Tax Advantages Still Challenge Investors

A survey of mass affluent investors found that understanding of tax-advantaged solutions such as annuities, life insurance and 401(k) plans varies among demographic groups. The desire for more education, plans to meet with an adviser this tax season and the implications of the new tax code are additional investor concerns.

“Advisers need to recognize that not all clients share the same perspective when considering the implications of new taxes,” said Eric Henderson, senior vice president of life insurance and annuities for Nationwide Financial. “Our survey suggests that, while some may be very receptive to considering portfolio adjustments, others may need a little more proactive education from their adviser.”

While women are more optimistic, the survey found they are less confident in their knowledge.  Women are less likely than men to expect a significant decrease in household income or asset value as a result of tax code changes (16% vs. 31%), and were less likely than men to have met with a financial adviser to talk about how new taxes may impact their portfolio, with just one in 20 having done so at the time of the survey (5% women vs. 13% men).

Additionally, half of female survey respondents (52%) say they are somewhat or very concerned that changes to the tax code will negatively impact their portfolio compared to seven in 10 male respondents (69%) who feel the same way. Women express less confidence than male respondents that they completely understand the tax advantages of annuities (17% vs. 27%), life insurance (23% vs. 34%) or 401(k) plans (38% vs. 52%).

“Time will tell if the comparative optimism of female survey respondents is warranted,” Henderson said. “In the meantime, it’s critical for female investors and their advisers to discuss new taxes. For most married couples, the wife is more likely to outlive her income, so it is important for both spouses to be active in managing the portfolio. The lack of knowledge professed by women respondents may be attributed to what appears to be an underutilization of the financial adviser relationship; however our survey data suggests that women may be more receptive than men to learning more about tax-advantaged products.”

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Middle-Aged Respondents More Receptive

Middle-aged survey respondents (ages 35-54) are less likely than those older to say they completely or somewhat understand the tax advantages of annuities (56% vs. 73%), but are twice as likely to consider purchasing another tax-deferred product (31% vs. 14%). This group of respondents is more likely than those who are 55 or older to want more education on annuities (51% vs. 37%), life insurance (23% vs. 14%) or 401(k) plans (30% vs. 17%). Middle-aged respondents are less resistant to making portfolio adjustments, with only about one third (31%) saying they won’t make any portfolio adjustments as a result of new taxes compared to nearly half (45%) of respondents 55 or older. 

“Middle-aged respondents want to enhance their understanding of tax deferred products and seem to be more open to making changes to their portfolio,” Henderson said.

Despite a less receptive mindset, 84% of those older than 55 say they are comfortable talking to their financial adviser about taxes, which suggests they are at least open to having a conversation, the survey found.  

(Cont’d…)

The Upper-Middle Income Is Open to Adjustments 

Respondents with $150,000 to $249,000 in income appear more optimistic and receptive to making portfolio adjustments. More than half (52%) believe changes can be made to prepare their portfolio for tax code changes, compared to just 36% of all survey respondents. Half (50%) of respondents with $150,000 to $249,000 in income want more education on annuities, compared with 41% of the total survey population.

“According to our survey data, men and women ages 35 to 64 with income of $150,000 to $249,000 may represent the ripest sales opportunities for advisers,” Henderson said. “However, it’s important to keep in mind that most mass affluent investors will be impacted by the changing tax landscape. Unfortunately, six in 10 (60%) survey respondents say they either won’t or are unsure if they will meet with a financial adviser to discuss taxes, so it’s up to advisers to provide proactive counsel to help all their clients understand potential opportunities—even if certain clients may not currently acknowledge a need to have this conversation.”

The study was conducted online by Harris Interactive between September 28 and October 5. The respondents were 751 adults ages 18 and older, with $250,000 or more in annual household income or investable assets. The data was collected before the election, and respondents were asked to answer questions assuming both potential outcomes. The data given here is from responses in which respondents assumed the Obama would be re-elected.