In the world of financial advice, there seems to be a horrendous rift between investment advice and tax advice. But an accountant and financial advisor working together can enable their clients to achieve so much more than either can alone.
In most situations, sound investment advice should include tax planning. At the very least, your investment advisor should be knowledgeable about tax laws and how they impact your investment performance. Specifically, your advisor should break down the tax impact of each financial transaction they’re recommending.
Let’s imagine that you ask your financial advisor about the tax liability of a specific transaction. You’ll likely hear, “I can’t give you advice on that. You’ll have to talk to your tax advisor.”
As the client, you deserve more. Your financial adviser should have a working knowledge of taxes. That way, you can be confident that your advisor has incorporated tax efficiency into your investment recommendations.
In fact, the Certified Financial Planner Board of Standards actually requires its members to have completed a tax curriculum before they can use the CFP designation. If your financial adviser says they can’t give tax-related advice, that should at least give you pause. Perhaps it’s time to find a new advisor.
More than that, your financial adviser should have a working relationship with your tax professional. If you don’t have one, your advisor should know tax professionals to introduce you to.
Having your investment advisor and accountant working together is the best way to ensure tax-efficient financial planning.
Here are five reasons why this is in your best interest.
Reason 1: You address issues as a team.
When discussing a transaction that has investment and tax implications, you might need a tax expert and the investment expert working together. Here’s what usually happens:
Typical client experience
Adviser: You should sell XXX, then buy YYY.
You: What would the estimated taxes be?
Adviser: Well, I’m not a tax expert, so you’ll have to talk to your accountant.
You (calling accountant): Can you tell me what my estimated taxes would be on this investment decision?
Accountant: I’m in the middle of tax season. Call me in mid-May.
Adviser: Are you going to follow my recommendations?
You: I have to talk to my tax person, first.
Adviser: You missed the opportunity.
Or would you rather have this one:
Adviser: You should sell XXX mutual funds, then buy YYY exchange-traded funds. This will help rebalance your investment portfolio. This will also result in a capital loss that you can use to offset some of your taxable income when you file your tax return.
We ran a tax projection based upon this investment recommendation. Here is your total estimated tax bill for the year.
Based upon the pay stubs you’ve given us, it appears you’re withholding too much from your paycheck. We recommend that you talk with your HR department about adjusting your W-4. That will help you increase your monthly cash flow.
Additionally, we looked at the previous tax returns that your accountant gave to us. We noticed a couple of tax planning opportunities.
We believe that making these moves will end up lowering your tax bill when you file your income tax return. Would you like to discuss them further?
You: Sure. I like the suggestion about increasing my cash flow, and I’d like to learn more about keeping my taxes low.
Adviser: Great. We’ll schedule a tax planning appointment to go into more detail.
Just so you know, throughout the year, we keep track of any major events in our clients’ lives where taxes might be an issue. At the end of the year, we forward this information, along with our brokerage statements and other financial statements to your accountant.
We find this makes it easier for them to prepare the tax return, which lowers the likelihood that you’ll have to file an extension. Is this all right with you?
You: Yes. I know that would make my CPA’s life easier.
For advisers who do tax planning with their clients, this type of conversation is very standard. Also, having a working relationship with the CPA means that you have access to expertise in more complicated tax situations.
When the situation requires, some financial advisors might schedule an appointments between the accountant, client, and their firm. That way, everyone fully understands and agrees on the way forward.
And many times, your financial adviser can do this directly with your accountant without you in the room.
Reason 2: As the client, you don’t have to be in charge of the team.
Many times, people want to hire someone, and let that person take the lead. But many investment advisors & tax professionals still leave their client in charge of everything.
But hiring a financial advisor who provides a comprehensive approach allows the client to take a step back. That way, the financial advisor takes the lead in bringing the correct service provider for specific financial needs.
So let’s see exactly what comprehensive financial planning services look like.
What is comprehensive financial planning?
Comprehensive financial planning is more than just tax planning or investment management. It serves to complete the entire financial picture so the client can make the correct financial decisions.
Comprehensive financial planning focus areas include:
Cash flow management
This could include debt management. But for most people with large investments, cash flow management is more likely about managing the cash flows from their investment portfolio.
Tax planning is more than just tax preparation. It’s about incorporating tax efficiency into financial decisions.
And when it comes to tax time, you can be confident that your tax liability is as low as legally possible. Which goes directly to your bottom line.
Retirement planning not only enables confidence in the decision to stop working. It also allows the client to see the financial situation over the course of their life.
For example, unanticipated needs, like funding a long term care plan, are often incorporated into retirement planning.
That additional information allows the client to establish long-term financial goals. From there, they can make informed decisions and move in the right direction.
Also known as wealth management. This is more than just picking stocks and mutual funds and talking about investment strategies.
Proper investment management aligns investment plans with the client’s long-term financial goals. That enables the client to choose an asset allocation model that supports those goals.
Finally, the advisor monitors and rebalances their investment accounts as market conditions change.
People often refer to this as insurance planning. But risk management is more than just insurance. It’s about acknowledging all the risks in a client’s life, and building a plan to address them.
For example, small business owners might have years of experience in their own business. But if they haven’t done any succession planning, their business is at risk. And so is their livelihood.
Estate planning is more than just having a will or trust documents. Proper estate planning addresses the following: What happens to me, my loved ones, and my assets, when I’m no longer able to make these decisions myself?
The team approach
It’s no surprise that the CFP Board includes each of these topics in their curriculum. It allows properly trained financial planners to serve a wide variety of financial planning needs.
But the time might come to bring in subject matter experts, for things like legal advice or accounting needs. So a good financial planner knows enough to bring in professionals with diverse backgrounds to help address those needs.
And a great financial planner can give that expert accurate information on your financial situation. That enables them to deliver great service to their client at minimal cost.
Reason 3: You get better service during tax season.
As great as your accountant may be, they’re usually not available from mid-February to early/mid-May. Why May?
Many accountants take a couple weeks off after the tax filing deadline.
That’s understandable. But you shouldn’t lose access to tax advice for as much as ¼ of the year.
If it’s a time-sensitive nature (like investment timing), it’s probably something that doesn’t need your accountant’s advice.
And if it’s something that needs your accountant’s advice, it probably can wait. In the case of IRS issues, there’s usually some sort of extension that can easily be filed to buy some time.
Waiting around your accountant’s schedule is something that you, as the client, shouldn’t have to deal with.
A financial adviser, working with your accountant to serve you, can provide first-level tax guidance or education on a particular topic. And many financial advisers are in fact CPAs or enrolled agents themselves. They can give you tax advice independent of the accountant.
However, most good advisors will probably discuss with your CPA first. That way, everyone’s on the same page.
Reason 4: You avoid unpleasant surprises.
When I was a financial advisor, we had two clients came to work with us because they were extremely dissatisfied with their prior advisers. Specifically, they were upset that their adviser’s investment decisions created huge, unexpected tax bills.
This did not cause financial hardship in either situation. But it did create unnecessary tax liabilities. And that’s something everyone wants to avoid, regardless of their tax bracket.
This happens a lot in people who are about to reach age 70 ½.
Satisfied with their cash flow, they realize that they now have to start taking required minimum distributions (RMDs) from their IRAs. And if they haven’t already done so, they start taking Social Security (delaying Social Security after age 70 is just leaving money on the table).
In many cases, this can even cause a jump to the next tax bracket.
Most tax-focused advisors will provide:
- A mid-year tax projection outlining their estimated taxes (we usually do this between July & October)
- Recommendations on how to lower their tax liability
- Recommendation on whether they need to make additional payments to avoid penalties
Most of the time, a firm’s clients will be on track. If there isn’t a significant one-time event or change, then their tax bill might look very similar to previous years. In this case, minor adjustments might occasionally be warranted.
Sometimes, though, your advisor might see something that doesn’t look right. Those tax planning appointments allow your advisor to explore this in more depth. After digging deeper, you might come to an more informed decision on the way forward.
In that case, your advisor might re-run the tax projection with updated information or discuss the situation with the CPA to get another opinion.
Reason 5: You can be more proactive in your tax planning.
A funny thing happens when you don’t have to worry about bouncing back and forth between your advisors like a pinball. When you don’t have to worry about the basics, like your questions become next-level questions.
How do I get my ‘investments guy’ and CPA on the same team?
The simple way to start is to ask the financial person about their approach to taxes. Ask them if they:
- Work with your CPA to coordinate your tax returns
- Do mid-year tax projections or tax planning meetings throughout the year
- Consult with your CPA on technically difficult issues
If their answer is “No,” then find another financial person. There are plenty of tax-focused, fee-only financial planners who can help you better integrate tax planning into your financial planning.