When saving for retirement, most investors focus on their top-line number or “How much money do I have?” And while the accumulation of assets is no doubt a huge factor when trying to meet financial goals, that pursuit sometimes creates a blind spot to an equally important ambition: the preservation of them.
Indeed, instead of thinking about retirement in terms of savings, wouldn’t it make just as much sense to consider how to pay Uncle Sam less each year?
Our complex tax code is the big reason many investors do not think in those terms, therefore they don’t see how they could preserve income and boost the true value of their investments. Sure, many Americans have IRAs and 401(k) plans, but outside of those easily understood vehicles, most investors don’t pursue more sophisticated strategies to minimize their tax obligations.
This is why more financial advisors need to make the effort to focus more on tax planning. Despite the clear need, too few give this area of financial planning the attention it merits, and that’s created a huge gap between the kind of tax advice clients routinely get and the kind they deserve.
Tax Planning Gap
Tax advice and services traditionally have been dispensed by CPAs and other tax professionals whose perspective is predominantly backward looking, meaning much of their work is focused on minimizing taxes through credits and deductions at the end of each year. These strategies no doubt can be beneficial to clients, and often result in significant annual savings.
The problem, though, is that such professionals sometimes provide tax planning advice when it’s too late, since it’s impossible to take a credit or a deduction once the previous tax year has concluded. Virtually every financial decision — up to, including and even beyond retirement — has tax implications. Navigating those implications to achieve the greatest impact takes someone who has a long-term, forward-looking view of a client’s situation.
Therefore, it’s easy to see why advisors (versus CPAs or other tax experts) are uniquely positioned to take the lead in this area. They must take a holistic view of their clients’ full financial picture, focusing less on what has happened over the course of any given year and more on what will transpire in the decades ahead.
Of course, most advisors are not qualified to provide tax advice, lacking the credentials to do so. But given the importance of taxes in financial planning, advisors either need to take the steps to become accredited themselves or form partnerships with local tax experts who can fill this gap in the advisor’s business.
Firms, for their part, should not only encourage their advisors to make tax planning more of a core part of their offering, but they actively should look for ways to support that approach. As long as advisors remain vigilant about staying within their defined area of expertise, everyone will benefit.
Win-Win for Clients and Advisors
The saying there’s nothing certain in life except death and taxes has roots in the 18th century. It’s remained relevant for that long because it’s mostly true. Underscoring the importance of a good financial advisor is that they help clients navigate both (though the financial aspects of the former are for another conversation).
For clients and advisors, tax-savvy planning is a win-win. Clients, rather than having to serve as a go-between for different financial professionals each focusing on a different aspect of their finances, get a more unified, coordinated approach plotting their future course. Meanwhile, advisors get an opportunity to differentiate themselves and their offerings.
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Wade Wilkinson is the president and CEO of Securities Service Network, an independent advisory and brokerage firm based in Knoxville and a subsidiary of Ladenburg Thalmann.