By Christophe Lapaire, Senior Project Manager at the Swiss Stock Exchange
2020 has so far presented the world with near unprecedented change. For investors, this change has mostly manifested in asset price volatility, ultra-low interest rates and tumbling financial markets.
Despite markets appearing to somewhat stabilise, revenues cannot currently be guaranteed, and return opportunities for investors are likely to be hard to come by over the next twelve to eighteen months. Private banks and wealth managers around the world have been left wondering what more can be done to safeguard performance in investment portfolios.
While there are several ways to identify efficiencies – with many simply just looking to negotiate a fee discount – to maximise performance, only forward-thinking private banks and wealth managers are exploring the option of utilising tax optimisation for their portfolios. A solution that looks to safeguard the performance of portfolios and achieve this aim of maximising the performance.
Easier said than done
Utilising tax optimisation to increase portfolio performance has clear benefits. However, the mere fact that it will benefit all private banks or wealth managers does not mean that all of them are capable of doing it.
When it comes to providing tax optimisation services to end investor clients, private banks and wealth managers have a decidedly mixed record. Many do not have the correct solutions – both in terms of software and processes – and they rely on antiquated technology and manual processing. This may set them up fine to conduct general business, but when it comes to delivering tax optimisation services, it just won’t cut it.
Given the benefits it provides to the client and the necessary infrastructure to support it, those who do offer tax optimisation services often see it as an integral part of the overall investment offering provided. Highlighting the offering to clients and explaining how it can help to reclaim any foreign withholding taxes.
What it means for clients
On the face of it, tax optimisation may not always seem so integral, given that many countries (including the UK) provide capital gains exemptions so that foreign investment trading is not impacted. Unfortunately, however, the same cannot be said for all countries. With these countries having a detrimental impact on the after-tax performance of any portfolio not optimising effectively.
Even when you do avoid paying tax twice on any dividends pay-out, getting the money back is not always as simple as it is sounds. When you couple this with the fact that many countries often have contradictory taxation rules or requirements, it becomes very clear that lacking the right expertise may mean you incur tax you may have avoided or mitigated.
As such, effective tax optimisation and knowledge is vital if you wish to be protected from the worst of any tax leakage at the investment level. This successful tax optimisation allowing investment managers to manage and subsequently reinvest funds easily.
Most notably, those who do not recognise the opportunities that tax optimisation presents risk losing clients to private banks and wealth managers that do.
Making use of tax optimisation
While tax optimisation is a no-brainer in theory, it is not always the right fit for every private bank or wealth manager. As previously mentioned, without the right setup – innovative technologies and automation – tax reporting to fiscal authorities can be incredibly labour intensive when done manually.
With that in mind, it is truly critical that providers who intend to offer the service are enabled with the right software and data processing capabilities to report tax information on behalf of clients, to ensure it is as efficient as possible. Doing so in a way that is sustainable and creates savings without detrimentally increasing labour efforts.
Those who do not have the requisite infrastructure in house should fear not however, as there are solutions available – such as the Swiss Stock Exchange’s Advanced Tax Reclaim – that allow them to offer a reclaim service at a reasonable cost, and therefore deliver value to clients.
These straightforward end-to-end tax reclaim services offer a huge number of advantages to private banks and wealth manages, but arguably most importantly, it allows them to provide a new service to end clients that strengthens existing commercial relationships and even attracts more business.
As investors seek to eke out returns amid the downturn, the demand for innovative solutions that blunt the impact of COVID-19 will only increase. The private banks and wealth managers that are suitably equipped to provide these innovative solutions will be the ones that reap the rewards. Again, in the end, those who do not equip themselves effectively will run the risk of losing current and new clients to someone who will.
