Wed Oct 16 2024, by Tyler Gardner

5 Myths About Investment Managers and Tax Savings

The next time you think that by working with an investment manager you'll save on taxes, just remember the following five things. I'm Tyler, a former financial advisor and portfolio manager, and I create financial content for free so you don’t have to pay for it.

1. Trading Incentives

In order to justify having their paws in your portfolio, active managers are incentivized to trade your account. They have to make it look like they’re doing something fancy that you don’t have the knowledge or skill to do.

2. Realizing Capital Gains

By trading your account, they are consistently and repeatedly realizing capital gains, a.k.a. generating more annual taxes for you.

3. Offset Gains with Losses

Then they’ll tell you not to worry about it because they’ll offset those gains by locking in some losses. But remember, you don’t actually lose money in the market unless you lock in losses.

4. Low-Cost Index Funds

They also won’t tell you that if you had just invested in a low-cost index fund on your own, you wouldn’t need to tax loss harvest at all, because you wouldn’t have sold it and realized any capital gains that needed offsetting.

5. The Annual Cost of Active Management

What they also won’t tell you is that, on average, due to tax inefficiencies alone, active managers actually tend to lose 1.2% annually compared to a low-cost index fund.

So next time someone tells you that a financial advisor can help you minimize your taxes, simply ask, “What taxes?” If any of this is helpful, please like and follow, and I'll keep trying to get you one step closer to where you need to be.

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