This document discusses how taxes and trading costs impact wealth management. It notes that maximizing pre-tax returns does not equal maximizing after-tax wealth, and taxes should influence decisions around asset allocation, location, and construction. While taxes are important to consider, they should not dictate investment choices. Examples show how taxes compound over time, reducing post-tax returns significantly, especially in taxable accounts. Proper asset location across individual, tax-deferred, and tax-free accounts can help maximize after-tax wealth. The document also cautions that trading costs, which often exceed stated fees, need to be considered.

1. Wealth Management
Impact of Taxes and Trading Costs

2. Tax-Aware Wealth Management
• Understanding that maximizing pre-tax return is not
the same as maximizing after-tax wealth.
• How taxes influence decisions related to asset
allocation, asset location, and portfolio construction.
• Don’t let the tail wag the dog. It is important to be
aware of taxes but they should not control your
investment decisions

3. Effects of Compounding on Taxes
Year
Value of $1
Pre-Tax
Value of $1
After-Tax
% of Pre-Tax
Wealth Retained
% of Wealth Lost
Due to Taxes
1 $1.10 $1.08 98% 2%
5 $1.61 $1.44 89% 11%
10 $2.59 $2.06 79% 21%
20 $6.73 $4.25 63% 37%
Comparison of Pre- and After-Tax Returns of One Dollar Invested
Assumptions: 25% tax rate paid annually: 10% annual returns
Because of this compounding feature, even small reductions in
the average tax rate can meaningfully enhance the long-term
growth of wealth.
Source: Goldman Sachs

4. Source: DFA -Tax Managed Strategies
Erosion of Total Returns

5. Asset Location
Deciding where to place the carious components of the
asset allocation plan among the individuals and entities
that make up the investor or family.
What is it?
Why it matters:
• Different types of accounts have different types of tax treatment, ie.
IRA’s are taxed differently than trust accounts and individual accounts.
• Determining the most appropriate location for an asset can help
maximize your after-tax wealth

6. Asset Location Examples
Taxable Accounts
Tax-Deferred Accounts
• Taxable bonds
• REITS
• Any mutual fund that generates high yearly capital gains
distributions
• Tax-friendly stocks due to lower capital gains, dividend tax rates, and the ability
to defer gains.
• Riskier and more volatile investments due to the ability to defer taxes and
capture tax losses on poor performers.
• ETF’s
• Tax-free bonds

7. Dividends & Gains are Costly to Taxable Investors
Source: DFA -Tax Managed Strategies

8. Trading Costs Matter
When Seeking liquidity, implicit costs typically exceed explicit costs
Source: DFA -Tax Managed Strategies

9. Trading Small Cap Stocks Can Be Costly
Price & Trading
Volume are typically
higher for large cap
stocks than for small
cap stocks
Initiating trades is
usually more
expensive for small
cap stocks than for
large cap stocks
Source: DFA -Tax Managed Strategies