There is a very simple way for financial advisors to save their clients' money and improve their investment results, and that is building tax-efficient portfolios. For many clients, taxes could be the single biggest expense they face each year. While last year’s tax reform bill reduced tax rates overall, the top ordinary rate is still 37% and the top capital gains tax rate is 23.8%, and that’s before you factor in state income taxes.

Building tax-efficient portfolios is a multi-step process, so let’s take a look at these steps through the lens of a tax-efficient portfolio pyramid (see below). This starts with the foundational building blocks of a portfolio, and each layer adds a way to improve the tax efficiency of the portfolio. Let’s go through each level of that pyramid from the ground up.

This is the fundamental building block for any portfolio, whether the portfolio is tax-efficient or not. However, it is critical to develop an overall asset allocation plan for the client’s entire portfolio, not just isolated accounts. In order to build a tax-efficient portfolio properly, you need to consider all the different account types held by your client.