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Inflation and Tax Management Will Become Paramount for Investors

by Eric

There is a large first-mover branding opportunity to be had, but we are not hearing much about it yet. A quick word association test:

ETFs = Barclays.
Index funds = Vanguard
Bonds = PIMCO
Tax management = Ummm
Inflation protection = Well...

No one seems to own the inside track on inflation protected or tax managed products, yet they are bound to become critically important to investors over the next twenty years. Here is why this opportunity is ripe for the picking.

Fast forward twenty years (2029) and tell me if this stretches the imagination:

• Rampant deficits from the 2007 - 2011 recession have left national debt at astronomical levels


• While President Obama spoke of fiscal restraint after the deluge of spending during the 2007 - 2009 financial crisis, his successors never scaled deficits back to pre-crisis levels


• Medicare is defunct


• Social Security is bankrupt, returning twenty cents on the promised dollar


• Given all of that, tax rates have gone up across the board. The top marginal rate is 50%, capital gains are now taxed the same as ordinary income, the preferred rate on qualified dividends has been abolished


• Partially as a result of printing money for a half-decade to prevent a depression, inflation has spiked from a relatively sanguine 2%, to a consistent 5%

To simplify, there are only three ways the U.S. can get the money to pay off debts:
1. Grow the economy rapidly enough that foreigners pay us for products we make or services we offer
2. Collect more in taxes (more profitable if we do this in addition to #1)
3. Print money to pay off the debts

If we cannot grow fast enough to pay off debts and we cannot let debt grow forever, then we are left to raise taxes or print money, which ultimately drives inflation.

Should any or all of the bullets above come to pass, investors will need to worry far more about inflation protection, tax costs, and after-tax returns than they do today. Because we can anticipate more modest asset returns going forward, investors and advisors need to start paying attention to this now for two reasons: (1) costs of any sort silently but steadily erode the growth of nest eggs over time; (2) rebalancing into tax-sensitive, inflation-protected, lower-cost funds can be difficult and costly to do in taxable accounts.

All of this means that asset managers and advisors have an opportunity to be at the forefront of these topics. Asset managers should tailor more of their products to address these needs (recent inflation-protected fund launches from Wisdom Tree and PIMCO show that they anticipated this) and start (or continue) talking to advisors and investors about them.

While the above theoretical scenario is twenty years in the future, the company that will be the industry leader in this space has already started addressing the issues. Which company will it be?