Peter Mallouk, CEO of Creative Planning, says an increase in the capital gains tax, which President
Joe Biden is considering, could “dra-
matically change” investment decisions
and “drive a stake through the heart of
model portfolios” many advisors use.
Biden campaigned on a variety of
plans to increase government revenue,
including raising the marginal tax rate
for those earning more than $400,000
from 37% to 39.6% and raising the tax
on long-term capital gains and qualified
dividends from 20% to 39.6% for those
taxpayers earning more than $1 million.
The president has not yet proposed
these and other tax changes as he is
focused first on getting the coronavirus
pandemic under control and provid-
ing relief to families, businesses and
communities affected by its economic
fallout. But Treasury Secretary Janet
Yellen, in her written responses to ques-
tions for her confirmation hearing,
affirmed Biden’s plans to increase the
capital gains tax for wealthy investors
and tax their unrealized capital gains —
both designed to “remove biases on the
tax code that favor wealth over work.”
At the hearing, Yellen said in responseto a question about taxing unrealizedgains, “capital gains at some pointshould be taxed,” noting that a “mark-to-market approach is one method butnot the only method.”
IMPACT OF HIGHER CAPITAL
GAINS TAXES
If capital gains taxes are increased for
wealthy investors, advisors will no longer
be able to get away with taking the port-
folio of a new client, converting it to cash
and then investing the proceeds, Mallouk
says. “There will be more demand for
customization that didn’t exist before,”
affecting advisors that pitch model port-
folios in particular, he says.
“Clients want advisors to work with
the positions they bring to the table. They
want advisors to work around the posi-
tions they bring, around capital gains.”
Mallouk adds that an increase in capi-
tal gains taxes also will bring mergers
and acquisitions to a halt and affect the
holding periods for private equity funds.
The Creative Planning CEO, who hasexpanded the firm from just $34 millionin assets in 2004, when it he took it over,to close to $70 billion today, has someinteresting things to say about bonds.
REPLACE 60/40 WITH 70/30
OR 80/20?
Investors should hold only enough
bonds to meet their income needs dur-
ing a long-term bear market when they
shouldn’t be selling stocks, according to
Mallouk. Bonds are earning next to noth-
ing now, less than most dividend-paying
stocks, he says. “Do I really think I will
earn zero in stocks for the next 10 years?”
In a recent podcast, he declared the
traditional 60/40 asset allocation model
“dead,” favoring 70/30 or 80/20 mix.
He says that Creative Planning clients
are holding 20% to 40% of their port-
folios in foreign stocks, both emerging
markets and developed markets, tilting
toward the latter.
ESG AND CRYPTO
Mallouk says environmental, social and
governance focused investing is becom-
ing more mainstream as an increasing
number of investors, especially millen-
nials, want their investments to match
their values, but advisors shouldn’t nec-
essarily bring up the subject directly.
Rather, they should “find out what a
client’s goals are.”
He says more and more clients are
asking about cryptocurrencies, which
are acquiring an aura of legitimacy that
they didn’t have before. ” The world defi-
nitely wants there to be a cryptocur-
rency they can rely on … [but] “Bitcoin
may or may not be the one that prevails.
“Look at AOL or Yahoo or Excite,”he says, referring to the once-hot internet companies that faded. “It will beinteresting to see how the governmentregulates it all.”
RIA LESSONS & LEADERS
By Bernice Napach and Jeff Berman
Creative Planning CEO: Biden’s Capital
Gains Tax Plan Could Kill Model Portfolios
Also, a Schwab report outlines how much RIAs employees get paid.
