The Art of Asset Location

You’ve probably heard a realtor or businessperson tell you that the three most important factors in determining a property’s value are location, location, and location. It seems crazy when you think about it, but it is so true.

There’s a similar rule for investments: asset location. We are constantly looking for the best asset location within your portfolio to help you keep as much of your wealth as possible, even after taxes.

That can be a deep cut, which makes asset location one of the top ways advisors provide additional value to investors, as individuals typically don’t have the time or resources to devote to this area.

What Is Asset Location?

We can begin by looking at what asset location is not: It should not be confused with asset allocation. They’re related, but in the same way you’re related to that distant cousin whose name you can never remember.

Asset allocation is how you divide up your money between separate asset classes. It is primarily focused on managing risk and returns. One example would be a 50/50 allocation, meaning your portfolio is 50% stocks and 50% bonds. You can also subdivide your stocks into international or US, small or large companies, etc.

Asset location is where you put your stocks, bonds, and other holdings within your taxable and tax-sheltered accounts. It primarily focuses on maximizing your portfolio's total overall tax efficiency.

What’s the Point Of Asset Location?

Investing professionals are always disagreeing about something, but asset location is pretty much universally considered to be worth the extra effort.

Over at “Nerd’s Eye View,” Michael Kitces points to a Morningstar analysis showing that a well-executed asset location strategy can add as much as a half-percent to your bottom line each year. That’s $500/year for every $100,000 invested (which could make up a good chunk of your advisor’s fee).

That’s your money; you deserve to keep it. You don’t want to hand it over to the government when you don’t have to.

Why You (Probably) Need An Advisor to Help

By putting your most heavily taxed investments in tax-sheltered accounts, you can minimize or possibly eliminate their tax inefficiencies. That seems simple enough, right? But it’s not as easy to put that plan into action as you might think.

First, your tax-sheltered accounts have limited space. If they didn’t, we’d just put all our money there and call it a day. In reality, challenging tradeoffs must be considered to ensure you’re making the most of your tax-sheltered “space.”

But it’s not just about sheltering your assets from taxes. You’ll need those assets available at certain times to achieve your personal goals, which can be a sticky situation when it comes to tax-sheltered accounts. There are a lot of plates to keep spinning, including:

• Managing within the context of your bigger picture – Before we decide where your assets should live, we determine your proper allocation based on your unique goals and risk tolerances. Allocation needs to always come before location.

• Planning for your goals and timeframe – How far are you from retirement? What’s your legacy plan? What upcoming changes in health, finances, and location are you expecting? Asset location is important, but it rightly plays second fiddle to withdrawal issues, estate planning, and other needs.

• Managing tax-sheltered accounts – What kind of tax-sheltered account opportunities do you have: Roth, traditional IRAs, company retirement plans? How much room does each one have for holding assets, and which kind of accounts will get you the most tax-efficient bang for your buck? Has the tax code changed (it's constantly evolving), and what does that mean for your plans?

• Considering other tax-planning needs – We also look at what benefits could be gained from holding stocks within taxable accounts: Can you harvest capital losses against capital gains? What about donating appreciated shares to charity? When is the right time to implement a step-up in basis? Could foreign tax credits be implemented? The importance of these opportunities depends considerably on your goals and circumstances, but you lose all of these options for your stocks once they’re in tax-sheltered accounts.

Never Heard Of Asset Location? There’s A Reason

Asset location doesn’t get much love in the financial press. To be honest, it’s not that glamorous. It’s not going to make you rich overnight, and it’s not going to ruin your portfolio. It’s a very practical, “boring” topic (although our advisors get pretty excited about it).

You’ll typically only see it offered by an advisor like McLean, who can watch over your larger holdings and provide objective counsel. If you don’t get that kind of help, you’ll find:

• Missing Pieces – Asset location works best when your entire financial picture is considered. Over the years, your multiple accounts, providers, and assets can get more difficult to track and get a cohesive picture without a single advisor coordinating and overseeing everything.

• Missing Expertise – Even if you have a clear picture of your varied accounts and holdings, asset location is not a “plug-and-play” solution. When considering your unique, often complex wealth management needs, finding your ideal answer is both an art and a science.

• Missing Oversight – Asset location is not a one-and-done process. The constant evolution of the market, government regulations, and your own goals require ongoing coordination to keep everything running efficiently.

Most investors don’t understand or realize they’re missing out on efficient asset location, but the money they’re losing is very real and unnecessary.