Fintech founder wants more financial advisors to consider taxes

The former CEO of Personal Capital, Intuit TurboTax and PayPal is spreading a simple message to financial advisors and investors: "It's not what you earn, it's what you keep."

Entrepreneur Bill Harris begins the 2024 edition of the "Investment Tax Guide" — a much more extensive version of his 2017 book by the same name — with that phrase, along with his views that "Tax is the single most important driver of investment performance" and "In many cases, tax strategy is more important than investment strategy." In an interview, he suggested that advisors and investors read about 50 or 60 pages, or maybe 80, rather than the entire book.

"It's 300 pages, but it's not meant to be read [straight through]. It's meant to be cherry-picked," Harris said. "You should be able to get everything that's relevant to you out of that."

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The intersection of wealth management with tax services is driving major M&A deals in the industry and more widespread adoption of methods such as loss harvesting and charitable donor-advised funds. Harris — who stepped down from being CEO of digital advice provider Personal Capital in 2017 eight years after launching the firm and three years before Empower Retirement bought it for $1 billion — and other adherents of tax-focused investing argue that many people focus too much on pretax yield and too little on the impact of paying Uncle Sam.

For instance, the largest estates pay taxes at a 40% federal rate when transferring to the next generation, Ray Morrill, a senior director of wealth management in the Los Angeles office of Choreo, noted in an interview.

"The lack of consideration for most folks when it comes to after-tax returns and the importance of taxes on investment decisions is drastic," Morrill said. "The savings number becomes very, very material, especially as the years go by. The importance of that is going to be much more dramatic than earning 5% versus 7%, yet the latter is what individuals want to focus on more often."

In the book, Harris presents brief tutorials on 10 tax strategies, which the table of contents suggests to read before skimming through more detailed sections on topics such as state and federal duties, investment assets, deductions and loans. The 10 tax strategies are: "tax-loss harvesting, tax-gain deferral, tax-exempt securities, tax-advantaged accounts, asset location, avoid short-term gains, avoid mutual funds, tax-efficient credit, education, gifts and estate and donor-advised funds."

"By using the right tax strategies, you can slash the taxes on your investments from as high as 50% to as low as zero," Harris writes. "This may surprise you, because no one in the investment industry ever tells you about taxes. Not brokers, not financial advisors, not firms selling mutual funds and ETFs. Everyone talks about pre-tax returns — the money you make before you pay taxes. No one talks about after-tax returns — the money you actually keep."

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While Harris acknowledged that advisors are likely to be familiar with municipal bonds and individual retirement accounts, he said that many just aren't tax experts and there's a need for better technology enabling planners to use all of the strategies at once. 

"This is a very consequential issue for investors," Harris said. "Most people just don't understand it, and that's because the U.S. tax code, uniquely amongst developed nations, is remarkably complex."

The eighth financial technology group Harris has launched in his three-decade career, banking and investment platform Evergreen, aims to build software that could help advisors and investors carry out portfolio optimization for tax savings.

"The obstacle is that designing a well-diversified portfolio of one or two hundred individual assets, then managing all the tax actions throughout the year, is a difficult challenge," Harris writes in the book. "So you should look for a financial advisor who offers a fully tax-aware managed account. They are few, but worth finding. With a team of tech veterans and financial professionals, I am building technology to do this on an automated basis, and so are one or two others. You could think of this as an ultra-personalized tax-minimized version of index investing. I believe this is the future of investing."