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Nobody Knows Your Client’s Tax Implications Like You

May 12, 2017

This time we hear from Willie Schuette, a financial coach with Avon, Ohio-based JL Smith Group. He describes how a new client’s need for better tax advice gave him the idea to expand his company’s product line.

One of the important services financial advisors provide is helping clients manage the tax implications of their investments. While it’s important to ensure clients invest in strong growth opportunities over their years of savings, it is equally important to consider the taxes they will face when they start to withdraw their money during retirement. It doesn’t do much good to build a big nest egg if you must turn a lot of it over to the IRS when you go to enjoy it. But many people who could benefit from such advice will never hear it because many people don’t feel they need or want to consult a financial advisor.

In fact, the only financial professional that many people deal with is a tax preparer — a person who isn’t necessarily in a good position to give solid retirement planning advice.

This lesson hit me several years ago when I met with a husband and wife in their mid-fifties. In many ways, they were typical employees who were getting a matched 401(k) from their employer. On the advice of their tax preparer — a big-box service I won’t name — they were contributing above and beyond the match, which means that they were accruing funds in a tax-deferred vehicle. What that meant, of course, is that they were not taxed on the money when they made their 401(k) contributions. Instead, they were deferring the taxes on that income until the day when they finally made a withdrawal. So, as their accounts grew, so did their eventual future tax liability.

Willie Schuette

It’s good to save on the front end, but clients don’t always understand the back-end implications. This couple was not getting complete advice about how to maximize the ultimate returns on their hard-earned investments. I suggested that what they needed to do was add a Roth IRA or tax-free municipal bonds to their investment mix, since these products would allow for tax-free withdrawals in retirement. I told them this could come in handy, for example, if one of them wanted to withdraw a chunk of money to buy a new car.

After I got this couple’s investments in better balance, it occurred to me that they were not alone. There were likely many other people who were not getting good advice from their tax preparers — if they were getting any advice at all. The more I thought about it the more I realized that financial advisors are far better positioned to offer retirement tax advice than the average tax preparer. And we are certainly better prepared than the average software program.

Because of this experience, we decided to add a tax service to our business line. We created a separate division to prepare individual tax returns for people who were not already clients. As well as preparing their taxes, we work with them to make sure they understand their tax liabilities going forward and give them a picture of how taxes will affect their level of retirement income.

As you might imagine, this tax service generated new leads for our core business: providing financial advice. Given the cost of hiring a quality CPA or tax advisor, the actual profit on the tax business was small. However, the primary return for us was the addition of new long-time clients to our advice business.

This whole process was a strong reminder for me that many people do not have access to good professional financial advice. At a minimum, I feel good that our tax clients are getting sound counsel about the long-term tax implications of their investments, and if they end up becoming clients of our financial advice business, then all the better — for us and them.