Financial advisors can deliver value to clients in 2025 by closely watching the political debate around taxes — and restraining themselves a bit, a Vanguard practice management expert said.
With so many unknowns about the details and impact of the extension of the Tax Cuts and Jobs Act, the "worst thing an advisor could do" would be to change their clients' portfolios based on a prediction, according to Fran Kinniry, a principal and the head of the Vanguard Investment Advisory Research Center as the lead author of the annual
"The key is not to speculate, but to implement portfolio changes to take advantage of tax policy once it becomes law," Kinniry said. "It's another reason why you may want
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For the first time, Vanguard's annual study, which tracks the quantifiable value advisors can offer their clients, calculated the specific potential
Kinniry also pointed out a key statistical difference in investing today compared to the first edition of the report in 2001: the average expense ratio for equities is down to 34 from 97; those of bonds have dropped to 32 from 79. That means that investors today are paying $116 billion less each year in fees today than a quarter century earlier.
The biggest shift in the profession over that span revolves around how the discussion used to focus on which funds to pick and what areas of capital markets showed the most bullish outlook. In other words, it was "a lot around things that really have a low probability of success," Kinniry said. The conversation evolved from "negative-sum games and low probability games" to "almost all positive-sum games and positive-value activities," he added, referring to methods such as
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Here's Vanguard's new breakdown of the potential areas of added value that advisors bring to their clients, as part of its calculation that the total number could reach or exceed 3% in additional after-tax returns:
- Behavioral advice and coaching: up to 200 bps or more
- Tax-loss harvesting: up to 150 bps or more
- Tax-efficient retirement planning: up to 100 bps or more
- Investment selection: 0 to 100 basis points
- Asset location: 0 to 60 bps
- Portfolio rebalancing: 12 bps
- Broad, diversified funds/ETFs: greater than 0 bps
- "Total return versus income investing": greater than 0 bps
The often-cited study has always occupied an important place in the planning profession based on Vanguard's legacy as one of the key actors in the movement of investors toward lower-cost, passive strategies and dominant position as one of the world's largest asset managers. Its specific highlighting of tax-loss harvesting this year reflects
"I've long argued that people want those tax savings. They don't want to pay Uncle Sam a dollar more than they should," Henry said. "It's a reminder that we as advisors play that critical role of technical proficiency, as well as the emotional guidance that leads to long-term success."
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Tax-loss harvesting speaks to both those technical and emotional sides of investing, since the concept goes against the basic and popular notion that gains in value are always the main goal. Those losses can offset other capital gains that would otherwise come with a higher tax burden, especially when advisors and their clients invest in particular stocks directly rather than across entire indices, Kinniry noted. Then they're taking advantage of drops in net asset value that occur because "the dispersion of securities is extreme," even in a year like 2024 that saw the S&P 500 jump more than 23%, he said.
"By holding the securities directly, instead of having one NAV or one price you have all the prices of the securities," Kinniry said. "We use daily tax-loss harvesting and that allows us to go in and harvest losses."
Investing frequently upends the conventional wisdom — such as the many experts who forecasted
"What happens is, after you experience negative returns, it's just like any other behavior: If you touch a hot stove, you want to seek safety," he said. "The advisor as a trusted coach can help mitigate that."
