What is Asset Location? | Erik Averill, Brandon Averill | AWM Insights #6

 
 

Episode Notes

In a time where it can feel like a lot of things are out of our control, there are still some things you can do that add tremendous value to your portfolio. Last week, we discussed one of the methods - tax-loss harvesting - and we'll continue this week by looking at asset location.

At its core, asset location is essentially a method of managing multiple accounts as one single portfolio. Research has shown with this practice that you can add .5% to .85% to your after-tax return, which over a 30 year period can be up to an additional 15% after-tax return.

Some investments in your portfolio - like bonds - pay you interest. If this is held in a taxable account, it will be taxed annually at a fairly high rate depending on your tax bracket. This ultimately hurts your take home return, so we utilize asset location to ensure those assets are not taxed annually and instead other assets likes stocks are the ones held in your taxable accounts.

This is a highly-specialized tactic that gets the most mileage from being utilized with our clients that are in the highest tax bracket with high levels of complexity. Listen for more details and answers to questions including:

  • What is asset location?

  • How does asset location work?

  • How can this practice save money over the long-term?

  • Who most benefits from this practice?

  • How can I tell if my portfolio is utilizing asset location?

+ Read the Transcript

Erik Averill (00:00):
Hey everyone. Welcome back to another episode of AWS insights. I'm your host, Erik Averill and I am joined once again by my older brother and business partner, the founder of AWM, Brandon Averill, welcome to the podcast. Thanks Eric. It's always great to be back with the face. Hey, you know, I, uh, I actually just gave you credit for being the only founder of the company, which is just absolutely not true. So, uh, we are co founders, but, uh, today we're not here to, uh, to talk about us. We're here to talk about how we can add some value to your portfolio in. This is an exciting topic for us because during these environments where it can feel like so much is out of control, there are some things you should be doing when it comes to your investment portfolio that add tremendous value. And what we're going to dive in today is something called the asset location.

Erik Averill (00:51):
And there's been a bunch of researches been done on what is the value of asset location. And this is something that has been researched and documented by multiple, uh, research companies that shows you can add on average about a half of a percent, 2.85% annually to your after tax return. And over a 30 year period, we're talking about an additional 15% after tax return. And we all know that ultimately if you grow your money by an extra 15%, this is a no brainer. And so Brandon, I want to dive into what exactly is asset location?

Brandon Averill (01:30):
Yeah, Eric JASA location, as you mentioned, super powerful methodology and really it's just a method of managing multiple accounts as one single portfolio. So what we do is we place the assets that are taxed more into more favorably taxed accounts such as your IRAs, individual 401ks or your employer. 401k. Uh, to simplify it somewhat and how it all works works out is that some of those investments within your portfolio such as bonds are going to pay you interest. Uh, this interest, if it's held in a taxable account, is taxed annually and thus at a pretty high rate, uh, depending on your tax bracket. And this ultimately really hurts your take home return. Uh, and since, you know, we're focused so much here at AWM on after tax returns because that's actually what you eat, what goes into your pocket. Uh, we want to make sure that those assets are, are not taxed annually.

Brandon Averill (02:27):
And the other assets such as stocks that are gonna grow mostly by increasing in value, are held in your taxable accounts. And the reason being is that these are, this growth has actually taxed it, what's called the capital gains rate. So it's a lower rate than your ordinary income tax rate. And this only gets taxed when you actually go to withdraw the money years later if you're pulling from a tax tax deferred account. Uh, so it's a really just a way of, if you think about it as, as a house and all the rooms have different purposes, you've got your living room for, you're watching the game, you got the kitchen for cooking dinner, you got the bedroom for sleeping asset is very, this very much the same thing. It's one house, it's one portfolio, but we're choosing where we want to put those, uh, investments into which room from a tax perspective. And Brenda,

Erik Averill (03:19):
I think an interesting note is if I'm sitting here listening to this podcast, one of my questions would be is like if, if this really could produce 15% more after tax return, like why isn't this front and center? And I think it's something that we've referenced on this podcast previously. The truth is that for 80% of people, they are in a tax bracket that is at 15% or lower. So it's lower than the cap gains rate. And so the majority of the average financial advisors out there, especially at the big brokerage houses that are focused on the massive fluent, uh, this just isn't even important to them, right? The stats is that 0.1% of singles and 0.7% of married couples are in the highest tax bracket. And so this is really something, you know, that that requires specialized expertise and for clients that have a lot of complexity and in the highest tax bracket. And so, um, can you dive in a little bit more of like what are the actual benefits? If you're sitting here, you're in the highest tax bracket, you do have these multiple retirement accounts, whether it's through your employer, uh, we may have heard of a strategy called the backdoor Roth IRA, or if you make money off of, uh, off the field or you own a business, um, and it's 10 99 income, you know, what's an individual 401k SEP IRA? What's the benefits of going through all of this complex planning?

Brandon Averill (04:43):
Yeah, I think there's a lot of benefits, but to hit on, uh, the structure of financial advice really quickly, I think you're exactly right. The majority of people, uh, unfortunately this doesn't really matter for the reason being is the same thing that we had, we've hit on in past data AWM insights. You really need to have two of three types of accounts. You've got to have a taxable and a tax deferred account, like a traditional 401k or an IRA, or you've got to have a taxable account and a tax exempt account like a Roth IRA or a Roth 401k. So immediately it takes a huge part of the population out. And I think that just leads to financial advice in general. The systems aren't set up to take advantage of this. And then the second part of it is quite frankly a risk play by some of the bigger firms. Those big firms don't want the liability of their advisors, uh, advising on company 401ks or employer 401k's for instance. So those often get missed. And it's really a detriment because there's such significant balances in those accounts. And when we look at it, you had hit on a couple of the stats. Uh, the research shows that anywhere between 0.1 and 0.82%

Erik Averill (05:58):
each year could be the benefit from asset location. So if we just take a generalized scenario and said, okay, well let's take, take the mid point and you're going to realize a 0.48% annualized return, that's what led you to the 15% more in retirement. So, uh, to translate that into more concrete terms, um, assume you had a compounding annual return of 7%. So you've got a moderate portfolio that a hundred thousand without asset location would grow to about $661,000 over 30 years. But if you flip that over to a portfolio manager with asset location, that same hundred thousand dollars compounded at 7% over that 30 year period is about $770,000 so that's how you get your 15% more, an additional hundred and $10,000 this is pretty significant retirement for most people. Yeah, that, that, that's powerful numbers when you think about it. And so a few key takeaways for the listeners here of if you're asking, you know, what is my advisor implementing these type of things, there's really some low hanging fruit that you should be able to pop onto your investment account.

Erik Averill (07:11):
And as Brandon had mentioned is you should be able to see in there in my 401k whether it's through my employer and hopefully if you have 10 99 income, you absolutely should have an individual 401k set up and you should look in there. And if it is not filled with fixed income, it's a sign that, that you might not be taking advantage of asset location. And then if nobody's ever talked to you about something called the backdoor Roth IRA strategy, it's really a sign that you're most not likely taking advantage of this. So encourage you guys to, uh, to do the research. Of course, we would love to hear from you here at AWM. Uh, you will be able to find our contact in the show notes and of course, uh, on our website. But, uh, with that, we hope that you guys have a tremendous week. Uh, we appreciate the time here, uh, that you have spent with us. And it was always stay humble, be a pro, and own your wealth.

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