Art of wealth management combines many decisions

We are all inundated with the now ubiquitous phrase ?wealth management.? It?s commonly used by many financial institutions in their promotions to attract customers. Has the commercialization of this phrase made its definition vacuous?

To most, wealth management has simply become a more eloquent, contemporary phrase, replacing such mundane terms as ?money management? or ?portfolio management.? Unfortunately, the industry?s drive to verbally out-promote each other has commandeered the true art of wealth management.

Certainly an investment portfolio represents an aspect of one?s wealth to be managed. However, there are more characteristics that require additional counsel. Are all the facets of your wealth managed with the same vigor as the investment selection component? We are all indentured to pursue which investment/manager has the ?best? return, but does this myopic zeal blind us to the other elements that create net returns?

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For instance, how well coordinated are investment monies to your income tax management? What effect does the lowered qualified dividend and capital gain taxes have on your investment strategy?

If the equity portion of your portfolio now can experience a capital gain with a tax of 15 percent, is it prudent to have capital gains realized inside of a profit-sharing plan? While deferred, upon withdrawal the capital gains now are subjected to ordinary income tax. The top bracket is currently 35 percent. While no one can forecast the future tax rates, the history of government creates a reason to be cynical about higher rates.

Perhaps this should give us pause as to where we allocate our equity investments. Perhaps we should consider tactical adjustments as to how we choose and deploy equity style managers. For example, active managers who create short-term gains could be utilized inside a profit-sharing plan, while a passive, long-term ?hold value? style manager could be engaged for our taxable holdings.

When we eventually look to our investment savings for income, does a qualified dividend taxed at 15 percent represent an expedient opportunity? Again, compare this rate to a withdrawal from a profit-sharing plan presently taxed at a top rate of 35 percent.

One strategy some employ is to place bonds in their profit-sharing plan, since they will be taxed as ordinary income either way. And, since we now tend to live longer, inflation protection is a bigger retirement consideration. This suggests that even at older ages some participation in the equity market remains prudent. Therefore, some qualified dividend stocks might serve a duplicitous role of a conservative equity play and to supplement income at a much lower tax rate.
These examples demonstrate that income tax management also is a significant wealth management factor. Sophisticated tax plans can influence not only asset allocation decisions but also asset type selections. In addition, the actual ?residence? of the financial instruments, inside or outside of tax deferred vehicles, joins the allocation equation.

Once you embrace the tax nuances of portfolio management, the next logical question is: How much of my ortfolio should be contained in a profit-sharing/pension plan, and how much should be held in a taxable state? This question expands the wealth management dynamic. Profit-sharing and other qualified plans can offer some level of creditor protection.

Do I need to contemplate some degree of asset protection in my wealth management plans? You may have been advised to protect as much of your savings as possible in profit-sharing or other qualified plans. If this were our only wealth management criteria, this may be a sound concept. However, there are numerous other considerations in pursuit of our goals and objectives. Income taxes are applied at the highest rate schedule on plan distributions. What is the ?investment? price of protection?

As you can see, the true art of wealth management is the simultaneous coordination of all the financial circumstances that permeate the development and maintenance of wealth. Investment portfolios require more than good money managers. They require good income tax advisers.
Investment decisions involve more than good tax advice. They involve counsel on the types of entities that should hold the assets. Finally, sophisticated, comprehensive financial analysis will have a dramatic effect on the accumulation, preservation and distribution of wealth.

Individuals, who approach the management of their wealth with institutions that take a circumspect view, and have a dedicated team at the ready, will generally experience superior results.

Kirk Lynch, C.F.A., has more than 15 years of experience in wealth management. He manages CBIZ?s Wealth Management office in Denver and can be reached at (303) 796-2600 or klynch@cbiz.com.