A Wealth Management Horror Story (Original)

The (not actually so scary) story of an IRS audit

In celebration of Halloween, we thought we’d share a scary story. It’s about — are you ready? — IRS audits. Not just any audits, but audits of investors who hired wealth advisors to manage their accounts. The cause? Suspiciously low taxes…

It’s a true story— we know because (shameless self-promotion) these advisors are our clients. It seems they were doing such a good job with tax management that they triggered IRS audits. We’re not talking about complex tax shelters here, just simple gains deferral and loss harvesting — done consistently and well. We’re glad to report that the story is actually not that scary. The investors in question passed their audits with ease — and, we’re pleased to report, viewed being audited as the ultimate endorsement of their advisor’s skill and value. 

While this story has a happy ending, it does reveal a disconcerting truth about the wealth management industry. If simple tax management done well causes an IRS alert, what does that tell us about typical wealth management? How bad must “average” be? The principles of tax management are well understood, and the process can be almost entirely automated. It should be “table stakes” — something every manager offers as a matter of course. And yet it’s not. The aspirational words are there — it’s hard to find any wealth management firm that doesn’t talk about the importance of tax management —  but for many wealth managers their commitment to tax management is belied by their results.

And that, we think, really is scary...