Taxes: Are you having the RIGHT conversation with your clients?

Are you having the right conversations with your clients?

What is the purpose of your clients’ investments? Is it simply to save as much as they can? Are there specific goals for their investment accounts?

Our recent advisor survey revealed that 73% of advisors reported that less than half of their clients’ taxable accounts are currently being tax managed. And 38% of advisors indicated that less than 20% of their clients’ taxable accounts are being tax-managed.

Too often, advisors and clients alike overlook a critical factor in investment success: taxes. Ignoring this may lead to inflated expectations and unmet financial goals. Especially when investments are meant to fund real-life objectives—like healthcare, retirement income, or other financial needs, it’s not just about growing money. It’s about accessing it. And for taxable accounts, access often means liquidation, which often means taxes.

Why does it matter?

• Healthcare costs are rising: Fidelity estimates a 65-year-old retiring this year will spend an average of $165,000 on healthcare in retirement—more than double what it was in 2002.¹
• Withdrawals drive liquidations: The 4% withdrawal rule of thumb assumes systematic withdrawals of retirement savings annually. At some point, this typically triggers asset sales and potential tax events.
• And almost half of mutual fund assets are taxable: According to data from the Investment Company Institute, nearly 50% of mutual fund assets reside in taxable accounts.²
• The odds of facing a tax bill from these types of withdrawals are high.

If you’re not modeling taxes and including them in your conversations, your clients may overestimate their real investment return—and their ability to meet their goals.

Without a clear understanding of the tax impact on their investments, clients may have an inflated sense of how likely they are to achieve their financial goals. Unfortunately, many advisors may be contributing to this disconnect—often unintentionally. According to a recent Cerulli report, 60% of advisors consider themselves “comprehensive financial planners,” but in reality, the survey shows only 25% actually operate that way. That’s a significant gap—and it means many clients may not be receiving the in-depth guidance they need, especially when it comes to planning for the tax implications of their investment strategies.³

The tax drag is real

The below analysis shows a significant difference in after-tax vs. pre-tax returns with a focus on returns after liquidation.

Over the last 10 years, U.S. equity fund investors saw – on average – an annualized 2.5% of return lost to taxes, reducing a 9.5% pre-tax return to just 7.0%. That’s 26% of return lost to taxes.

This average annualized lost return of 2.5%  reflects the average fund being sold and the taxes paid on the 10-year appreciation plus any income along the way.

For Non-U.S. Equity and Taxable Bond funds, the tax impact was even worse. These category averages include both active and passive funds and ETFs.

Not talking about these tax impacts does not make them go away. If your clients have a purpose for their investments, these post-liquidation impacts can be material.

What advisors should do

1. Acknowledge the tax impact

Comprehensive planning means going beyond asset allocation and returns. At Frontier Asset Management, we report both pre- and post-liquidation after-tax returns every quarter for our Tax-Managed Strategies. Showing pre-tax return can be helpful, but for taxable investors – it is the after-tax returns that matter. Remember, clients can’t live on pre-tax returns.

We report after-tax returns based on:

• Pre-Liquidation: Taxes from income, dividends, and rebalancing
• Post-Liquidation: Includes the taxes above plus any taxes related to change in value of the investments upon liquidating or selling the investment.

For both of these types of return, we publish the amounts at both the highest income level (greater than $751,600 for Married Filing Joint) and a more middle taxable income of $240,000. Publishing these amounts are important for two reasons:

• For you to measure how we are doing on our value proposition, and
• To communicate to your clients their progress toward their financial goals for the taxable accounts.

2. Know your clients’ brackets – and fill them thoughtfully 

Clients’ tax brackets and tax rates may change—especially in retirement. Consider a couple with taxable income of $610,000 today made up of $510,000 from W-2 income, $20,000 of Short-Term Capital Gains or Interest Income, and $80,000 of Long-Term Capital Gains. In retirement, without the W-2 income, they may fall to much lower brackets—reducing taxes on future investment income.

• Ordinary income could drop from 40.8% to 24% or 22% or 12%.
• Long-term capital gains could fall from 23.8% to 15% or even 0%

Planning withdrawals with this in mind can mean thousands—sometimes hundreds of thousands—saved over a lifetime.

3. Prioritize after-tax wealth, not just tax avoidance 

There’s a difference between minimizing taxes and maximizing after-tax returns. At Frontier, we start with managing risk, then focus on maximizing after-tax results.

It’s not about finding the least-taxed investment—it’s about helping clients maximize after-tax wealth over time.

Putting it together

No one likes taxes. But pretending they don’t exist—or not discussing them openly—can erode client trust and investment outcomes. Don’t let your planning stop at winning the account and asset growth. Help your clients understand their after-tax reality.

Because in the end, they can’t live on pre-tax returns.