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Asset Location Can Be as Important as Asset Allocation
Article publishedBy: Holly Swan  |  Article published on:October 4, 2023

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Asset Location Can Be as Important as Asset Allocation

By Holly SwanExecutive Director, Advisor Institute

While clients may know the importance of asset allocation and how it can impact pre-tax returns, many overlook asset location, which can strongly influence what remains after taxes. A comprehensive investment plan should help improve after-tax outcomes by coordinating asset allocation with asset location.

Demonstrate your value with prospective clients, particularly those who are self-directed, by illustrating the importance of asset location with this explanation:

"If asset allocation is what you invest in, asset location is where those investments are placed. Owning the 'right investments' in the right accounts can influence returns (two steps forward). Owning the 'right investments' in the wrong accounts can impose tax costs (one step back)."

Asset location refers to the type of account that holds an investment, such as tax-free accounts including Roth IRAs and Roth 401(k)s; tax-deferred accounts including traditional IRAs and retirement plans; and taxable accounts such as brokerages.

Consider tax-friendly accounts like Roth and traditional IRAs and 401(k)s for investments that generate high levels of income, or portfolios that require ongoing rebalancing or are subject to substantial capital gains.

Consider taxable brokerage accounts for tax-loss harvesting opportunities, which let clients offset realized gains with realized losses in the same or another taxable account they own.*

While asset allocation decisions may explain the majority of a client's pre-tax returns, tax-smart asset location helps them keep more of what they've earned.

Bottom line: Help prospective clients improve after-tax returns by demonstrating how asset location can be as important as asset allocation.