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Considering an investment in wealth management technology? Here’s a benefit you may have overlooked.
Jan 18, 2023
Innovative digital solutions that can make it easier for high-net-worth individuals and family offices to manage wealth are gaining in popularity. Wealth management technology, or wealthtech platforms, help provide a way to review and manage your portfolio on a single platform. The technology incorporates automation features to help track performance and gain efficiencies with general ledger and accounting functions.
But did you know that some wealthtech platforms — when paired with tailored internal processes — can also play a critical role in tax planning and compliance, providing real-time insights?
Wealthtech for tax planning and compliance
Family offices, wealth owners, financial sponsors, fund managers and anyone involved in tax compliance can attest to the amount of effort that often goes into this process. Not only do you have to track events and gather documentation throughout the year, but you will likely need to model both current and future estate structures to increase tax efficiency and facilitate the transfer of wealth through generations.
There are three key ways wealthtech platforms can help create efficiencies and manage the complexities that come with tax planning and compliance for wealth owners:
1. Gain insights with real-time, consolidated reporting on taxable events.
Wealth owners often use multiple investment managers to help grow and protect their wealth, which can create documentation and reporting challenges. Wealthtech platforms can help address these problems by collecting data from multiple sources and conforming them to one standard. This can help inform tax professionals about taxable events before they happen or immediately after they happen, which can allow them to identify opportunities to make recommendations about tax liability strategies and estimated tax payments to help prevent penalties and interest.
Access to real-time, organized and accurate data helps enable tax professionals to more precisely estimate key income and expense items for tax returns during the year. As the tax code increases in complexity and source documents are delivered later each year, platform data can help save tax preparers from having to rely on prior-year numbers or stale estimates. For example, WealthCompass, PwC’s managed service and wealthtech platform, provides reports that summarize realized and unrealized gains and losses across various accounts, managers, financial institutions and asset classes to support tax estimates, wash sale analysis and gain or loss harvesting throughout the year. This visibility can help reduce the year-end time crunch.
The right wealthtech platform and processes can enable tax functions to reliably estimate the amounts to be reported on 1099s and those last-minute or missing K-1s.
2. Reduce time and effort with easy access to documentation.
Capacity constraints are common during tax compliance season. One time-consuming task can be the collection of documents needed to prepare the filings. Throughout the year, documents pour in from asset managers and advisors for use by investment professionals and accountants. Tax professionals also need these documents for tax estimates, planning and tax return preparation at the end of the year.
Wealthtech platforms can empower tax professionals to access this supporting documentation themselves, without needing to contact wealth owners, family office employees or counterparties. We’ve seen a significant amount of time being saved when our clients can leverage a platform with flexible controls, so they can set permissions for exactly who needs access to what documents when. The documents needed to support tax planning and reporting can be efficiently and safely collected, stored and accessed, which can greatly help reduce non-value add time related to tax compliance. This can eliminate countless hours from the collection process.
3. Identify opportunities with comprehensive analysis for tax planning.
Having a clear understanding of the current portfolio and estate structure helps wealth owners effectively plan for the future and make decisions that may have a significant impact on their communities, employees and future generations. The ability to see the full picture of the estate in detail throughout the year can help tax professionals review and understand fact patterns before they are finalized or recorded on tax returns and can help prevent additional work or missed opportunities.
Wealthtech platforms can allow wealth owners and advisors to analyze their portfolios and investment vehicle structures in historical context, present form and future design, which can enable tax, estate and philanthropic planning. Armed with this timely, powerful information, advisors can identify opportunities to transfer wealth and income in tax-efficient manners, reduce tax liabilities or fully utilize loss carryforward, as well as help increase the impact of their philanthropic efforts by identifying the most tax-efficient assets to donate.
In addition to the most common reasons for investing in wealthtech, these platforms also can help enable industry leading practices related to document management, data collection for tax reporting and estate structure analysis for tax planning. Taken together, these core capabilities can help alleviate capacity constraints for tax professionals and stakeholders at the most critical times of the tax compliance year and can also help free these valuable resources for more value-added contributions and analysis.
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