Tax Suitable Wealth Management - Quo Vadis?

Investor protection regulations like the Swiss Financial Services Act (FinSA) or the European MiFID II are silent or equivocal on a somewhat controversial issue in the wealth management industry: Should the investor also be protected against products that are not optimal for tax purposes?

Although income tax is a normal factor that reduces a portfolio's performance, easily by 20 to 45 percent depending on the country of residence, wealth managers take a conservative approach to this issue, recommending that investors seek the advice of a tax advisor "to assess the tax implications of any proposed investment".

Interestingly, there is somebody with an answer to this question - the Swiss Banking Ombudsman!

The wise man - the Swiss Banking Ombudsman

This neutral Conciliator provides independent information and mediation. Client complaints about banks based in Switzerland are taken up there. And precisely, the Ombudsman regularly publishes on its website selected cases of blatant mismanagement that cause tax damage to the final investor:

  • In the context of an asset management mandate, the Ombudsman severely points out that: “[The Bank] must avoid administrative actions that are so damaging to tax that they jeopardise investment performance. This is part of its duties as an asset manager and has nothing to do with tax advice. In the case at hand, the client lost considerably more than 10% of her investment assets due to taxes alone.”
  • In another context relating to the provision of investment advice (advisory), the following is stated: “Even if no tax advice is owed on the basis of the contractual agreement, the Ombudsman is of the opinion that, based on the duty of care incumbent on it in the context of investment advice, a bank may not recommend any products which, irrespective of the client’s individual tax situation, lead to avoidable tax burdens due to his tax domicile and which have a substantially negative impact on the achievable income after tax. Whether in the specific case in question the structured product was to be regarded as ‘tax harmful’ in this sense remained controversial, however.”

The Ombudsman - which is not a court - is careful enough not to mention the legal basis on which its reasoning is based. All the more so as there is to date no civil case law on the subject. What is clear from these cases is that a product must really be what is colloquially referred to as a "tax bomb" to justify a banker's duty of care or action.

Tax bombs are products that could cause a huge increase in costs for the client, an inability to deduct losses, additional reporting requirements, or even fines or penalties. Fortunately, there are only a few in each of the reference markets.

What should we conclude from this?

The investor therefore does not necessarily have to be protected against fiscally unsuitable, inappropriate or non-optimal products; but at a minimum, he or she will need to be protected from tax bombs.

Importantly, any solution in the field of tax suitability, whether automated or not, should first focus on detecting tax bombs by market, without further unnecessary granularity and complication.