Tax preparation opens doors with clients

By Terry F. Ritchie | June 1, 2009 | Last updated on September 15, 2023
8 min read

Some years I wonder why I do it? The long hours. The time away from my family. The last-minute procrastinators.

Given that our fee-only practice specializes in comprehensive fi nancial planning for affl uent individuals with challenging Canada/U.S. fi nancial, tax and estate matters, for many of our clients tax season doesn’t end on April 30th. Automatic extensions for U.S. citizens resident in Canada and Canadians who may have a U.S. tax fi ling requirement (such as the renting or sale of U.S. real estate), goes through June 15th.

Further, a properly fi led U.S. extension can push the date for other clients back to October 15th. Sometimes, I think it might never end and ask myself why I decided so many years ago to offer tax preparation as part of my fi nancial planning practice.

I grew up in Canada, but moved to the United States just prior to my last year of high school. My mother was a U.S. citizen and my father was eager to leave the high Canadian tax environment of the 1970s and escape the brisk Alberta winters. So, in 1979, our family sold virtually everything it owned in Canada and moved to Paradise Valley, Arizona—a small community nestled between Scottsdale and Phoenix.

I graduated in 1985 with a degree in fi nance from Arizona State University and very quickly focused my efforts on a career as a fi nancial planner and the attainment of my CFP designation in the U.S.

My father was in the life insurance business in Canada, so I had some knowledge, although somewhat skewed, as to what fi nancial planning was all about. I worked within a Phoenix-based fi nancial planning fi rm and recall at the time the solution for most clients seemed to be Universal Life Insurance with interest rate projections of 13%—yes, those were the good old days.

Fee Change I learned very quickly that although I was licensed to sell life insurance and a variety of investments on a commission basis, I was uncomfortable with the perceived confl ict of interest and found a product solution was not always best for the client. Although some of my colleagues were handsomely rewarded through the products they sold, I wanted to do more for my clients and decided to focus on providing more of a fee-based planning solution.

Specialization is prevalent in many professions, most noticeably medicine and law, and I found if I could develop more specialized expertise in the area of tax and tax preparation, it could foster a greater degree of growth within my fee-only practice.

Many of my clients—initially a number of physicians I was working with— were frustrated with their professional tax preparers and accountants. In many cases, they asked their accountants for tax-planning ideas and opportunities, only to fi nd these folks were doing little more than putting the numbers on the forms and schedules.

There was no discussion as to the kind of business entity they might use within their practices; how assets should or might be titled; the kinds of retirement plans they might use; or the kinds of investments they should hold in their registered and non-registered portfolios. Many of my clients didn’t start their previous tax preparation relationships for fi nancial planning reasons. However, they all had fi nancial planning problems when they went to their accountants. They just didn’t realize it.

Since I wanted to be able to do more for my clients, using a fee-only comprehensive fi nancial planning or wealth management approach, I decided tax planning, and ultimately tax preparation, needed to be a part of the offering. And since I was drifting away from commission- oriented products, I needed an additional revenue stream to replace the lost income.

During university, I took courses on tax and started to read various books and guides on tax planning and preparation, both in Canada and the U.S. I also made an effort to attend specialized courses and pursue my U.S. Enrolled Agent (EA) designation through the Internal Revenue Service and my Registered Financial Planner (RFP) designation in Canada.

Expanded Offering As more of my clients learned I was capable of preparing their tax returns as part of their overall engagement, it became easier for them to refer clients to me—since many of their friends and colleagues needed to have tax returns prepared and were also looking for fi nancial planning advice.

As my colleagues were prospecting for new business, I was fi nding it easier to get new clients. And not just any clients: I was getting business from truly worthwhile people.

Since I was managing money for my clients, and reviewing their tax returns as part of the engagement, I became aware of their levels of taxable investment income, their discretionary cash flow, the proceeds from the sales of assets, and the types of bank and investment accounts they held. That being the case, as part of my personal tax review, I was in a much better position to provide solutions to help structure their investment portfolios on a more tax-effi cient basis. Research has consistently shown the two biggest determinants of investment performance are tax and cost.

Do It Yourself So why might you want to add or incorporate tax preparation as part of an overall comprehensive wealth management engagement?

Here are some reasons:

It’s Part of a Comprehensive Service Process – You are in the business of taxes, whether you like it or not. It’s really that simple. Tax planning is an integral and critical part of the comprehensive fi nancial planning process. As a planner, taking tax planning to the next level through tax preparation can be a practical step for the fee planner.

Client Expectations – We prepare a comprehensive fi nancial plan for new clients prior to making any investment recommendations, and ultimately any investment management implementation. Through this process, we become keenly aware of our clients’ personal tax situations. We review past tax returns in Canada and the U.S., and prepare current-year projections and tax planning recommendations. That way, when it’s time to prepare current-year returns, we’re far more effi cient thanks to all of the work up-front.

We generally provide tax preparation to our existing annual retainer clients and fi nd most affl uent clients expect that service to be part of the overall wealthmanagement process.

Setting Yourself Apart – Many new clients come to us for income tax reasons. Although we closely follow a defi ned process, income tax is only one part of the overall planning process. By focusing on a comprehensive fi nancial planning approach that also incorporates tax preparation, you can differentiate yourself from other advisors.

It’s not uncommon for a client to contact us specifi cally about an income tax issue and then learn, as we further investigate his or her situation, that more coordinated and comprehensive planning is required. Keeping abreast of the tax law changes and discussing the impact to our clients—good, bad or otherwise— goes a long way in setting ourselves apart from other planners.

Additional Revenue – Whether you’re a planner who provides comprehensive fi – nancial planning or modular planning, providing income tax preparation can be an additional revenue stream in these uncertain economic times. Let’s face it, whether our clients like it or not and regardless of how the markets behave, they still need to have their taxes prepared every year.

More Coordinated Investment Management – Research consistently shows tax and cost are two of the largest determinants of overall investment performance. Coordinating your clients’ investment portfolios to their unique personal tax situations is one way to enhance returns without taking certain kinds of unnecessary market risks. We continually see investment advisors in Canada and the U.S. managing portfolios while totally neglecting their clients’ overall personal tax situations.

In many cases, they don’t even understand the damage they might be doing. This year for example, how many clients who did not harvest market losses within their portfolios (and have lost market value) are being surprised by the large unexpected capital gain distributions in their mutual funds?

As we review portfolios on a quarterly basis and rebalance accordingly, to our clients’ overall objectives and investment policy statement guidelines, we also take the opportunity to review those clients’ current-year income tax projections. Should they harvest losses to offset current gains? We help them decide if they should make that last instalment or estimated tax payment, or adjust their income tax withholding from their employment income to free up more of their tax refund now, as opposed to at tax time in April.

Adding Value to Your Existing Relationships – With the uncertainty of the global markets and economy, some of your clients might be re-evaluating their relationship with you. A recent U.S. survey conducted by Russ Allen Prince of 400 affl uent investors with at least $1 million invested found:

› 81% of clients with at least $1 million invested said they were going to leave their advisors; › 86% of those clients were not going to refer their advisors to their friends and associates—or say they are warning their friends and associates about their advisors; and › Only 2% of those clients were planning to make referrals.

Whether those statistics play out in real life won’t be known for a while. But the numbers do suggest affl uent investors are unhappy with many of their present relationships. True wealth management goes beyond just investments and fi nancial planning. And the ability to provide tax preparation as part of your wealth management business model can go a long way in creating value within your existing practice.

Making tax returns part of your fi nancial planning process does present challenges. Having a solid understanding of tax laws, being conversant with the technology required to prepare returns, and keeping abreast with continuing education requirements are all essential.

Further, there are liability issues attached to preparing tax returns. You’re dealing with agencies that don’t forgive mistakes and clients resent being audited. To protect yourself, be sure to have adequate and additional errors and omissions insurance (E&O) coverage.

Finally, there are certain working environments that prevent planners from offering tax preparation to their clients. If that is the case for you, align yourself with a good accountant or tax preparer who shares your way of doing business and can benefi t both you and your clients.

Terry F. Ritchie, CFP (U.S.), RFP (Canada), TEP, EA, co-founder of Transition Financial Advisors Group Inc. and co-author of several books on cross-border fi nancial issues.

Terry F. Ritchie