The two factors that directly impact a client’s financial profile are how much they earn — whether in the form of income or investment gains — and how much they keep.
And although the former is widely addressed by financial advisors, it’s the latter that’s quietly in high demand by RIA clients. The intertwined relationship between investment advice and personalized tax planning is a top consideration among high-net-worth (HNW) clients when choosing their financial advisor — a reported 47% of HNW clients are particularly interested in tax planning services, and a surveyed 46% of respondents are willing even to change their advisor to find them.
Below, we’ll explain what you need to know about offering tax planning services to your clients and, most importantly, how to stay out of legal trouble.
Why you may consider offering tax planning services at your firm
Anytime we can consolidate the number of service providers we use, it’a good day. This goes for getting a haircut and a beard trim, finding a happy hour that serves good drinks and food, and you guessed it — working with an advisory firm that offers investment advice and tax planning services.
The reasoning is simple: clients want more value from a single relationship than enlisting another tax planning professional. When you consider a client’s complete financial picture, their investment portfolio and the tax strategies designed to optimize how much they owe the government are closely related.
From a business perspective, you’re dealing with competitive pressures from a record number of RIA firms and the looming decision either to fold to industry-wide fee compression or provide more value to your customers.
Ultimately, with the number of firms offering supplemental services to their clients increasing, tax planning presents advisors with an opportunity to provide greater value to their clients with holistic investment advisory and tax optimization.
Tax planning 101: here’s what you should know
For starters, what exactly is tax planning?
While there’s not one exact definition of “tax planning,” it’s generally considered to be the analysis and preparation of potential tax strategies for a client given their financial profile. More importantly, however, is what tax planning isn’t — which is the recommendation of a specific tax strategy. This distinction illustrates a critical difference between tax planning services and tax advice.
Tax planning vs tax advice
The difference between tax planning and tax advice may seem like semantics, but the implications of crossing the line into providing tax advice can mean having exposure to financial and legal liability.
Giving tax advice is an Internal Revenue Service (IRS)-regulated activity outlined in the Treasury Department Circular No. 230. The circular provides guidance on who designated tax practitioners are — Certified Public Accountants (CPAs), Enrolled Agents (EAs), attorneys, and occasionally other limited parties — and the types of activities that only tax practitioners can engage in — generally speaking, coordinating documentation and communicating with the IRS, or strategizing ways for client tax avoidance.
On the other hand, financial advisors and their tax planning services must rely on “tax optimization” strategies, rather than tax avoidance strategies.
Tax optimization vs tax avoidance
Tax optimization strategies are used to help clients pay the lowest possible tax on their income and assets by optimizing how and when taxes are paid. It isn’t about never paying taxes, but minimizing the amount of taxes legally owed to the IRS.
Examples of tax optimization strategies might include:
- Electing for an LLC to be taxed as an S corporation
- Contributing to tax-advantaged retirement accounts
- Harvesting your tax losses to offset capital gains tax
- Filing an 83(b) election on an equity grant to save on future taxes
- Helping a business owner navigate QSBS regulations
In comparison, tax avoidance strategies seek to permanently hide taxable income or assets from the IRS through abusive tax shelters and transactions. While not necessarily illegal, tax avoidance strategies require regulated tax advisors to file certain disclosure forms when recommending these strategies.
As a reminder, only designated tax advisors can recommend tax avoidance strategies, while financial advisors can provide potential options for tax optimization strategies.
What to keep in mind before you begin tax planning services
When you’ve decided that offering tax planning services is the right move for your business, there are a few things to consider to execute your new service offering successfully:
Working with your counsel
Tax planning services occur on a spectrum somewhere between generic information — providing clients with information on tax laws — and specific projections and hypothetical examples of different tax strategies. Part of your determination of the extent of tax planning services you want to offer will come down to what your counsel is comfortable with.
Some counsel may only be comfortable with the most generic tax planning guidance, while others would be okay with you making detailed projections and hypothetical scenarios for your client. At the end of the day, it’s always possible to be held liable if a client takes your guidance as a recommendation and it doesn’t end well. The line between tax planning and tax advice can be thin, and what matters most is whether your client believes that you gave them a tax recommendation, and therefore provided tax advice.
You should work with your counsel to create a plan that works for you and your firm while taking precautionary measures to not cross the line into tax advice.
Partnering with a tax attorney
Testing the waters with an external partner can be a good choice as you begin offering tax planning services through your firm.
Your primary role as a tax planner is to synthesize all of the information you know about your client’s financial situation and create tax-optimization strategies as potential options — given that your counsel has greenlighted this. You can then present these options to the tax attorney, who can then make the formal recommendation to your client.
In some cases, your client might already have a tax attorney, in which case you can work with them. If your client doesn’t already have a tax attorney, it would be beneficial for you to build some relationships with trusted tax attorneys that you feel comfortable working with for your tax planning clients.
Managing your communications
The way that you write and speak with your clients will determine whether they consider your tax planning strategies as tax advice.
You’ll want your language to stay clear from making concrete suggestions, and instead, present options to your clients that they or their tax advisor can select.
To illustrate an example of what language could look like:
Tax planning: “If you were to contribute $10,000 to your Traditional IRA this year, you would save approximately $2,500 in federal taxes.”
Tax advice: “Your best option right now is to contribute to your Traditional IRA as it would lower your taxable income since you expect to be in a higher tax bracket today than you’ll be when you retire. You should contribute $10,000 this year.”
For extra peace of mind, you might also want to add a template disclaimer to all of your client communications indicating that nothing should be taken as tax advice and that the client should see a tax professional for tax advice.
Your path to offering tax planning services
Offering tax planning services at your RIA can mean revenue diversification, market defensibility, and, most importantly, additional value through a more holistic approach to your client’s financial goal.
Although the path to offering this service isn’t without its challenges — you shouldn’t be deterred.
Working with your legal team and relying on professional tax support to deliver client recommendations can enhance the value of your firm while delighting your clients and keeping you out of legal trouble.
