Where’s the Value of Wealth Management: Tax Planning or Asset Management?

Abstract:     
For savers, the quality of an investment is measured by the efficiency with which it defers purchasing power to the future. This efficiency can in turn be measured by the real rate of return after tax (discounting for inflation) obtained on the investment.

Two main factors affect the real rate of return after tax: the allocation and management of assets, and tax planning.

Using a simple but realistic model, we show that, given the generally high levels of taxation and the nominal nature of the tax system, tax planning represents a source of value creation of roughly the same importance as the allocation and management of assets.

That does not mean that tax considerations should play an exclusive or even dominant role in wealth management, as many examples of misleading tax incentives show. But the high levels of taxation on wealth and its yield now imposed in many countries mean that tax aspects cannot be overlooked.

Number of Pages in PDF File: 15

Keywords: asset allocation, portfolio management, wealth management, tax planning

JEL Classification: E21, G11, G20, H24

working papers series