Goals-Based Wealth Management: An Integrated and Practical Approach to Changing the Structure of Wealth Advisory Practices

Chapter 2An Example of a Crucial Interaction: Tax-Efficiency

The first professional article I ever wrote was entitled “The Upside-Down World of Tax-Awareness” and was published by Trusts and Estates, in 1997.¹ At that time, the classic article by Robert Arnott and Robert Jeffrey had already been published (it came out in 1993) and the fundamental question had been asked: “Is your alpha big enough to cover its taxes?”² Yet, I can vouch for the fact that practitioners, although intellectually interested in the question the article raised, seemed singularly unwilling to change their ways. In fact, when J.P. Morgan introduced the first active tax-aware equity investment process a little more than eighteen months after the Arnott and Jeffrey article was published, it really seemed to us that we were blazing a trail and yet only got minimal press coverage for it!

In this second chapter, we will be looking more deeply at the issue of tax-efficiency and the ways in which it forces us to change the way we think. A book could be written on this topic—and in fact a few of them have been—but our point is not to take our readers to the full depth of the issue, but rather to use it as a proxy for the way in which considering the interactions identified in Chapter 1 require practitioners and families alike to revisit the way they have been working. We'll start with a simple exposition of the effect of the tax bite on compound returns, and then focus on three ways in which our thinking must ...