Year-End Tax Planning: Leveraging Risk Tolerance for Optimal Client Outcomes

Year-End Tax Planning: Leveraging Risk Tolerance for Optimal Client Outcomes

As the year comes to a close, it’s the perfect time to connect with your clients and reassess their financial picture. It’s the chance to go beyond a simple review to understand their evolving goals, priorities, and multi-dimensional risk tolerance. Engage them in open conversations that uncover the drivers of their financial decisions.

These discussions will not only strengthen your client relationships but also provide valuable insights for year-end tax planning. By understanding the “why” behind their choices, you can better advise them on strategies that balance tax efficiency with their individual financial goals and risk tolerance. 

In this blog post, we’ll explore the role risk tolerance plays in effective year-end tax planning and offer a few common-sense tips.

Educate Clients About How Risk Tolerance Impacts Tax Strategies

While understanding a client’s risk tolerance is crucial for effective tax planning, many clients may not have a clear grasp of their risk profile or how it influences their investment decisions. You can use this time to explain (or re-explain) the concept of risk tolerance in simple terms — help them understand it’s about their financial ability to take risk (how much they can afford to lose) and their willingness to accept risk (psychological comfort level with market fluctuations.)

TIP: Financial ability to take risk commonly evolves over time as someone migrates toward and through their financial chronology — expenditures, goals, anticipated in-flows, savings, etc. Schedule regular reviews to reassess client risk profiles and adjust tax strategies accordingly.

A client’s holistic risk level may be best differentiated across accounts of varying tax status based on the likely chronology of usage. For example, a client using a large portion of their assets in the next year or so to purchase a property should often take less risk amongst the taxable accounts that will support the large distribution. Advisors won’t typically recommend pilfering the client’s retirement accounts early if taxable assets can be used for that goal. 

Where most advisors get stuck is how to appropriately measure the differential and demonstrate that it was done diligently. But with the right technology, advisors can provide significant value by finding the optimal balance between tax efficiency and their client’s financial goals, even when the investments are spread across different locations

TIP: Tolerisk measures financial ability mathematically while using a standardized (benchmark stocks/bonds split) scoring scale so it’s easy to show clients how this advice was determined. 

Risk Management & Tax-Efficient Investing

Risk and return are inextricably linked in any investment strategy and tax planning should be no exception. Aligning tax planning with a client’s risk profile is essential for enhancing their overall financial well-being. This means carefully considering how different tax-efficient investment strategies fit within their risk tolerance and capacity.

For instance, a client who owns taxable investments with a very low cost basis might be tempted to forgo traditional diversification that would require a large tax bill. Being able to measure the trade off in returns on the balancing portfolio to achieve the same equivalent risk level facilitates the kind of discussion that clients appreciate from their advisor. In the end, advisors with the best technology are armed to more easily take complex topics around risk and make them meaningful to clients. This drives better informed decisions and greater confidence in the advisory process. Advisors cite client confidence as one of the most important factors in increasing client retention and referrals.  

Best Practices for Informed Decision-Making

To effectively guide clients regarding tax-efficient investments and year-end planning, you can leverage advanced risk assessment tools and techniques.

Tolerisk, for example, offers a comprehensive approach that incorporates factors such as financial longevity assessments, portfolio comparison tools, and probability of returns visualizations. Our platform can help: 

• Identify Hidden Risks: Uncover clients who may be unknowingly taking on excessive risk and could benefit from tax-advantaged strategies that offer more stability.
• Tailor Recommendations: Analyze where to take risks to be consistent with the client’s financial ability across accounts of differing tax status as well as use and purpose.  
• Enhance Communication: Clearly illustrate the potential impact of different risk and tax strategies on financial longevity, fostering greater understanding and trust.

TIP: Use Tolerisk’s visualizations to clearly show clients how different risk levels could impact their portfolio’s potential performance in the coming year. To see this in action, contact us to learn more.