America's biggest investment firms have a major problem with the GOP tax plan

  • A little-known provision of the GOP tax plan would make investors sell out of positions using an accounting method that would cost them flexibility.
  • Large investment managers like Vanguard are worried that the measure could cost their clients millions of dollars.

America’s biggest investment managers aren’t thrilled with the GOP tax bill.

Under a little-publicized provision of the bill, clients would be forced to sell their oldest shares first when cashing out of positions, according to a report from Laura Saunders of the Wall Street Journal. That would reduce flexibility in terms of minimising taxes, something that investment firms fear could end up costing clients loads of money.

The provision would make investors selling partial positions offload them on a “first in, first out” (FIFO) basis, rather than allow them to selectively liquidate shares bought at different prices.

Saunders received a statement from a spokeswoman at $US4.4 trillion money manager Vanguard, who said that the firm is concerned the provision will “most likely increase significantly the amount of taxable distributions made to investors every year.”

One popular method that would take a hit is the so-called “harvesting” of losses, which investors implement when they want to cut losses on a trade that’s lost them money and in order to get some tax relief. Under the new plan, if those same investors also have an older holding in the same security, that’s the one that would get sold, regardless of whether it has a more beneficial tax profile.

With that said, it’s still possible that the oldest holdings would also be the most favourably priced from a tax perspective. What’s troubling to investment firms is the lack of flexibility.

As posed at present time, the change would take effect for sales in 2018, and it’s estimated to raise $US2.7 billion over 10 years. With that type of windfall, it’s not particularly surprising that the GOP would try to include the provision. But there’s no denying that the measure comes at the expense of investor optionality.

Thomas Faust, the chief executive of Eaton Vance, a firm that manages more than $US400 million, has a broader take on the provision. And it’s not great for market efficiency.

“Markets will work less well,” he told Saunders. “Our fund managers will have their hands tied, and our shareholders will owe more in taxes.”

Read the Wall Street Journal article here.

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