Maximizing after-tax wealth: A growth opportunity for advisors

Key takeaways

• Client demand for tax planning is high, yet many advisors may still fall short of meeting expectations. 
• Direct indexing can offer tax benefits such as the potential for tax-loss harvesting but remains underutilized across the advisor community.
• Ongoing capital gain distributions have the potential to erode after-tax returns, reinforcing the value of a tax-efficient advisor.

We believe the opportunity for financial advisors to help maximize after-tax wealth for their clients may be particularly significant today. Don’t believe me? Consider these three key statistics.

According to CEG Insights (formerly Spectrum Group) research, 92% of clients expect tax planning services from their financial advisors.¹ Yet, only 25% of clients feel they are actually receiving it. This gap represents an opportunity for advisors who are willing to address their clients' tax needs.

While many broker-dealers advise their representatives not to provide tax advice, let’s face it. If you’re not considering these consequences when making investment decisions, it’s time to start. Many advisors already are.

Now, I’m not suggesting that you replace your client’s enrolled agent or certified public accountant, but basic tax planning starts with the fundamentals: building tax-efficient portfolios, leveraging tax-loss harvesting and making other strategic adjustments. These are areas where advisors—regardless of tax certification—may be able to add value.

Cerulli recently projected that direct indexing separately managed accounts (SMAs) will grow at a 12% rate annually over the next five years.² Yet, according to Investment News, only 18% of financial advisors currently use direct indexing strategies.³

This could be a significant opportunity. Direct indexing is gaining traction quickly, and more clients are asking for it. However, the fact that only 18% of advisors are using it means many of your clients and prospects may not have heard about it. Advisors who adopt early may be well-positioned to introduce this tax-efficient strategy to their markets. In some cases, early adoption can provide a competitive edge.

Nearly half—approximately 48%—of the $28.5 trillion invested in U.S. open-end mutual funds is held in taxable (non-qualified) accounts, according to the 2025 ICI Fact Book. Many investors tend to employ the same investment strategies in both taxable and tax-deferred accounts. However, investment solutions well-suited for tax-deferred environments may falter when taxes come into play. Ignoring the tax impact on taxable investments likely comes at a cost.

A common challenge for clients with taxable accounts is recurring capital gains distributions and the resulting tax liabilities. Over the past two decades (2006–2025), U.S. equity mutual funds have distributed capital gains averaging about 7% annually, based on Morningstar Direct data and Russell Investments analysis, excluding money market funds. Advisors focused on tax efficiency may consider strategies such as direct indexing SMAs, tax-managed funds, and active ETFs to help address these concerns. These approaches can offer potential tax benefits and may provide clients with more control over taxable outcomes.

If you don’t think your clients and prospects are tax-sensitive now, it may be important to them in the future. The forces driving the U.S. government’s fiscal challenges—rising debt, increasing entitlement spending and potential future tax policy adjustments—could increase investor focus on tax-efficient investment strategies.

Advisors who are proactive about addressing these issues, and who can offer tax-focused solutions like direct indexing and tax-managed portfolios, may help address evolving needs. If you’re not already thinking about how to help your clients optimize their tax strategy, you could be left behind.

Rather than attempting to address every tax consideration at once, a practical starting point is to focus on areas where tax planning may have a more meaningful impact. In our work, we consistently see seven primary sources of taxable assets. Using this framework, advisors can prioritize clients and situations that may benefit from proactive tax management.

1. The sale of real estate
2. The sale of a business
3. Deferred compensation
4. Inheritance
5. Insurance proceeds
6. Trusts accounts
7. Existing taxable assets

The need for tax-efficient strategies appears increasingly relevant. Advisors who incorporate tax-aware planning into portfolio construction and client conversations may be better positioned to meet client expectations and adapt to changing conditions in the years ahead. 

 

¹  Source: CEG Insights (formerly Spectrem Group), Wealth Management Redefined; as cited in Advisor Perspectives, “Tech Is Helping Advisors Meet (And Exceed) Client Expectations,” February 2024.

² Source: Cerulli Associates press release, Direct Indexing Growth Projected to Outpace ETFs, Mutual Funds and Separate Accounts Over Next Five Years (Aug. 2021.

 ³ Source: Almazora, Leo. “After Ending 2024 with $865B, Direct Indexing Has More Room to Grow.” InvestmentNews, April 10, 2025.