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12. Don’t let taxes drive the entire investment strategy.

Financial Planning > Tax Planning

Tax Talk? Bring It On. Tax Prep? Don‘t Go There, Advisors Say

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What You Need to Know

  • While advisors without proper qualifications need to avoid giving
  • Offering qualified tax prep within an advisory firm has major pitfalls, advisors say.
  • Forging close relationships with CPAs outside the firm is typically preferable.

When it comes to taxes, financial advisors must often walk a fine line. While they must avoid giving “tax advice” if not qualified to do so, they need to know enough about taxes to help clients keep as much of their money as legally possible, according to David Gordon,  senior vice president of direct indexing at Vestmark.

And what about offering tax preparation services? While some large firms in recent years have added CPAs, expanded their tax services and touted the business-building benefits of offering qualified tax advice, financial planners cautioned that, for smaller firms especially, offering tax prep was more difficult than many might expect.

So how, and how much, should advisors talk about taxes?

When running an advisory firm, “you need to have people that understand taxes and are not afraid to talk about them but most advisory firms are not set up as tax advisors,” Gordon told ThinkAdvisor in a phone interview on Tuesday. “So you wind up having to put disclaimers everywhere [saying the] firm does not provide tax or legal advice.”

However, “for a long time, advisors have sort of hidden behind that disclaimer as a reason not to talk about taxes,” said Gordon, who previously served as director of Eaton Vance Advisor Institute.

The problem with that is “I just don’t think advisors can pretend not to understand what the tax consequences of their advice could be,” he said, noting that a significant amount of financial advice that advisors provide stands to have an impact on how much their clients pay in taxes.

Advisors “need to have tax awareness” but need to be “very clear that you don’t position yourself as an accounting firm if you’re not an accounting firm,” he cautioned.

Clients, like everybody else, don’t want to pay more taxes than they need to, he said, noting: “I’ve never met anyone that feels under-taxed. It’s a hot button for investors and that’s why advisors are willing to have conversations about the tax implications of their investment recommendations [and] will really position themselves [as being] truly on the same side of the table as the client.”

At the end of the day, “advisors who have an awareness for doing things in a tax-smart way, whether it’s locating assets in the right place or taking advantage of some of the hints that the tax code provides about what the government wants you to do and doesn’t want you to do will be in a much better position than the advisors who sort of bury their heads in the sand and say ‘that’s not my business,’” he said.

The CPA Connection: Beyond Referrals

RIAs and financial planners are probably more likely to have a tax specialist working at their firm’s office than are broker-dealers, who may have tax teams they can turn to at their company but not in the same office, he said. Many BDs may have relationships with certified public accountants outside their firms, and that is still the way that many advisors handle tax issues also, he noted.

Gordon also strongly suggested that advisors ask to see their clients’ tax documents before their taxes are prepared each year, calling it “one of the best ways that advisors can gather an awareness of opportunities for advice” to give their clients.

Advisors should have collaborative relationships with accountants that are beyond mere referral relationships, he also said.

“Most of the time” advisory firms should not be handling tax preparation “because you really do need a tax professional to do that,” he went on to say. “If your practice doesn’t actually have a CPA as part of the practice … there is a little bit of legal risk” in claiming that you have a tax expert on staff, he warned.

An example where an advisor working with a CPA can save a client money is looking within the investor’s portfolio for stock shares with unrealized capital gains, he said. Donating shares that could create a future tax problem for the client and getting a tax deduction from it is typically a more “efficient” way of giving to charity than just writing a check, he explained.

He suggested discussing taxes with clients each time they meet or even speak by phone but to be sure to describe it as tax information and not tax advice. “Smart advisors will not be shy about providing tax information but they will avoid providing tax advice,” he said.

The Hazards of Tax Prep

Talking about taxes is one thing. But for most advisors, offering actual tax preparation may be taking it a step too far. A Twitter thread on March 29 featured advisors warning their peers of the hazards of starting tax preparation operations within their firms.

“Almost every financial advisor I’ve ever met dramatically underestimates the difficulty of running a tax prep operation,” tweeted Bill Mulvahill, a partner at Trailhead Planners in Minneapolis. “So many think there’s ‘opportunity’ in this space. Unless you have real, qualified tax prep experience, there’s not.”

Advisors and others who responded were pretty much in agreement. “No way would I add tax prep to my offering without hiring/contracting with a real tax pro – I don’t do my own taxes, let alone someone else’s,” tweeted Ronnie Colvin, a certified financial planner who is founder of French Press Financial Services in Reno, Nevada.

Similarly, Michael Garry, a CFP who is founder and CEO of Yardley Wealth Management in Yardley, Pennsylvania, tweeted: “I wouldn’t touch having a tax practice, I couldn’t imagine it (and I did some tax work early in my … career.)”

By email on Tuesday, Garry went even further, telling ThinkAdvisor: “I don’t think most advisory firms should have a tax practice or a specialist on staff, unless the firm is large enough for that person to devote all her time to it. Even then, I don’t think I’d do it. It is a huge distraction from your main business and at deadlines, takes all of your time.”

In addition, when it comes to tax services, he said: “There seem to be more unreasonable client requests and reluctance to pay fair fees than with advisory practices. From my own experience with clients over the years, I think people don’t like the whole process of preparing and paying taxes and paying their tax person is like an add-on to the cost.”

He noted: “We have close relationships with three CPA firms and that is preferable to having a CPA in-house in my opinion. We still deal with a lot of tax questions and requests from clients, but it’s not like having a tax practice where you can’t do anything else leading up to deadlines.”

What is realistic within his firm is helping clients with “understanding the tax implications of their choices” and then turning to a CPA “for help when we don’t know an answer,” he added.

(Image: Shutterstock)