If you work with a financial adviser and a CPA, you’ve probably been caught in a gray area between them more than a few times. For example, say you read one of my articles on Roth conversions. You ask your CPA about the strategy in your situation, and the CPA tells you to ask your financial adviser. When you ask your financial adviser, they tell you they can’t give tax advice. In no-man’s land, you give up and go back to playing Wordle.
Wouldn’t it be easier if you could hire someone to just do both — financial advice and taxes? Full disclosure: My firm does do both, but as of now, only a small minority of clients uses our tax services. I do believe that this is the future. Yes, I also believe it will lead to better client outcomes, but more than that, I think it’s just easier.
So, why won’t your adviser talk taxes? Below are three possible reasons.
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1. Revenue
I once heard a Vanguard adviser say that their advice ends where their products end. This is not a dig at Vanguard. This is true of most product manufacturers in most industries. You wouldn’t ask the sales rep at a Ford dealership for a recommendation on which Honda motorcycle you should buy. No, they offer advice on the things that they get paid for.
At age 26, I earned my CERTIFIED FINANCIAL PLANNER™ certification. I also hold the IRS Enrolled Agent license, which allows for a unique approach to planning that can be beneficial to retirees and those selling their businesses, who are eager to minimize lifetime taxes and maximize income.
Because most financial advisers are still somehow affiliated with a product manufacturer, their advice extends to those products. Most of the advisers I know who are offering tax advice or tax planning are independent. They are either charging separately for that advice or they are bundling it with everything else they do.
2. Liability
If you’ve worked with an adviser, you can probably search your inbox for “this is not tax advice” and come up with plenty of results from said adviser. Offering tax advice comes with significant liability. Imagine me writing instructions on how to do a knee replacement and then sending you with those instructions to an orthopedic surgeon. There is a lot of room for error, especially if the adviser giving the advice is not hands-on in the return-preparation process.
Typically, an investment firm will have specific procedures for delivering investment advice. They likely will not have those same rules for tax advice, and therefore, will have a mountain of disclosures stating that any advice is “not tax advice.” Additionally, the insurance that most advisers carry does not cover errors and omissions related to tax advice. All of this is to say that it’s a risky proposition for the adviser.
3. Knowledge
The CERTIFIED FINANCIAL PLANNER™ certification is the gold-standard designation for financial advisers and planners. One of the modules in the CFP program is tax. I struggled through it at age 25, as I really didn’t have any practical experience because we weren’t offering much tax advice in our practice.
In 2015, I started working with retirees and realized just how much value you could provide by understanding the impact of your advice on the taxes that clients pay. In 2021, I went through the Enrolled Agent classwork and passed the three exams necessary to gain the license via the IRS. That coursework went many levels deeper than the CFP did, and things started to click.
My experience with friends in the profession who offer tax advice is that they either followed the same path I did, or they started as CPAs and transitioned into financial planning. The CFP certification alone typically is not enough.
In terms of who does what, I often think of the tax adviser as the passenger in the car looking through the rearview mirror. Their job is to minimize taxes on everything that has already happened. The financial adviser should be looking through the dash to see what’s coming and to minimize taxes based on that. In order to do this, you need to project out future taxes. If you want to use a free version of the software we use for this, you can access it here.
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