Why Most Financial Advisors Do Not Provide Valuable Tax Planning

This financial advisor thinks tax planning should be part of every client relationship. Reducing your taxes is an integral part of a comprehensive financial plan as well as any wealth-building strategy. Even among clients who are just utilizing a financial advisor for investment management, tax efficiency is essential to optimal portfolio performance (after all, it’s not just what you make but what you keep). According to Orion advisor solutions, many advisors lack the tools to even begin offering tax planning; other financial advisors are not even allowed by their firms to offer tax guidance.

You, as the consumer of professional financial advice, should expect more when it comes to tax management. The days of saying put more money into your IRA and calling it tax planning are over. Let’s be honest; most of you reading this likely make too much money to deduct your IRA contributions. According to a new survey from Orion (which queried 2000 investors), tax advice is something that clients consider extremely important. Anecdotally, as a fiduciary financial planner who works with many high-income business owners, many retirement plan contributions are motivated by their tax savings, beyond just what is needed to retire comfortably at some point in the future.

A staggering 80% of investors believe that their financial advisors should be focusing on the minimization of their taxes. Similarly, 90% of respondents believe that taxes can erode the growth of their investment accounts over time.

Some advisors totally skip over tax-loss harvesting, while others only perform this valuable service once at the end of the year. This lazy approach to minimizing taxes can mean missed opportunities when the stock market gets volatile, as we saw near the beginning of the COVID pandemic going mainstream. This resulted in the shortest bear market on record around March 2020. If your financial advisor missed this huge opportunity to reset your tax basis within your portfolio, they might have missed a big opportunity to minimize the taxes on your investments for years to come. Put another way; they are costing you money in the form of higher than necessary tax bills.

According to the Orion survey, 86% of financial advisors believe that being able to quantify and report to clients the ongoing effect of tax management is essential to growing their financial advice businesses. But it would seem a much smaller number provide anything coming close to real tax planning. Few financial advisors even take the time to collect and review their clients’ tax returns.

“The hardest thing in the world to understand is income taxes.”

-Albert Einstein

What Is Tax Planning Advice?

Investopedia offers this definition of tax planning, “Tax planning is the analysis of a financial situation or plans to ensure that all elements work together to allow you to pay the lowest taxes possible. A plan that minimizes how much you pay in taxes is referred to as tax efficient. Tax planning should be an essential part of an individual investor’s financial plan. Reduction of tax liability and maximizing the ability to contribute to retirement plans are crucial for success.”

Tax planning should go beyond telling you to save more for retirement, which may result in a tax deduction. It should include strategies to help you pay the least amount of taxes over your lifetime, not just the current tax year. At the same time, it may help you find all of the tax deductions you are entitled to today. Furthermore, ensure that your investments are managed in a tax-efficient manner to not increase your overall tax burden.

Opportunities for proactive tax planning are even larger for those who are self-employed or small business owners. This can also include those with a side hustle or other self-employment income. Setting up the right corporate structures can directly affect your overall rates each year. Likewise, setting up the right retirement plan can dramatically increase your tax savings, as well as help minimize things like the 3.8% Obamacare surtax.

I was just speaking with a business owner who was looking at a multi-million-dollar business income this year (shared with a business partner). His current advisor told him to fund a traditional IRA. He was not excited about the $7,000 tax deduction ($6,000 max contribution plus $1,000 catch-up contribution). He found me via my article The 19 Most Valuable Tax Deductions For Your Small Business and wanted to know how much I thought I could help him.

At first glance, setting up the right retirement accounts could help shelter hundreds of thousands of dollars of income from current taxation each year. In this case, with the high business income, this owner and his partner could shelter closer to $1 million dollars this year with a Profit Sharing 401(k) and Cash Balance Pension Plan combination. This huge retirement plan contribution limit is based on their income, ages, and the fact that they also had several family members working in the business, which helped increase the potential maximum contributions and potential tax savings. Obviously, I am aware not everyone is able or willing to contribute at this level, but at the same time, it is important to know your options.

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Your tax preparer and financial planner should work together to help you keep more of your hard-earned money. I am not opposed to paying taxes, but I am opposed to paying more taxes than is owed. Having an income where taxes are an issue is a good problem to have. Advice without implementation is worthless. Much tax-planning advice is given by CPAs but never implemented. I often hear from prospective clients, “My CPA has been telling me to do this for years.”

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