Creative Planning CEO Peter Mallouk.
Peter Mallouk, CEO of Creative Planning, says an increase in the capital gains tax, which President Joe Biden is considering, could "dramatically 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 providing relief to families, businesses and communities affected by its economic fallout. But Treasury Secretary Janet Yellen, in her written responses to questions 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 response to a question about taxing unrealized gains, "capital gains at some point should be taxed," noting that a "mark-to-market approach is one method but not 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 portfolio 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 portfolios in particular, he says.
"Clients want advisors to work with the positions they bring to the table. They want advisors to work around the positions they bring, around capital gains."
