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Financial Planning > Tax Planning

TurboTax and CPAs: Lessons for Planners on Robo-Advisors

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When TurboTax and other do-it-yourself tax preparation software programs were introduced in the mid-1980s, many pundits predicted the demise of the human income tax preparation industry. Yet, in the intervening years, tax-preparing accountants have not only survived—they continue to thrive. For instance, according to the National Society of Accountants: “The average [fee] for a professional income tax preparer to handle a ‘typical’ 2014 tax return was $273…a 4.6% increase over the average fee last year, which was $261; and an 11% increase from two years ago.”

And according to an article written last year by CFP Mark Cussen on the future of the tax preparation industry, “In 2012 there were about 160 million households that filed tax returns in America. About 60% of filers went to a Certified Public Accountant (CPA) or a tax preparation franchise such as H&R Block or Jackson Hewitt to have their taxes prepared, [while] 30% of filers used computer programs such as TurboTax.”

We believe the 30-year experience of tax accountants faced with the digital automation of their services provides an important lesson for today’s financial advisors confronting the challenge of online investment platforms (the so-called robo-advisors).

In the case of Turbo Tax, et al (Quicken, TaxSlayer, TaxACT, H&R Block at Home, etc.), their 30% market share has come largely from people who were already preparing their own tax returns manually, and found the computer programs (and now, online platforms) to be way easier.

Even more encouraging, many of the taxpayers who switched from professional help to doing it themselves digitally were overwhelmed by the complexities of tax law, and quickly went back to their old tax preparers—with an increased sense of the value of professional tax help.

In our view, financial planning will turn out to be the wooden stake in the heart of robo platforms.

Historically, financial planning has been the “loss leader” for marketing investment management services. In the 40+-year history of the “financial planning” industry, very few planners have actually turned a profit on their planning services, with the majority of firm revenues coming first from the sale of tax shelters, annuities, mutual funds, and most recently, AUM fees. And those firms who live by planning fees alone tend to be very small businesses.

What’s more, over the years many investment advisors and planners who have dropped financial planning to focus on investment management have found that providing financial planning services builds a much stronger bond between client and advisor, which translates into significantly lower client attrition rates—particularly when markets fall and portfolios shrink. 

Today, many in the financial planning industry are concerned that the online investment platforms are “commoditizing” investment management, and will result in driving down AUM fees. We agree that business economics dictates when a service becomes a commodity, its value falls. Which is why we wouldn’t be surprised to see AUM fall from the current highs of 200+ bps down to the 25- to 30-bps range—which will certainly spell trouble for advisors who only manage assets.

But we also predict that financial planning will once again turn out to be the salvation of the financial planning industry: for the bond it creates with clients and for the value of planning services themselves.

We believe that, with the devaluation of asset management, financial planning will become more attractive to retail investors, due to its comprehensive approach to personal finances, and its focus on attaining specific lifestyle goals. 

Consequently, we believe that over the next four to five years, the majority of advisory clients will pay a separate “fee” for financial planning services that will be quite a bit higher than their commoditized AUM fees. The planning fee might be a flat quarterly or annual fee, such as some planners are using now. But we suspect it might be a more frequent ongoing fee—possibly an automatic monthly charge to a credit card, as many online services collect revenue these days. 

We also suspect that to justify these ongoing fees, the scope of financial planning will have to expanded from the initial plan with periodic updates to an ongoing planning process: one that essentially rewrites a client’s plan every year or so to accommodate clients’ changing circumstances, markets, needs and goals.

But if offered as a compelling service, we believe that financial planning services will transition from loss leader into the primary generator of advisory revenues: solving the historically sticky issues of market downturns, retirees depleting their portfolios and the conflicts of interests inherent in asset management.


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