Nov 7 The election results have given financial
advisers two things to plan for: higher taxes for the wealthy
and likely volatility in the markets.
Neither will be welcomed by investors, and larger questions
remain surrounding the looming fiscal cliff. But for advisers,
who have been hamstrung by a deadlocked Washington, the little
clarity the election has brought is better than nothing.
"I don't think I've seen as much uncertainty in all the
years I've been doing this," said Mitch Drossman, a nearly
three-decade veteran of the industry and head of national wealth
strategies for U.S. Trust, a division of Bank of America Corp.
. "Clients are just begging for answers."
Post-election, advisers are focusing on lowering their
clients' tax bills and protecting them against market swings
that are expected for the rest of this year.
Conventional wisdom has it that people should defer taxes
whenever possible. But advisers will be making exceptions to
that rule now that the elections have killed what little hope
the wealthy had for avoiding higher taxes next year.
Advisers are encouraging clients make big gifts to their
heirs before the likely cutback of the gift tax exemption in
2013. Currently, Americans can give $5.12 million to their heirs
tax free, and double that for married couples pooling their
resources. Next year that exemption is slated to fall to its
lowest level since 2002 - $1 million.
Lawmakers may find a middle ground on this change, but
wealth management experts agree that this benefit will probably
never again be as generous.
Clients "look at this as perhaps the golden age of estate
planning," said U.S. Trust's Drossman, who said gifting levels
are currently the highest he has ever seen.
Another tax strategy expected to pick up steam is converting
a traditional tax-deferred IRA into a Roth IRA, in which taxes
are paid upfront but not owed later.
This is a good fit for clients who won't need the money for
a while - say a decade or more - so the interest has time to
make up for the initial t a x bill, said Richard Weeks, managing
director at HighTower Advisors' VWG Wealth Management in Vienna,
Virginia. The conversion isn't a good fit for clients who may be
in a lower tax bracket at and during retirement, Weeks noted.
Advisers are finding ways for clients to take advantage of
current capital gains rates before their scheduled increase from
15 percent at year end, to as high as 39.6 percent.
Investors with concentrated positions in a highly
appreciated stock are in most cases wise to sell, b ut shouldn't
let the tax tail wag the investment dog, advisers said. In
short, don't give up a big stock gain to cover a small tax loss,
During the debt-ceiling crisis in August 2011, the Dow Jones
Industrial Average posted four straight days of 400-plus point
swings. That kind of volatility could reappear at the end of
this year as legislators wrestle over federal spending cuts and
tax hikes that will automatically start at year end, advisers
To prepare, VWG Wealth's Weeks said his firm, which manages
$750 million in client assets, has been looking to diversify
away from index-based funds and into non-dollar denominated
assets, like equity holdings in emerging markets. He's also been
looking for fund managers who have a record of outperforming in
"I don't think now is the time to add risk assets," he said.
Other advisers were more optimistic.
Thomas Moran, senior portfolio manager of the Moran Edwards
Asset Management Group, part of Wells Fargo Advisors, said he's
hopeful that Washington will resolve the fiscal cliff crisis,
and in turn, unlock equities from their currently positions,
which he sees as undervalued. That's motivated him to move into
more growth-oriented sectors, like technology and consumer
The tough part for optimists will be converting clients, who
are still stuck in "obsessive crisis disorder" mode, according
to Tony Roth, head of wealth management strategies at UBS Wealth
Management. [ID: nL1E8LIBN7]
Advisers have to shake clients out of the pattern of
constantly worrying about the next big issue, he said. There is
hope they'll finally listen: In UBS' most recent Investor Watch
Survey, 50 percent of clients said they wanted to review their
plans right after the election.
"I think there is a desire on the part of investors to get
re-engaged, and it's up to the advisers to get them off the
sidelines," Roth said.