Why Palisade Focuses Heavily on Minimizing Taxes and Fees
Many advisors spend a lot of time trying to control what is inherently out of their control (market returns), but very little time controlling something that is often well within their control: the taxes and fees their clients will pay on their investments over the course of their lifetimes.
Palisade considers this a core fiduciary responsibility, and seeks to maximize clients’ after-tax, after-expense returns. From a tax standpoint, Palisade seeks to minimize the tax consequences of every action they take in their client portfolios, via:
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Routing excess income to tax-advantaged accounts (401ks, IRAs, HSA, etc) in a optimal way, to maximize upfront deductions or secure tax-free growth.
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Holding less tax-efficient assets in more tax-advantaged accounts, and vise versa, to minimize tax drag from interest and dividend income over time.
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Avoiding unnecessary trading in taxable accounts so as to minimize the realization of capital gains.
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The strategic sale of underperforming securities to generate capital losses that can then be used to offset capital gains, followed by the immediate reinvestment of proceeds to maintain market exposure.
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Anticipating future tax exposure in order to take advantage of long-term tax optimization opportunities, such as Roth conversions during lower-income years to minimize lifetime tax liabilities.
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The strategic sourcing of retirement funds from taxable, tax-deferred, and tax-free accounts in order to minimize taxable income.
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Maximizing the impact of charitable contributions by eliminating capital gains taxes on them, using donation vehicles such as in-kind gifts, qualified charitable distributions, and donor-advised funds.
Various research studies have shown that a tax-aware advisor can have a significant impact on their client’s after-tax returns:
Vanguard research estimates that tax-aware advisors could potentially add up to 1.5% in additional returns via tax loss harvesting, up to 1% additional returns via tax-efficient retirement strategies (Roth conversions, strategic withdrawals, etc), and up to 0.6% additional returns via asset location strategies. (Separate research from Vanguard estimated that asset location strategies improved returns between 0.05% and 0.30% per year.)
Envestnet research estimates that tax optimization strategies can add approximately 1% of annual value when compared to an investment strategy that is not actively tax managed.
The above estimates fall roughly in line with our own research and experience, with one major exception. Because of our unique tax strategies, the tax savings become significantly larger for our clients who make charitable donations, including donations to religious, educational, or any other charitable institutions.
Minimizing Fees & Expenses
Because the fees of various investment products are not always transparent or easily comparable, it is common for investors to find themselves in investments that have high fees, loads, or annual expenses. Unfortunately, it is not uncommon for advisors to recommend such investments, either because they are pursuing active investment strategies (which have inherently higher fees), or because they receive commissions from the investments they recommend (commissions are paid from fees).
In contrast, because Palisade does not accept commissions from third parties (such as mutual fund providers or insurance companies) and is focused on passive investment products, it is able to employ investments with very low costs, saving our clients money and improving their investment returns.
“For all long-term investors, there is only one objective: maximum total real return after taxes.”
