Sign up today and take advantage of member-only content — the kind of timely, cutting edge industry insight that only Money Management Executive can deliver.
  • Exclusive Online Only Content
  • Free Daily Email News Alerts
  • Asset Management Blogs

Fund Shareholders' Tax Concerns Mount


Mutual fund shareholders are increasingly wary about taxes on their investments and say that taxes are an important investment consideration, according to a recent survey.

Eighty-four percent of investors consider the impact of taxes on their stock mutual funds to be an important consideration when making investment decisions, the survey found. Fifty-eight percent of investors said that over the past year, the impact of taxes on their investment returns has increased in importance.

"This finding didn't surprise us," said Duncan W. Richardson, senior vice president of Eaton Vance Corp. of Boston, which released the study last week. "Let's not forget that 2000 was the year of double-tax trouble for investors because they had a brutal combination of down markets plus big taxable distributions." Peter Schoen and Berland Associates of Washington, D.C conducted the nationwide survey.

The combination of built-up gains carried over from prior years, high portfolio turnover in a volatile market and an "insensitivity" to tax considerations on the part of most fund managers created a "perfect storm" and dumped large capital gains distributions on many unsuspecting shareholders, Richardson said.

"In very high return years, people were somewhat dismissive of taxes," said Richardson. "The tax-drag was still there but they didn't have to experience it because it is one-tenth of their returns. In a normal year, the difference is much more distinct."

Investors also want more disclosure when it comes to taxes. Eighty-two percent of investors consider disclosure by mutual fund organizations of the tax implications of fund investing to be important, according to the study. Eighty-five percent of investors said they carefully examine their investment statements in order to determine the degree to which taxes affect their returns. Also, 60 percent of respondents said that the U.S. government should require mutual fund providers to state after-tax returns for stock mutual funds and that they supported the Securities and Exchange Commission's new after-tax return disclosure requirements.

Even though investors recognize the importance of tax considerations, most have only a limited understanding of investment-related tax issues, according to the study. Twenty-five percent of respondents did not know their current federal income tax bracket. Twenty-six percent were unfamiliar with the concept of "tax-efficient" investing and 33 percent were unable to cite any investments that offer high tax efficiency, the study found.

"We are surprised at how little knowledge people have of ways to reduce their taxes," Richardson said. "I think the findings offer a great opportunity for those in the industry to help educate investors."

Seventy percent of investors said they use a broker or financial advisor for assistance with investing. Of those who have in previous years invested strictly on their own, 22 percent said that they were very likely to use a financial professional next year, according to the study. Seventy-two percent of investors who use a financial advisor said they discuss the tax implications of their investments to at least a limited extent.