The Resurgence of After-Tax Performance

Author

Travis Morgan

Publish Date

Type

Article

Topics

  • Performance

“86% of advisors believe that being able to quantify and report to clients the ongoing effect of tax management is essential to growing their practices” according to a December, 2021 article by Financial Advisor IQ. However, firms are struggling without up-to-date standards for after-tax performance reporting, or readily available systems to guide their decision making.

It has been over 10 years since the CFA Institute removed guidance specific to the calculation and presentation of after-tax performance from the Global Investment Performance Standards (GIPS®). Since then, most investment firms looking to present after-tax performance results rely on the United States Investment Performance Committee’s (USIPC) After-Tax Performance Standards.

The GIPS standards and performance advertising was, historically, heavily focused on tax-exempt institutions. Therefore, most investment managers chose not to report after-tax performance (there was just not a need to). In today’s market, however, the industry is seeing a rise in retail investors looking to historical performance results as a tool in their manager and strategy selections. As a result, investment firms have begun looking for ways to distinguish themselves from their competitors, and tax management is often a key factor in this space. However, with tax management comes the need to measure the impact that it had on the investor’s overall financial outcome.

Without a readily available performance system to handle these calculations, investment firms are turning to internal resources to provide their investors with after-tax information. We find that investors want to see a number of metrics, not just the after-tax performance. Investment managers, however, lack sufficient guidance to assist with this. Listed below are a few of the more popular topics.

  • After-tax benchmarks to reflect how the market did on an after-tax basis
  • After-tax alpha to demonstrate how the portfolio would have performed without the tax management overlay
  • Tax liabilities to reflect the estimated taxes due each year
  • Tax drag to represent the impact that the taxes had on the overall return

Given the wholesale changes that occurred within the 2020 version of the GIPS standards, and the new Securities and Exchange Commission (SEC) marketing rule, a revision to the after-tax calculation and reporting standards would be welcome. It is perfect timing that the CFA Institute has released a survey to better understand the industry’s need for updated guidance on the matter. We encourage anyone who presents after-tax performance, or is contemplating after-tax performance, to complete this survey and provide the CFA Institute the insights needed to update the current guidance.

Complete the CFA Institute After-Tax Survey

How we help

ACA has worked with firms presenting after-tax performance and understands the associated issues. Combining our investment performance expertise along with the peer knowledge that comes with our large client base, we can help firms tackle the following topics:

  • After-tax performance calculations and metrics
  • Pre- or Post-Liquidation Approach
  • Assumed tax rates
  • After-tax benchmarks
  • Composite construction
  • After-tax performance disclosures

If you have any questions about after-tax performance or how we can assist your firm in navigating the complexities of after-tax performance, please contact us.