Jeffrey Schulte

Tuesday, 25 January 2005 19:00

Back to basics

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

To most, wealth management has become a more eloquent contemporary phrase to replace yesterday's now-mundane terms like money management or portfolio management. Unfortunately, in the industry's drive to verbally outpromote each other, the true art of wealth management has been commandeered.

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?

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

If the equity portion of your portfolio 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 are now subjected to ordinary income tax. The top bracket is currently 35 percent. While no one can forecast future tax rates, history creates a reason to be cynical about higher rates.

Perhaps this should give us pause as to where to allocate equity investments. Perhaps we should consider tactical adjustments as to how we choose and deploy equity style managers. For example, active managers that 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 taxable holdings.

When you do look to investment savings for income, does a qualified dividend taxed at 15 percent represent an expedient opportunity? Compare this rate to a withdrawal from a profit-sharing plan presently taxed at a top rate of 35 percent. One strategy is to place bonds in your profit-sharing plan because they will be taxed as ordinary income.

And since we now tend to live longer, inflation protection is a bigger retirement consideration. Even at older ages, some participation in the equity market remains prudent. Sophisticated tax plans can influence not only asset allocation decisions but also asset type selections. So consider the "actual residence" of the financial instruments, inside or outside of tax-deferred vehicles.

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

Should you contemplate some degree of asset protection in your wealth management plans? Many people have been advised to protect as much of their savings as possible in profit-sharing or other qualified plans. If this were the only wealth management criteria, it would be a sound concept. However, there are other considerations that lead to reaching one's goals. Income taxes are applied at the highest rate schedule on plan distributions, so what is the "investment" price of protection?

An attorney's counsel may add a valuable perspective to a wealth management strategy. What if a trust could be created that also offered creditor protection? What if this were taxed as if you held the trust's portfolio directly? Could this provide additional creditor protection yet maintain flexibility to balance tax and investment plans?

What about estate taxes? Would this trust also be a useful estate planning vehicle? Yes, if estate tax issues are a dimension of your wealth that require management. Certain trusts can provide creditor protection and shield the corpus from your estate taxes.

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 also require good income tax advisers. Investment decisions involve more than good tax advice; they also involve counsel on the types of entities that should hold the assets.

Sophisticated and 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.

Jeff Schulte is a Chartered Financial Consultant, ChFC, and president of CBIZ Wealth Management. CBIZ, a publicly traded company and the 10th largest accounting firm nationally, provides a wide range of assurance, tax and consulting services to individuals and to small and mid-sized companies. Reach Schulte at or (610) 862-2387.