Why tax alpha is the returns driver HNW advisers need to measure

For high-net-worth advisers, the conversation about returns has quietly expanded. Asset allocation, manager selection and fee management remain core.

A fourth driver has stepped forward and deserves the same scrutiny: tax. Praemium and CoreData’s new Tax Alpha research argues that tax alpha, the return generated by deliberate tax management, is now a structural feature of HNW advice.

It is no longer an end-of-year afterthought. The research also shows that the gap between what advisers do on tax and what clients see is a real commercial problem. For practices that can close it, the upside is meaningful.

What tax alpha actually means

Tax alpha is the after-tax return advisers generate by deliberately managing the tax consequences of investment decisions. It is not a single technique. It is the cumulative result of structure selection, expense timing, CGT management, franking credit harvesting and superannuation planning. All of these are coordinated around the client’s broader financial position.

The research describes the underlying behaviour clearly. Around 70 per cent of HNW clients sit in tax-optimised portfolios, against 50 per cent of non-HNW clients. At the higher end of the market, tax is a structural input rather than a downstream adjustment.

That distinction matters. For most clients, tax sits next to the portfolio. For HNW clients, the tax position increasingly sits inside the portfolio. Trades and rebalances are weighed against unrealised gains, loss harvesting opportunities and the client’s broader tax position.

The research found 85 per cent of advisers’ rate CGT data and tools as important when making trades. That importance rises as advisers take on more responsibility for tax strategy. Running an HNW portfolio is now substantially a tax exercise as well as an investment exercise.

Why it belongs alongside the other returns drivers

Treating tax as a returns driver, rather than a compliance task, changes the way advisers think about value. The point is straightforward. After-tax returns are what clients actually keep. Compound a modest after-tax improvement across a long horizon and it often delivers more than aggressive equity tilts.

For an HNW client with multiple structures, deliberate tax management is one of the most reliable sources of incremental return. That is especially true in volatile markets where market-driven alpha is hard to come by.

The research highlights one of the reasons this matters now. In volatile markets, clients become more forensic. They ask sharper questions and they want to understand the consequences of decisions made through the year.

Tax outcomes sit squarely in that conversation. They are one of the few areas where advisers can demonstrate clear agency regardless of market direction. That makes tax alpha not just a returns driver but a trust driver. It matters most when other parts of the portfolio are working against the conversation.

The risk is that the value is being created but not captured in the relationship. The research found that 63 per cent of advisers do not report tax outcomes separately to clients. Only around a third of HNW clients are perceived to understand how tax strategy contributes to their outcomes.

Even among HNW-focused practices, more than half do not consistently bring tax outcomes to the foreground. The work is happening. The recognition is not.

How leading practices measure it

For tax alpha to function as a returns driver, it has to be measurable and visible. That is where reporting infrastructure becomes decisive. The research found a striking dependency. Almost half of advisers with a medium to high HNW focus say more than 90 per cent of their clients rely on platform tax reports at tax time.

Platforms are no longer simply administrative. They determine whether advisers can move from explanation by assertion to explanation by evidence.

Leading practices appear to be measuring tax alpha across three dimensions:

• First, by reporting tax outcomes separately from investment outcomes. That makes the contribution visible rather than buried inside a total return figure.
• Second, by tracking realised and unrealised CGT positions through the year. Trading decisions can then be made with the tax cost or saving already on the table.
• Third, by reviewing portfolios for tax considerations quarterly rather than only at EOFY. The research associates this cadence with the most HNW-focused practices.

Coordination is part of measurement too. Around seven in ten HNW clients have their own accountant or tax specialist. If reporting is fragmented or delayed, the accountant becomes the narrator of the client’s tax story. Where reporting is consolidated and timely, the adviser remains central.

For HNW practices, tax alpha is ultimately a combination of two things. The technical work, which most advisers already do well. And the articulation, which is where the next phase of differentiation will be won.