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Five Reasons Your Financial Advisor Should Work With Your Tax Professional, Not Against Them


Introduction 

In the world of financial advice, there seems to be a horrendous rift between ‘investment advice’ and ‘tax advice.’  In most situations, sound investment advice should incorporate some semblance of tax planning, or at least a rough calculation of the tax impact of a given transaction.  What’s more likely, though, is that when you ask your ‘financial advisor’ about what your tax liability will be, you’ll hear, “I can’t give you advice on that.  You’ll have to talk to your tax expert.”   

As the client, you deserve more.  Your financial adviser should have a working knowledge of taxes, so that you know that he or she has incorporated tax efficiency into your investment recommendations.  In fact, the CFP® Board actually requires its members to have completed a tax curriculum before they can call themselves a Certified Financial Planner™.  If your financial adviser says they can’t give tax-related advice, that should at least give you pause when it comes to continuing that relationship. 

More than that, though, your financial adviser should have a working relationship with your tax professional (or be able to introduce you to a tax professional) so that your experience is more seamless. 

Here are five reasons why: 

Reason 1:  You address issues as a team. 

Which conversation(s) would feel better to you: 

Conversation 1: 

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:  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, then buy YYY.  This will 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, and 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 so that you can increase your monthly cash flow. 

Additionally, we looked at the previous tax returns that your accountant gave to us, and noticed a couple of tax planning opportunities.  We believe that making these moves will end up lowering your tax bill in the long run.  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, 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.  We often schedule appointments between the accountant, client, and our firm to make sure we fully understand and agree 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. 

Knowing that two of your advisers are on the same side of the table when giving advice gives a lot of people more peace of mind.  Specifically, this is true if your advisers consist of  

An investment adviser (as opposed to a broker-dealer representative), who has a fiduciary obligation to protect the best interests of their clients.  They are responsible to either the Securities & Exchange Commission (SEC) or their state financial regulatory office for upholding this obligation. 

A tax practitioner (CPA, lawyer, or enrolled agent), who is accountable to the Internal Revenue Service for the tax advice they give to their clients. 

When there are multiple ways for your team to be held accountable for the advice they give, it makes it more compelling for them to get it right.  This is only to your benefit.  

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 working 80-90 hour weeks ahead of the tax filing deadline. 

While that’s understandable, it doesn’t have to be the case that you don’t have access to tax advice for as much as ¼ of the year.  To be honest, 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’s probably not so urgent that it can’t wait—in the case of IRS issues, there’s usually some sort of extension that can easily be filed to buy some time. 

However, 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, who can give you advice (although most of us will probably discuss with your CPA to make sure we’re all on the same page, first). 

After all, you shouldn’t have to wait until tax season is over to have access to tax advice.  In the spirit of making sure you don’t have to be in charge of everything, your team should be able to help you throughout the year. 

Reason 4:  You avoid unpleasant surprises. 

At the time of this writing, our two most recent clients came to work with us because they were extremely dissatisfied with their prior advisers.  Specifically, it was the fact that the investment decisions that their previous advisers made created huge, unexpected tax bills.  While this did not cause financial hardship in either situation, creating unnecessary tax liabilities is something EVERYONE wants to avoid, regardless of their tax bracket. 

We’re not tooting our own horn.  Certainly, no one can claim that they’re going to help all their clients avoid paying taxes.  And as you get older, there are certain instances where an increase in taxes might be unavoidable.   

We see this 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. 

However, we believe that each client should receive, at a minimum: 

  • 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, our clients are 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, we might see something that doesn’t look quite right.  Our tax planning appointments allow us to explore this in more depth, learn more about the client’s situation, and decide what to do.  In that case, we might re-run the tax projection with updated information or discuss the situation with the CPA to get another opinion.   

But in our experience, our clients are okay with paying taxes throughout the year.  What most people (and most accountants, for that matter) are NOT all right with is finding a four or five-figure tax bill on April 14th. 

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 your team is giving you basic information without you having to ask, your questions become next-level ones.  When you can take a step back and think about the big picture, you can actually shift the focus of your planning meetings on the big picture.  And the big picture is what financial planning is really about. 

For most of our lives, we have a mantra beaten into our heads: 

  • Go to school 

  • Get a good paying job 

  • Spend less money than you earn 

  • Save the difference wisely  

As long as you’re able to spend less than you earn, then you should be okay.  But there is a certain flaw in that thinking.  First, it assumes that nothing will ever happen to your ability to continue earning money.  Second, it never really teaches you what to do when you stop earning money (either by choice or a life event makes you leave the workforce).  Third, you never figure out when you can stop.    

Financial planning helps you address these issues.  Proper financial planning lets you, the client, ask the ‘what if’ questions, and work with your team to create the solution that’s right for you.  When you’re in ‘crisis’ mode, running from your investment guy to your tax guy, trying to coordinate the details, you might very well quit in frustration before you get to the ‘next-level’ questions.  And that’s a shame, because money and taxes shouldn’t drive your life.   

Our goal is to help our clients adequately address the investment and tax decisions while focusing the majority of their time and mental energy to the things that are most important to them.  Sometimes, we do have to have tough conversations.  But they’re almost never about routine tax questions that we’re able to answer or coordinate with their CPA.  And because we do a lot of heavy lifting at the end of year, the CPAs we work with are able to get our clients’ tax returns done with less effort.   

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.  You can probably find one close to you.  But if not, contact us at Lawrence Financial Planning.  We’d be more than happy to schedule a complimentary phone appointment to see how we might be of service to you.   


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