Executive Summary
The Internal Revenue Code stipulates that US citizens must pay taxes on all income worldwide. Which makes it somewhat inevitable that financial advisors, who counsel clients on how to enhance their financial futures and generate wealth to achieve their financial goals, will have to help their clients deal with the tax consequences of that financial success (and the implementation of the advisor’s advice along the way). And in the end, it’s appealing to provide tax guidance to clients, as the hard-dollar tax savings can in many cases more than offset a financial advisor’s entire fee… even if we’re not ultimately the ones who prepare and file the tax return itself (which, in the end, is backward-looking anyway, while financial advice – and its potential tax consequences and tax savings – is an exercise in forward-looking planning).
Yet the irony is that even as the world of financial planning and tax planning converge – especially as technology automates more and more of the investment process, shifting the focus of the advisor value proposition to the other supporting advice areas (e.g., tax planning) around it – there remains remarkably little in the way of tax education for financial advisors. As in most states, CPA licensure requires numerous courses or outright years of experience in auditing (which isn’t practical for most advisors to get after they’re already advisors), the Enrolled Agent license is still primarily focused on tax compliance (e.g., filing returns and other tax reporting, and responding to IRS inquiries), and what little advisor education that exists is either relatively basic (the CTS designation) or a very substantial commitment (e.g., a Master’s degree in Taxation).
And so we’re excited to announce a new Kitces Course on “Reviewing The Tax Return For Planning Opportunities”, a 6-hour online educational program designed for CFP certificants who have obtained the tax knowledge but have little-to-no practical experience applying it in the real world (and would rather gain experience in a structured course that allows them to apply the knowledge and practice with hypothetical-but-real-world client scenarios, instead of just trying to figure it out on ‘live’ clients when real dollars are at stake!).
In the end, we anticipate this new Kitces Tax Course will be just the first of many to come, providing not just the knowledge but the opportunity to practice and master the skills it takes to become a better and more successful financial advisor. And while we don’t have any plans to issue a new designation – there’s enough alphabet soup in the world of advisor designations – we do hope that advisors who complete our new Kitces Courses will not only use their completion certificates to claim their 6 hours of continuing education credits… but also include it on their resume as a demonstration of their commitment to honing their skills as a financial advisor!
The Rising Role Of Tax Planning In Financial Advice
It was Judge Learned Hand who famously wrote in the case of Helvering vs Gregory that “anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury.”
In the case of Gregory, the matter at hand was a series of corporate mergers and liquidations that had been structured in a manner to minimize taxation. More generally, though, financial advisors are increasingly put in a position of recommending to clients how to arrange and structure their personal financial affairs in a manner that can minimize their taxes as well. From the use of traditional and Roth IRAs (and other tax-sheltered accounts) and which assets to hold within such accounts, to the use of annuities and life insurance (with their tax preferences) and managing investment portfolios (with the attendant tax ramifications of trades and turnover, not to mention unwinding concentrated positions), financial advisors are routinely put into a position where they are called upon to provide guidance to clients about how to “arrange their affairs” to minimize their tax liabilities.
In recent years, the intersection of financial planning and tax planning has expanded so much that a growing number of CPAs have come directly into the financial planning business, more and more financial advisors are getting their Enrolled Agent licenses, and the lines between financial and tax planning are blurring even further. Yet in practice, the bulk of financial advisors still set a clear dividing line between tax preparation work and providing formal tax advice (e.g., rendering opinions on the tax consequences of complex business transactions under the Internal Revenue Code that can be legally relied upon by clients) which is referred out to CPAs and EAs, and their own tax planning and guidance with clients that occurs in the natural course of providing financial advice (e.g., regarding the use of retirement accounts and various investment decisions).
Still, though, even as most financial advisors refer out the preparation of tax returns, asking for copies of a new (or ongoing) client’s recent tax returns is a staple of the client data gathering process, given the wealth (no pun intended) of information that’s available within a tax return, and the insights that can be gleaned about a client’s financial affairs in the first place by seeing what expenses are being claimed (providing insights about the household’s cash flow), and what income is currently being produced (which in turn provides perspective on the underlying assets that may be producing it). As in today’s low-yield environment, in particular, a relatively ‘innocuous’ looking item like $5,000 of interest on Schedule B could actually be an indicator of a $200,000 bond account (yielding a meager 2.5%?) or a $1M uninvested balance in a high-yield cash account (yielding just 0.5%?).
And ultimately, in a world where so much of the value of financial planning is intangible and distant – “we’re going to do this every 6 months, and trust me you’ll thank me in 30 years when you’re retired!” – tax planning strategies that result in tax savings is often one of the most straightforward “hard dollar” outcomes that a financial planner can point to – as a result of this tax planning strategy, your tax savings this year alone adds up to more than our entire financial planning fee!?
The Lack Of Tax Planning Designations For Financial Advisors
Notwithstanding the ongoing rise of tax planning amongst financial advisors, there remains a remarkable dearth of tax-related education (or “tax designations”) relevant for financial advisors.
For those so inclined, becoming a Certified Public Accountant (CPA) is certainly appealing, and the license holds substantial gravitas with clients to boot. Yet the reality is that for financial advisors who didn’t start their careers as accountants, it is highly impractical for most to go back and obtain the credential later. As while the CPA license has requirements ‘similar’ to CFP certification – including an Educational component, an Experience requirement, and a CPA qualification exam that must be passed – most states require 150 semester hours of college education to become a CPA (equivalent to an undergraduate degree and a Master’s in Accounting) that typically includes multiple courses in audit (which is not relevant to the work financial advisors do), and most states also require at least two years of public accounting (i.e., audit) experience (and realistically, most experienced financial advisors will not want to take a 2-year entry-level audit job to obtain their CPA license!).
Alternatively, more and more financial advisors are pursuing the Enrolled Agent (EA) license instead, which allows the advisor to prepare tax returns as a licensed preparer and represent clients in matters before the IRS. And becoming an Enrolled Agent requires “just” the passing of a 3-part exam (with no separate educational requirement beyond reading the study materials to prepare for the exam), which does require an average of about 200 study hours to prepare (a substantial amount of time, but still less than what CFP certificants typically spend in studying for the CFP exam even after completing their educational component). However, in the end, the Enrolled Agent is still focused primarily on tax compliance – i.e. literally, complying with the obligations of tax filings and tax reporting, including preparing tax returns, and responding to IRS inquiries. All of which is backward-looking on what has already occurred in the client’s tax life (and must now be reported). It is not necessarily a program designed to help advisors engage in proactive forward-looking tax planning.
Yet again, when it comes to more financial-advisor-specific tax education, there is very little created specifically for financial advisors. The Institute of Business & Finance does offer a “Certified Tax Specialist” designation (alongside its “Certified Annuity Specialist” and “Certified [Mutual] Fund Specialist” programs), but the CTS is focused (but the IBF’s own explanation) on investment-related tax advice and not necessarily the full breadth of what a comprehensive financial plan would cover (and thus is perhaps more akin to just taking the tax course of the CFP educational requirement in the first place).
For those who want something significantly more advanced – a “post-CFP” level of tax education – there are a growing number of Master’s degrees in Taxation, including some like Golden Gate University’s Masters in Financial Planning with a Tax concentration, that are created specifically for financial advisors. But a full-on graduate degree entails substantially more time (and financial) commitment than the advisor may be prepared to commit (as the typical Master’s degree course requirements are nearly double the requirements to satisfy the Education requirement for the CFP marks in the first place).
The end result of this “book-ends” nature of tax education for financial advisors – either basic or administratively oriented, or very advanced but beyond the scope of what most financial advisors actually do – is that even as financial advisors increasing engage in more proactive tax planning with clients, there is a substantial gap in education and training for financial advisors to help them apply what they’ve learned in the process of becoming CFP certificants in real-world client scenarios!
Introducing the Kitces Tax Course on (Finding Opportunities When) Reviewing A Tax Return
Given these challenges in the landscape of financial advisor tax education, we’re excited to announce the launch of the first Kitces Course (one of our most highly requested new offerings in our annual Reader Survey!), with a specific focus on teaching CFP certificants (particularly those who just recently completed their CFP education and exam requirements but have limited client experience) how to actually review a client’s tax return to glean financial planning insights and find planning opportunities!
Specifically, the new Kitces Course is a 6-hour guided program, replete with not only articles and videos that walk through the entire Form 1040 tax return and explaining line by line (at least for all the lines that matter to financial advisors) what it covers for tax purposes, what it reveals about the client’s financial situation, and the planning opportunities it may help uncover. And as a course designed to actually help financial advisors not just learn the material – which you may have already gleaned from the tax course of the CFP educational requirements – but actually practice it and travel down the path towards mastery, our Course will provide real-world case scenarios and a final capstone to allow the advisor to gain experience applying the knowledge. Because in the end, it’s better to practice and gain mastery in a structured learning environment… rather than just figuring it out as you go with ‘live’ clients!
As a 6-hour Course, advisors who complete the program will receive Continuing Education credits for the full range of other professional designations, including CFP CE credit, CPE credit for CPAs, CE for Enrolled Agents, and those with designations from the Investments & Wealth Institute (e.g., CIMA, CPWA, and RMA designees), or the American College (e.g., the CLU, ChFC, etc.), and a completion certificate that can be used for self-reporting to other designation providers. And perhaps more importantly, a Kitces Certificate of completion that the advisor can print and put on their wall, share digitally, or include on their resume when trying to get that next job opportunity!
Notably, though, unlike our Nerd’s Eye View content – which is and remains free to the advisor community – our Kitces Courses will have a cost, of $397 per person (or $297 for those who have already become Premier Members).
In the long run, we see this Kitces Course on Reviewing A Client’s Tax Return as just the first of many to come, all built with a focus on not just providing the information alone (which you can read on this blog!), but helping advisors actually train and practice their skills on the path towards mastery, across the full spectrum of the work we do with clients (that we otherwise only learn by the school of hard knocks, which is problematic when real clients and their financial lives are on the line!). All built with the focus of fulfilling our Kitces.com mission of Helping Real Financial Advisors Be Better And More Successful!
Much needed.
Talking with the tax preparer, working as a team.
I work as a CPA doing tax work. The added benefit of coordinating with a financial advisor is very worthwhile to the clients. Really coordinating, talking outside of tax season when there is time.
Even just helping clients make sure they have all their tax documents organized for their tax preparer as a nice value-add. And helping clients sort through the impact of when their income changes, e.g. taking Social Security benefits, IRAs RMDs, perhaps donating from their IRA to charity, etc. these are all value-ads.
I prepare most of my clients income tax returns as part of my advisory service and I will say they place more value to it than what they might pay a CPA to prepare their returns. It is comforting to have someone who knows their financial situation to be involved in the tax process too. Getting “prepared for the preparer” is about as much fun as going to the dentist. Anything we can do to make it a less arduous chore is valued by many.
This sounds like it could be very beneficial for both the client and the practitioner.
Will there be any printed or printable, material available? It can be much easier to review, study, and make notes on paper rather than digital media.
Thanks.
Can a financial planner without the CFP designation participate in this course? I have completed all of the CFP coursework, with plans to sit for the November 2021 exam. I would be interested in taking this course now, if eligible.
The first of many towards out Financial Advicer Certification?