Thursday, 20 February 2025
By Romain Faraut, Director of the Swiss Market at Croesus and Nabil Hatimy, Director and Head of Clients Delivery & Partnerships at Indigita SA
Effective portfolio management goes beyond selecting suitable financial products and optimising asset allocation—it must also account for tax efficiency. By integrating a client’s tax residency into investment decisions, portfolio managers can enhance after-tax returns and mitigate unnecessary tax burdens.
In today's economic climate, where governments are actively seeking new revenue streams to offset mounting debt, tax regulations on financial products are becoming increasingly complex and numerous. This evolution directly impacts capital mobility, prompting wealthy individuals to relocate their tax residences to jurisdictions offering more favorable fiscal conditions. Frequent changes in taxation laws only reinforce this trend, making tax-efficient portfolio management a crucial aspect of modern wealth management.
At the same time, the wealth management industry is undergoing significant consolidation due to shrinking profit margins. Private banks are continuously innovating to differentiate themselves from the competition and strengthen their commercial advantages.
One key strategy involves offering highly customised services, which were once reserved exclusively for ultra-high-net-worth clients (UHNWI), to a broader clientele. This shift has led to a growing emphasis on tax-efficient portfolio management. Formerly unattainable due to the resources it required, this large-scale personalisation is now accessible to any wealth management firm equipped with the right technology tools.
The Importance of Tax-Efficient Portfolio Management
Traditionally, portfolio management has focused on product characteristics, client suitability, and strategic asset allocation. However, modern digital tools have transformed this process. Today, tax residency is a crucial parameter in investment decisions, ensuring financial products are assessed based on their tax implications within the client’s jurisdiction. This approach allows for more precise and personalised management with portfolio rebalancing and asset selection.
Leveraging Tax Intelligence in Portfolio Management
To navigate the complexities of global taxation, financial institutions are increasingly turning to specialised tax intelligence. Tax advisory firms provide tax ratings for financial products from an international perspective, helping wealth managers evaluate tax efficiency across multiple jurisdictions.
By integrating these tax ratings into wealth management banking systems via APIs, financial institutions can seamlessly incorporate tax considerations into centralised wealth management platforms, investment advisory services, and core banking systems. This technology-driven approach empowers portfolio managers to proactively manage tax-related risks, enhance portfolio performance, and deliver greater value to their clients.
Win-win situation for Clients and Financial Institutions
A tax-efficient portfolio strategy provides clients with the assurance that their investments are managed in accordance with their specific tax situation. It also gives them greater control over the taxes imposed by their tax residency, rather than being subject to unexpected liabilities from foreign jurisdictions. For wealth management firms, this approach significantly enhances the client experience, reducing unpleasant surprises related to tax liabilities on investment holdings and transactions.
Case Study: The Role of the Banking Ombudsman
Failure to implement tax-efficient portfolio management can lead to disputes, some of which may be escalated to financial ombudsman services. A relevant case handled by the Swiss Banking Ombudsman involved an elderly client residing abroad who had entrusted her wealth management to a Swiss bank. Without notifying her, the bank liquidated her entire portfolio and reinvested the proceeds into an internal fund, generating substantial capital gains. Unfortunately, as the client resided in a jurisdiction where capital gains were taxable, she incurred a significant tax burden.
Initially, the bank refused to compensate the client, arguing that it was not obligated to consider individual tax circumstances. However, following mediation, the bank agreed to cover 50% of the taxes owed due to the portfolio restructuring.
This case underscores the importance of integrating tax considerations into wealth management strategies. A proactive approach to tax efficiency not only enhances post-tax returns for clients but also strengthens trust between clients and financial institutions while minimizing legal and reputational risks.
The Future of Tax-Efficient Wealth Management
In an increasingly complex and evolving global tax environment, tax-efficient portfolio management has become a necessity rather than a luxury. Financial institutions must develop a deep understanding of international tax regulations and integrate these considerations into their investment and wealth management strategies. Those that successfully adopt this approach will provide substantial value to their clients while safeguarding themselves from costly disputes and reputational damage.
By leveraging cutting-edge financial technology and global tax intelligence, banks and wealth managers can ensure compliance with tax regulations, optimise after-tax returns, and offer a personalised, transparent client experience. As tax policies continue to evolve, embracing tax-efficient portfolio management will be a key differentiator in the competitive landscape of modern wealth management.
What Indigita and Croesus Can Do for You
In collaboration with Croesus, Indigita simplifies tax-efficient portfolio management by integrating tax treatment and suitability data for 80 countries directly into portfolio rebalancing workflows. This seamless solution helps wealth professionals optimize tax efficiency, mitigate risks, and enhance compliance.
Book a demo to learn more!
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