paycheck”.  During your working years you probably enjoyed a regular income.  When you retire, it should be no different.  We can implement strategies for you that will provide a regular, constant stream of cash flow into your checking account.  If you need $5,000 per month and your portfolio will support that, we can have $5,000 automatically deposited into your checking account each month. 

               Automatic Tax Withholding.  If your distributions come from a tax deferred account, such as an IRA, we can arrange for automatic tax withholding based on your estimated year-end tax liability.  Accumulating tax payments throughout the year avoids an emphasis on any single month’s portfolio performance, and can help avoid IRS under-withholding penalties.

                Reduced volatility.  A lower volatility portfolio preserves more of your wealth when markets turn down. Two portfolios with the same average return can have very different actual wealth accumulation results. Higher terminal wealth means you have more money to spend or share.  Lower volatility feels better, and works better in the long run.   



  1. David Blanchett, CFA, CFP® and Paul Kaplan, PhD, CFA, “Alpha, Beta and Now….Gamma”, paper prepared for Morningstar Investment Management, 28 August 2013