Portfolio tax risk is the risk of acquiring a financial instrument that violates the recommendations of tax authorities. This can result in two negative effects: Increased taxation (which will reduce performance after tax), or explicit penalties (either financial or criminal).
When the tax impact is strongly felt by the customer, this is colloquially called a tax bomb. In case a portfolio is under a discretionary or advisory mandate, the investor could legitimately – under European and Swiss laws – seek compensation from the wealth manager for the damage of a tax bomb, from a civil court.
According to regulatory minimum standards, Tax Suitability is the new benchmark.
Even though it is impossible to guarantee 100% suitability in portfolio allocation, it is imperative to protect the wealth manager against the suspicion of negligence: i.e. by proving that a reasonable risk mitigation had been done at the level of portfolio management.
At gwp, we are recognised experts of Tax Suitability. We will help financial intermediaries mitigate legal risks by implementing corresponding services in the day-to-day activity of their institution.