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SEI-BeingMoreTaxAware

VIEWS: 5 PAGES: 4

									Are You Doing Enough For Your Clients in Today’s Challenging Markets?
     Being More Tax-Aware Can Help Clients Keep More of What They Earn

The financial markets of today are raising the bar even higher for financial advisors like you – forcing you to deliver
increased value for your clients and further differentiate yourself within the highly competitive market.
One way to deliver greater client value and practice differentiation is by offering sound, tax-management solutions
and advice that save your clients money and create opportunities to attract new business for your practice.
Now is the right time to help them – especially coming off a record year of nearly $34 billion in taxes paid on
mutual fund gain distributions!
So how do you differentiate yourself from your peers amongst the deluge of tax-management product offerings?
One way to stand above the rest is to identify and clarify common and often costly misconceptions about tax-
management coupled with proven techniques and strategies.


      Common Misconceptions Around Tax-Management Strategies
 1    Low turnover in a mutual fund or                              3   Index mutual funds are
      manager is good for tax purposes,                                 highly tax efficient.
      while high turnover is bad.                                       An index mutual fund is still a mutual fund. It may
      Many clients believe that low turnover in a mutual fund           have lower turnover since it tracks an index, but any
      or by a manager is good for tax purposes, but that’s              gains that are recognized within the fund need to
      not accurate. Low turnover can mean paying less in                be paid out to the underlying investors. Also, large
      taxes if that turnover relates to profitable positions, but       distributions made to accommodate exiting investors
      higher turnover with an eye toward tax-management                 can result in larger-than-expected capital gain
      – such as utilizing loss harvesting – can be even better          distributions at the end of the year.
      for the taxable investor.


 2    Active mutual funds are tax inefficient.                      4   ETFs do not issue capital gains.
      Most funds try to serve both qualified and non-                   While some of the larger ETFs that track the S&P 500
      qualified investors within a single portfolio, and tax            Index or other well-known indices may not have a
      strategies designed to help qualified investors can               history of paying capital gains, some newer ETFs that
      prove detrimental to non-qualified investors. However,            are narrower in their focus, are paying taxable capital
      funds that employ specific, active tax-management                 gains which can have an impact on a client’s taxes.
      strategies can benefit the non-qualified accounts of
      individuals in high tax brackets.
                                                                                                                                                        PAGE 2

  2007 Doing Enough For Your Clients in Today’s Study of Advisory Firms
 Are YouMoss Adams – Compensation and Staffing Challenging Markets? Highlights and Insights


Taxes Can Suck the Life Out of                                                      Taxes Are a Drag
Investment Returns                                                                  Taxes often represent the largest detractor from
Your clients have every reason to try to avoid the taxes they                       performance of any investing factor, and together with
pay on capital gains and investment income.                                         investing fees and inflation, can put a serious dent in
                                                                                    any portfolio’s net returns.
Whatever an investor’s goal, taxes significantly reduce the
likelihood that the objective will be achieved. As Figure 1                         The threat of taxes is never comforting, but it’s less of a
illustrates, tax liability is not an abstract concept, but a real                   concern during long bull markets. As Figure 2 shows, during
threat to financial security for millions of investors. In this                     the 15 years ending in June 2000, the S&P 500 enjoyed an
example, taxes reduced investment earnings by nearly half.                          annualized return of roughly 18%. With performance this
                                                                                    robust, even the combined effect of fees, taxes and inflation
Taxes Reduce Performance Over Time – Growth of $100,000*                            couldn’t prevent strong, real growth in investors’ portfolios.
                                                 Before-Tax Portfolio: $2,995,824
$3,500,000 –

$3,000,000 –                                                                          S & P 500 InDEx
$2,500,000 –
                                                                                      15 Y E A RS EnD In g JunE 20 0 0
                             49% Lost to Taxes
$2,000,000 –                                                                          Annualized S&P 500 return                                      18%
$1,500,000 –
                                                                                       Minus Custody/Trading/Fees                                   (1%)
$1,000,000 –
                                                                                       Minus Taxes (25%)                                          (4.5%)
  $500,000 –
                                                  After-Tax Portfolio: $1,521,877      Minus Inflation                                              (3%)
       $0 –
          1979       1984      1989       1994         1999         2004    2007      Real (Net) Growth                                             9.5%
 Figure 1.
                                                                                      Figure 2.
 Source: Parametric Portfolio Associates: 60% Russell 3000;
 40% Lehman Aggregate; No Liquidation                                                 Source: Parametric. S&P 500 Index returns calculated using Factset.
                                                                                      Custody and fees are an estimate of those faced by a typical investor.
 No liquidation, interest income and dividends are taxed annually
 at historical top marginal tax rates; capital gains are realized at
 50% per year and are taxed at the historical long-term capital gains               This bright scenario evaporated with the end of the bull
 tax rate. Past performance is no guarantee of future results.
                                                                                    market, and from June 2000 to June 2007, the S&P 500’s
 *A hypothetical tax-free $100,000 portfolio (invested 60% in stocks and            formerly impressive annualized return was more in the
 40% in bonds) held for 28 years would have grown to nearly $3 million.
 If the portfolio was taxed like an average mutual fund, it would have lost         neighborhood of 9%.
 49% of its value, due to taxes paid and earnings lost on that money.
 Tax-managed investment strategies are designed to minimize capital
 gains distributions and maximize after-tax returns.                                  S & P 500 InDEx
                                                                                      15 Y E A RS EnD In g JunE 20 07

It’s important for clients to understand that when it                                 Annualized S&P 500 return                                       9%
comes to net investment returns, the mark of success                                   Minus Custody/Trading/Fees                                   (1%)
is not what you earn; it’s what you keep after taxes. And                              Minus Taxes (25%)                                         (2.25%)
because clients look to you to maximize their investment                               Minus Inflation                                              (2%)
performance, tax issues present you with a unique                                     Real (Net) Growth                                            3.75%
opportunity to add value to client relationships in many
                                                                                      Figure 3.
ways, including:
                                                                                      Source: Parametric. S&P 500 Index returns calculated using Factset.
                                                                                      Custody and fees are an estimate of those faced by a typical investor.
• Identifying tax-managed investment strategies for
  all of your clients’ assets whether you are currently
  managing them or not.                                                             Looking at Figure 3, we see that the 15-year period that
• Reviewing annual tax returns can be instrumental                                  ended in June 2007 delivered a much-more-modest
  in helping clients lower their tax bills.                                         annualized return. After fees, taxes and inflation, this weaker
                                                                                    market provided investors with real growth of just 3.75%.
                                                                                                                                      PAGE 3

  Are You Doing Enough For Your Clients in Today’s Challenging Markets?


The divergence between these two scenarios presents a
stark reminder that it is important for investors, and their                SEI’s Tax-Management Solutions
advisors, to aggressively do all they can to reduce the impact             Consistently Beat Their Benchmarks
of taxes on portfolio performance.                                  After-Tax Performance*
                                                                    Through 12/31/2007
This level of commitment is particularly appropriate if the                                                       1 YEAR   3 YEAR   5 YEAR
                                                                    SEI TS 100 Model                              6.47%    10.85%   15.50%
currently favorable tax environment does not continue into
                                                                      Morningstar 100% Equity Blend               5.85%    10.64%   15.36%
the future. We believe this to be the case for a number
of reasons:                                                         SEI TS 80 Model                               5.65%     9.16%   13.32%
                                                                      Morningstar 80/20 Blend                     4.88%     8.90%   13.16%
• Both marginal and capital gains tax rates are currently
                                                                    SEI TS 60 Model                               4.84%     7.43%   11.00%
  at historic lows.
                                                                      Morningstar 60/40 Blend                     3.93%     7.12%   10.81%
• The federal deficit is projected to grow to approximately
                                                                    SEI TS 40 Model                               3.99%     5.68%    8.71%
  $12 trillion by 2012.
                                                                      Morningstar 40/60 Blend                     2.96%     5.33%    8.49%
• Both presumptive presidential candidates have talked
                                                                   Past performance does not guarantee future results.
  about increasing taxes in some form.                              Figure 4.
• Starting in January 2011, taxes could revert to higher,           Performance assumes investment at the begining of the period
                                                                    indicated and reflects all recommended reallocations and changes
  pre-2003 levels.                                                  among the funds, including changes in investment managers and
                                                                    funds included in the model. Information on allocations among funds,
                                                                    reallocations and model changes is available upon request.
Turn to SEI for unique Tax-Management
Techniques and Solutions
                                                                  Unlike most product-oriented strategies, SEI’s Tax-
Clearly, tax management will continue to be a critical            Management Solutions are designed to reach higher
component in investors’ strategies over the lifetime of           after-tax returns by:
their investments. In order to ensure that you are doing
everything to help your clients save money on taxes, you          • Maximizing tax savings through separate accounts
need to adopt more than just a product-oriented investment          and tax-efficient mutual funds.
approach.                                                         • Employing an experienced tax overlay manager to
                                                                    serve as a “tax quarterback”.
As a pioneer in the practice of tax-aware investing, SEI
offers full turnkey solutions, utilizing multiple outside money   • Coordinating activity among equity managers with the
managers in fully diversified portfolios.                           goal of producing higher after-tax returns.
                                                                  • Generating positive after-tax alpha (above the manager
  SEI’s Tax-Management Turnkey Solutions                            alpha) through –
                                                                         → Tax-aware trading,
                                                                         → Offsetting gains with losses,
                                  INTEGRATED
  TAX-MANAGED    TAX-MANAGED       MANAGED       STRUCTURED              → Loss harvesting,
    FUND OF      MUTUAL FUND        ACCOUNT       MUNI BOND
     FUNDS        PORTFOLIOS       PROGRAMS      PORTFOLIOS              → Deferring the realization of gains and accelerating
                                     (IMAP)
                                                                           the realization of losses, and
                                                                         → Tax-lot accounting.
                                                                  • Leveraging tax-intelligent accounting.


   SEI’s Tax-Management Solutions can help you minimize taxes in your clients’ portfolios and grow your business.
     Call 1-888-SEI-AnSWERS (1-888-734-2679) to speak with one of our experienced Practice Consultants,
                                 or visit www.seic.com/advisors for more information.
                                         There’s no obligation, just opportunity.
About the SEI Advisor network
SEI Advisor Network provides independent advisors with outsourced wealth management platforms that are designed
to meet the demands of a new generation of wealthy clients. In an evolving wealth management industry, the Network
offers an end-to-end process for successfully transforming their clients’ businesses in every critical area, including
marketing, practice management, investment strategy and client relationship platforms. The SEI Advisor Network is
a strategic business unit of SEI.




*After-Tax Performance Benchmark Blends
TS 100
ü Morningstar categories utilized to mirror SEI TS 100 model – Large Cap Blend (61%); Small Cap Blend (8%); Foreign Large Blend
  (20%); Diversified Emerging Markets (10%); Tax Free Money Market (1%)
ü 35% federal / 15% cap gains rates used; no liquidation; all dividends and income was reinvested
TS 80
ü Morningstar categories utilized to mirror SEI TS 80 model – Large Cap Blend (49%); Small Cap Blend (7%); Foreign Large Blend
  (16%); Diversified Emerging Markets (8%); Muni National Interm (12%); High Yield Bond (2%); World Bond (3%); Emerging
  Markets Bond (2%); Tax Free Money Market (1%)
ü 35% federal / 15% cap gains rates used; no liquidation; all dividends and income was reinvested
TS 60
ü Morningstar categories utilized to mirror SEI TS 60 model – Large Cap Blend (37%); Small Cap Blend (5%); Foreign Large Blend
  (12%); Diversified Emerging Markets (6%); Muni National Interm (25%); High Yield Bond (4%); World Bond (6%); Emerging
  Markets Bond (4%); Tax Free Money Market (1%)
ü 35% federal / 15% cap gains rates used; no liquidation; all dividends and income was reinvested
TS 40
ü Morningstar categories utilized to mirror SEI TS 40 model – Large Cap Blend (25%); Small Cap Blend (3%); Foreign Large Blend
  (8%); Diversified Emerging Markets (4%); Muni National Interm (38%); High Yield Bond (6%); World Bond (9%); Emerging
  Markets Bond (6%); Tax Free Money Market (1%)
ü 35% federal / 15% cap gains rates used; no liquidation; all dividends and income was reinvested
Neither SEI nor its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication
cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or
marketing of the matters addressed herein: and (iii) you should seek advice based on your particular circumstances from an independent
tax advisor. This material represents an assessment of the market environment at a specific point in time and is not intended to be
a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or
investment advice. This information is for educational purposes only. There are risks involved with investing, including possible loss of
principal. SEI Investments Management Corporation is the adviser to the SEI funds, which are distributed by SEI Investments Distribution
Co (SIDCO). SIMC and SIDCO, are wholly owned subsidiaries of SEI Investments Company. Services provided by SEI Investment
Company and its wholly owned subsidiaries. SEI Advisor Network is an internal business unit of SEI Investments Company.
Index returns are for illustrative purposes only and do not represent actual model performance. Index performance returns do not
reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past
performance does not guarantee future results.




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                                                                                                                                    (6/08)

								
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