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Although investors are broadly aware of the importance of taxes on investments, understanding of investment tax issues remains poor.
According to the fifth annual investor survey commissioned by Boston-based investment manager Eaton Vance, more than three-quarters of investors (77 percent) say they carefully examine their financial statements with regard to investment tax implications, and eight in 10 investors (80 percent) say they believe taxes have an important effect on stock mutual fund returns. More than eight in 10 investors (82 percent) say they know what an IRS Form 1099 is. And nearly nine in 10 investors (87 percent) consider disclosure by mutual funds of the tax implications of fund investments to be important.
The nationwide survey, conducted by Penn, Schoen and Berland Associates, reveals that in terms of specific knowledge about investment tax issues, many investors earn a failing grade.
When asked what types of investments may offer high tax efficiency, nearly one in three investors (32 percent) could not name a single category of tax-advantaged investments. Less than half of investors (48 percent) say they have ever invested with specific consideration of tax efficiency or after-tax returns. When asked whether different types of tax-advantaged investments are more suitable for use inside a qualified retirement plan or outside a qualified plan, most surveyed investors did not know that such investments are best used outside a qualified plan. Only one in three investors (32 percent and 34 percent, respectively) understands that tax-managed stock funds and variable annuities are generally most appropriate for non-qualified plan investments. Less than half of investors (46 percent) understand that municipal bonds and municipal bond funds may best suited for investment outside qualified plans.
One reason investors are confused about investment tax issues is because they seldom discuss the subject with financial advisers. Among investors who use an adviser, four in 10 (40 percent) discuss investment tax issues with their advisers not very much or not at all. Only 15 percent of investors who use an adviser discuss investment tax issues with their adviser a great deal.
"Given the significance of investment tax effects and the poor understanding most investors have of this subject, it is critically important for financial advisers to talk to their clients about tax issues," stated Tom Faust Jr., Executive Vice President and Chief Investment Officer of Eaton Vance. "I can think of few ways in which the services of a financial adviser can be of more value."
Eaton Vance and its affiliates manage approximately $85 billion in assets as of March 31, 2004, for more than 70 mutual funds and thousands of individual and institutional accounts, including those of corporations, hospitals, retirement plans, universities, foundations and trusts.
For more complete information about any Eaton Vance fund, including investment objectives, risks, and charges and expenses, call or write your financial advisor for a prospectus. Read the prospectus carefully before you invest or send money.
To learn more, write to Eaton Vance Distributors, Inc., The Eaton Vance Building, 255 State Street, Boston, MA 02109 or visit www.eatonvance.com.
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