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Steven is constantly approached by Advisors who all have the same game changing idea: “I should buy a tax practice to generate leads”. While this sounds great on paper it is not so simple in reality. In this week’s episode Steven is joined by Financial Advisor (and panelist at the 2023 RTS Tax Planning Summit), Michael Cummings to talk about the realities of buying and owning a tax practice in addition to being a financial advisor. Mike candidly shares his experience, the challenges and successes he has seen along the way.
Steven and his guests share more tax-planning insights in today’s Retirement Tax Services Podcast. Feedback, unusual tax-planning stories, and suggestions for future guests can be sent to email@example.com.
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Hello everyone, and welcome to the next episode of the Retirement Tax Services podcast, Financial Professionals Edition. I’m your host, Steven Jarvis, CPA, and I’m really excited for today’s episode because we get to talk about a topic that advisors are constantly coming to me with, not even necessarily as a question. Sometimes it’s even more just like an aspirational statement, but I think sometimes it’s excitement before there’s any context. And so I’m excited to have Michael Cummings on the show with me today to give context to this idea of, as an advisor, should I go out and buy a tax practice. So Michael, welcome to the show.
Thanks for having me, Steven.
You and I have had a couple of chances to interact in person and have this conversation, so I appreciate you being willing to come on the podcast because from my perspective, not as an advisor, I totally get where people are coming from with this idea, but I think that the reality is a lot different than many advisors expect it to be. And so you’ve been through this successfully. I might add, I appreciate your willingness to share your perspective, share some background on what you were doing before you bought this tax practice and what led you to being willing to pursue this, and what your experience has been since.
Thanks so much. So yeah, I’m a financial advisor. Been in the business for a little over 15 years and probably have typical relationships with tax accountants and attorneys and other kinds of COIs over the years. But I definitely found a pain point when working sometimes with accountants where you’re constantly working to really add value and you see mistakes and having that communication with the accountant was a challenge. So that being said, I worked really, really hard to develop relationships with accountants that had worked with my clients and accountants that I had any kind of relationships with. Basically, what happened with me is I had a situation where I had a great accountant that I worked with that was looking to retire, and then that was that light bulb moment saying, Hey, is there an opportunity? Is this something I should even consider pursuing? And then that led me down the path of what it took to basically purchase an existing practice.
As we’ve talked, this has been a few years ago now, so I’d love for you to talk about the timeline and maybe especially in that first year or two, kind of what your expectations going in were and then what the reality was as you initially took this on.
Yeah, cool. So that’s perfect because I think I’ll have people ask me, and certainly financial advisors that’ll come to me and say, oh, you did that really easy thing. It’s as good as you think it is. It’s no big deal. And there’s no doubt about it. I was naive and my understanding of what that business was. I would argue that the accounting business, that model, the tax preparation, accounting, bookkeeping, all that model is a lot different than our model than the typical financial advisors model where it’s very hourly based or maybe task-based. And as we probably all know, that work is crunched in a short period of time, which is just, it is significantly different than what we’re doing. So I was naive. I came in there thinking, cool, this is an existing business that’s profitable. They got lots of clients, we can just step in there and just knock it out.
And that is not the case. Okay, somebody the first to tell you, I don’t know where you want me to start on the problem number one, but I will say here, let me just, one other thing I want to make clear is I had no intention of preparing tax returns or being the CPA or doing any of that stuff. And so that, I would say that’s almost, that was a problem and an opportunity only in the sense that there was no chance I was going to step in and save the business if it wasn’t working right, because I wasn’t going to do it. Know what I mean? That was what I came in first. So that being said, you really much have to really, really concentrate and focus on who the employees are going to be, who’s going to be doing the work, who’s going to be preparing the tax return, how many hours are they going to work, all that stuff. And that was the part of the challenge that I wasn’t a hundred percent prepared for, but I’ve kind of found solutions over the years.
That’s definitely one of the things that I don’t think a lot of people appreciate about the traditional, especially small CPA practice model, is that everybody wants to look at it as a business. What it really is is a job. And so especially for smaller practices, you compare it to the advisor side, which as an advisor, I mean for the most part you’re building a business, you’re building an asset that you could sell to someone else as a traditional business. It’s just not how it works on the CPA side because it’s so hourly-driven. If there’s a CPA that’s working 60, 70 hours a week during filing season to get these tax returns turned out, and especially if it’s somebody who wants to retire, wants to walk away from the business, to your point, you’ve got to be really clear on, well, who’s going to step in and do this? And what if halfway through they get pneumonia, what if they decide this isn’t for them? I mean, you said it going in that you didn’t want to be the one preparing tax returns, but hey, your name’s on the door. If it’s not on the door, it’s on the paperwork behind the door, and so you are ultimately responsible for this.
Yeah, totally. So that being said, I would say kind of step one, if this is even on your radar as an advisor, I would make sure that you have a very strong tax planning and just understanding of a tax return in general, because otherwise then you’re putting yourself in a world of potential problems. If you don’t understand just the basis of how a tax return works and how just the details of how that all works. I will say I familiarized myself with how the software works before purchasing the business. I learned how tax preparation software worked. I learned a ton. I mean that was eye-opening as far as how that all works. And really the beautiful thing about doing that, I mean I would actually recommend this to anybody as a financial planner because you really do learn how tax return works in a much deeper way than just printing it out or looking at the PDF.
You really kind understand how these numbers flow through. So anyway, so that was wonderful. The challenge is finding somebody that understands that business, understands that unfortunately there are some compressed times and you do have to work a little bit more on certain hours. But I will say that was the situation that I kind of alleviated over the time. My mission and vision for the business was that I don’t want these people having to work 60, 70, 80 hours Now that maybe involved me hiring more people and doing a little bit, kind of changing how the model worked, but that was what I kind of evolved into where I was saying we’re basically kind turning it into a more of a tax planning business. But that first year, there is no doubt about it. We were a traditional accounting business and it was very hard to understand how that rhythm worked within that business.
A couple of things, I want to go down there, but I want to highlight something you said in there that really wasn’t even part of my initial thought process and what we talked about today, but you talked about the long-term value of you getting in and understanding the tax prep software and understanding how a tax return really gets together, and it’s something that I’m working on. I haven’t quite figured out how we’re going to do it yet, but I would love to figure out a way to help every advisor get real experience with preparing a tax return, even if it’s only one or two, even if it’s only their own return. There’s something you’re going to learn from that you can’t any other way. And so I’ll certainly let everyone know when we figure out what that’s going to look like, but I’m with you that there’s tremendous value and at least once or twice if not a dozen times, going through those mechanics and it’s going to teach you so much that you wouldn’t otherwise learn.
I love it, man. No, that’s awesome. Yeah, once again, without me going through it, I wouldn’t have known that and I felt I had a lot of understanding of how the tax return works, but there’s no doubt about it. That was a trial by fire where you really start to learn on exactly how this stuff really, really interacts with every single schedule. How they interact with each other is super helpful.
So when advisors come to me and they have this great idea that they’re going to go transform their own practice by buying a tax practice, usually what they’re leading with is, Hey, I’m going to go buy this tax practice. They convert everyone to wealth management clients, and that’s how I’m going to make a ton of money. Like, Hey, heck, I’ll lose money on the tax practice. I don’t care. I’ll just convert everyone to wealth management. And they talk about it. It’s just flipping the switch that you just bought this client list and that everyone’s going to immediately convert over because you’re such a wonderful advisor. Why wouldn’t they talk about what your expectations going in, how you thought about this, and then how reality has shifted over time for you.
Yeah. So no doubt about it, that is not going to happen. Okay? You’re not going to turn, and the truth is you’re not going to want a lot of those clients anyways. And even if they look good on paper, you’re not going to want ’em, right? They’re just not going to mesh well with you. You can look at the tax return and determine, yes, this is a person that would fit my AUM model or whatever the case may be, and then you can basically have a three-minute conversation with ’em and realize this is not a person for you. So that’s not going to happen no matter how much you really, what a great salesman you are, whatever the case may be. But yeah, so then the other thing is I would absolutely approach the business as you want that business to be profitable. You want it to stand on its own and be profitable on its own, because otherwise then you are just, yeah, you’re in a bad position where you are kind of subsidizing a wealth management marketing thing.
I mean, that just does not make any sense to me, especially since you can be very, very profitable within that business if you do it. But I would approach that business as how can we make this business profitable on its own, honestly, without you working in that business. I mean, that’s the way I would approach it because you don’t need another job. And exactly what you said, I should probably take that back, what you were talking about, Steven, with purchasing, I mean that is the way most small accounting firms kind of preposition themselves is you’re buying this job, it’s a book of business, now you’ve just added X amount of hours per week, but you can make money on that or whatever the case may be. And it’s also part of the opportunity why they’re cheaper. So the evaluations because they’re not really worth much unless you’re working it.
Right. So that being said, I guess my expectations were sort of in line on the wealth management side because a big part of my pain as far as converting some of those clients, I probably converted somewhere around maybe $10 million or so that first year. And that’s been a steady stream of maybe that’s close to maybe 8, 10 million a year on average, some years better than others as far as how that conversion was. And that was within my expectations honestly, because the two things I focused on was making sure the business was profitable, standalone on its own, and then really have a continuation of servicing my existing wealth management clients, making sure that all of the tax planning that we put in place were basically followed through with properly through the tax preparation and on the backend. And that to me was those two things were just super critical, and that’s what I focused on kind of day one.
I love that you highlight that because somebody tries to reinforce for advisors all the time that until the tax planning gets reported correctly, it didn’t happen. And that gets missed so often that advisors who are doing a fantastic job on the first part of tax planning, of helping identify the opportunities, helping educate the clients, communicating what needs to go on even doing a lot of the execution as far as the movement of money or whatever needs to go on. But then the part that gets missed is how that gets communicated to the CPA and how it gets reported on the tax return. And that can blow up an entire tax strategy. In fact, you can put your client worse off than if you hadn’t done anything with them if you blow up the reporting side. And so I love that that was part of your emphasis. That’s phenomenal that you are getting clients to convert from tax prep to wealth management. How are you approaching that? What do those conversations look like to get people to convert over?
So that does require some kind of coaching of the accounting staff essentially for them to kind of uncover some of those opportunities necessarily, right? Because typically accountants, I don’t know most advisors experience, but I would say most advisors that I talk to, it’s kind of a one-way street on the referral portion where we give a lot of referrals to accountants. I’d never really received a whole lot of referrals from accountants over that, and kind of goes back to what we talked about. They have a compressed work schedule. They’re working really hard during one year, then they want to take the rest of the year off or take months off at a time, which I get, and really they see very little upside in kind of referring to you.
They don’t necessarily always see eye to eye with advisors on how we do things. So there’s just that challenge. So basically there is some coaching involved in uncovering some of the opportunities so that the accounting staff can be aware of it. And generally speaking, that’s basically what they do. And my focus is going to be retirees. So not all of those clients are retirees. A lot of ’em are small business owners and they all have aspirations to retire one day and so. But to plant that seed, basically, any of the client referrals that I received this year from my accounting firm have been accounting clients for years. And then basically we had that event. Either they retired or they sold a property, sold a business, whatever the case may be, and now they know this is the guy that we need to talk to, they’re vaguely aware of me. You know what I mean? But we’re in the same build and then they kind of know the integration, and we’ve kind of planted that seed over a series of years. Yeah, it’s not a typical situation where we say, here’s your tax term, Mr., next step is to go talk to the financial advisor and go open the accounts with him. It doesn’t necessarily work that way.
Yeah, I appreciate you highlighting that because I think that’s another misconception that advisors have when they’re thinking about going down this route that they’re going to get this client list, that they’re going to come up with some really incredible email marketing, or there’s going to be some leaflet that goes in their tax return every year and that it’s just, Hey, I’m Mike and come work with me after the tax return’s done. But just like any other prospecting we’re doing, you got to lead with value. You got to lead with identifying those opportunities. I mean, being able to not just get a copy of their tax return, but have people who are tuned into the tax plane site involved in the tax prep is certainly a huge leg up, but just buying a tax practice doesn’t mean that you can get rid of your otherwise intentional process.
Yeah, I couldn’t agree more. Yeah, I mean, pretty much there is a, both sides of my businesses, essentially, we are leading with tax planning now. So my wealth management business, there’s no doubt about it. Tax planning is so integral to what we do. That’s a big part of my conversations as well. But then we’ve also basically integrated that with the accounting firm where yes, they’re going to prepare the return properly, going to make sure we don’t break any rules, make sure everything’s reported timely, all that good stuff. That’s kind of table stakes at this point. Then in addition to that, uncovering opportunities, and it’s kind of funny, actually, one of my accountants this year, he kind of pointed out that every single year I recommend them to do these certain things and then they come back the next year and they don’t do these things. So that’s why when I say that they kind of plant the seed and they can say, Hey, we recommended you do these things. You didn’t do ’em last year, that would’ve helped. You may want to consider working with an advisor or as your advisor helping you fulfill some of these strategies. So that becomes very, very helpful. And once again, you’re like you said, you’re adding value the whole way through. So we kind of feel good about it on both sides of the businesses.
So for advisors, whether they are looking at or have bought a tax package or they’re just following through on my constant refrain of getting tax returns to all their clients and prospects, I mean, how are you helping coach your accountants, I guess? Are you giving them a checklist or here’s my top three things. How are you helping people who even if they were accountants, they still weren’t tax planning focused? How are you helping them be able to better identify those opportunities?
You’re right, we do have a checklist, but we really do have almost a case study where we’ll say, Hey, this was this situation, this time of year, end of the year as we’re preparing, we’ll go through that. But then end of tax season as well, we’ll go through some of those case studies and say, Hey, this is the situation where this person made mistakes that really you couldn’t be rectified after the year was over. And that is the case, unfortunately, with a lot of tax-related strategies or challenges for that matter.
The more process-driven things can be, the more we can delegate to team members, the more we can get everybody involved. Mike, I know that you’re really open about this process you’ve been through, which I really appreciate, and because of that, advisors will come to you and say, Hey, Mike, I want to do the same thing you did teach me your ways, and I know that for you, there’s times where you’ll help people go down that path, and there’s times where you think you really need to stop here. So for you, when an advisor comes to you mean what kind of things are you looking for to gauge whether you think somebody’s really serious or really in the right position to pursue something like this?
So I have my own bias that I led with that. I really don’t think as a financial advisor that I really don’t think it’s super helpful to be the tax preparer as well. I just tend to think that’s very distracting as far as just the nature of it. So a lot of folks have come to me and said, okay, great. I’m thinking about doing this, and I’m basically thinking about getting my enrolled agent license and become the tax preparer for all my clients and basically for the same pain points that I had where there’s mistakes being made. So my bias is I really don’t think that’s a good idea. I mean, for the revenue that you’re necessarily driving and the time, the commitment, I don’t know if that’s, so I’m going to stop you right there and say, I think that you need to really understand what you’re doing.
You may want to test the waters on that, add 10 clients this year and see how that looks, because that’s usually the simple, where I’ve stocked a lot of people and said, don’t think that’s a great vision. But then the other side of it is, I’ve had people that were kind in the same boat as me. They were working with an accountant over the years, had an accountant that they work with that was looking to retire, and then you’re looking to purchase that practice. But then when I start digging in with them, I realize that they really don’t understand anything about taxes, and I think that could be a pretty big pitfall unless you really had an existing staff that was going to move over on that, that you really had a comfort level that would keep it. I will say you really do have to have a deeper understanding of how the tax returns work, how everything flows through. I would argue that, especially that first year, that probably saved me a lot just by understanding some of the basics and understanding on a deeper level how that all works.
You’ve mentioned a couple of times the importance of having good team members that if you want this to be successful, that as the advisor, you can’t be looking at this as, oh, well, I’ll be the key tax person. Well, I had a chance to meet your head CPA recently, and she’s fantastic, but I know that you didn’t find her right away. And so I mean, maybe talk a little bit about the challenges of finding good staff when it comes to this kind of stuff.
Yeah, so that is the biggest challenge, and that’s what I should have led with honestly when we first started this conversation. There’s no doubt about it. I mean, that is the biggest challenge, and regardless of their credentials, you can go down their resume. That’s not going to tell the whole story. And a lot of times you can sit through an interview and they can tell a great story too, but it really does. It’s a hard to kind of find that fit, because I would say accountants, good or bad or indifferent are a little bit different than financial advisors the way we think about things, and that’s the reason there’s a lot of accountants that we don’t get along all the time Over the years, I didn’t always get along with accountants either. So you do have to find that person or those people that really do kind of have a planning mindset, right?
Because accountants are just, I mean, they’re so, so many good things that they do. They refuse to make even the most minor error and essentially make sure that everything is perfect, which I respect and that’s incredibly important, but I think you do need to find that person that also has a planning mindset and is willing to say, Hey, there’s a big picture here that we can really, not only can we make sure everything’s all the Is are dotted Ts crossed, all that good stuff, but in addition to that, we’re adding value on a multi-year planning approach. And that took me some time. There’s no doubt about it. My lead accountant is not my first lead accountant. We went through some iterations and people that were perfectly qualified, no knock against their qualification through the skill level or all that stuff, but finding someone that was able to kind of embrace the planning in addition to the perfect preparation was a challenge, no doubt about it.
Yeah, I think one of the most recent reports I saw, something like 20% of the accounting field has left the industry in the last three years. It’s a challenge. The gate just supply and demand. But then to your point, you don’t want somebody that just checks the box on credentials. You need to find somebody who’s going to be open to that planning mentality. As we look for people to add to our team, it’s almost impossible to find CPAs or enrolled agents who have that planning experience. And so I don’t make that a requirement, but we’re screening for, are you open to this? As we talk about different strategies, if I mention Roth conversions, you’re like, oh yeah, those are the worst. It’s like, okay, well, this isn’t going to be the right fit. No matter how good you are preparing tax returns, you’ve got to be open to these things and willing to learn.
That’s true. I mean, there’s no doubt about it. We went through that. We went through our trials and tribulations in regards to that. Yeah, Roth, that’s a good screener right there. Just the Roth conversion alone. I have countless number of accountants that have come back to me and say, why did you contribute to Roth? Why did you convert? Essentially, why did you pay more taxes on purpose this year? Which, well, it is a deeper conversation, and that’s on me for maybe not explaining that fully to the CPA at that time. But yeah, there’s no doubt about it. You really have to have that planning and sure, this, honestly, when I think about now that I’m in that business in the accounting business for as long as I have been, I actually think that is the evolution of that business. I think to improve that business, to get those accountants to come back into the industry is really evolve that business where there is a more of a planning mentality where there is, it’s not just the one and done where we’re kind of ongoing monitor and making sure you’re doing much more aligned to what we do.
Maybe that’s my dream, but I actually do see that as, and I also do see clients very, very receptive to that, even though it is a deviation from what they’ve experienced throughout their experiences with accountants over the years.
It is really interesting because CPA is still by far the most recognized and trusted designation in the financial services space. Whether that’s earned or not. I always like to joke with people that there are CPAs in prison. I’m not sure why that doesn’t discredit the rest of the industry, but I’ll take it. But it’s such a consumer, see it as something they have to do. There are plenty of people like, ah, I don’t need a financial planner. I don’t need one now. I don’t need whenever. But everyone knows they have to file taxes every year, and a lot of people get sick of doing their own taxes or feel like it’s something that’s beyond them. And so having that mentality of both, I can do a quality job of getting your annual taxes done, but I can also help you look to the future and take that multi-year approach you mentioned because that’s really what it comes down to. Anybody who leads with tax planning that they think can all get done in one year, it’s okay, what are you trying to sell me? Tax planning is not a one-and-done solution.
Yeah, couldn’t agree more. And I would say, so I’m assuming you’re listeners to this podcast are very tax planning focused, and you’re probably honestly on the cutting edge of most advisors, I would assume. And so that actually is an opportunity for if you’re approaching a COI and you’re trying to add value to their business, you can show them some of the things that you do or how you think about tax planning, not only so you develop that relationship with ’em, but maybe to enhance their business. You can say, Hey, these are some things that if you were able to do this throughout the year would be really, really valuable for these clients, and you could therefore charge more and you deserve to charge more because it takes more time. So I mean, that’s something that I’ve approached accountants and I’ve told them, I’ve said, Hey, this is something that we’re doing. I think it’s really, really effective. You can add value and also add revenue at the same time.
I appreciate you bringing that up because I would assume, and please correct me if I’m wrong, but even though you now have a tax practice that you own, I’m going to assume that you still have to maintain and build great relationships with other accountants because it probably doesn’t cover a hundred percent of your clients. There’s other situations that come up. And so regardless of what solution you think you’re going to find, I mean, even our advisors that work with us through our RTS Premiere platform, we’re not taking care of a hundred percent of their clients. And so this reminder of how do you build great relationships is really important. Time and time again, the most effective way to do that is to demonstrate how you are adding more value than the typical advisor.
Couldn’t agree more. And I know you guys promote a 1099 letter. I have a version of my own that is just I, that is step one as far as showing your value to the account and saying, okay, these guys are doing more than the typical advisor and adding anything that may be tax related, that may not show up on the 1099, including QCDs and rollovers and things of that nature. Or I’ll even indicate strategies where we took a gain harvest for some specific reason, at least to indicate why that happened so that you’re not the bad guy, or at least there’s an understanding of why this happened. They can call you if there was a recharacterized, anything like that. I think that goes a really long way. Those are the things that you’ll have the accountant call you for sure and say, that was wonderful. Thank you so much. That made a tremendous difference. Sometimes they ignore it, but I would say that would be absolutely step one to distinguish yourself from other advisors.
So Mike, every time we do this podcast, we always make sure that we’re taking the information and making it valuable, which for us means giving people ways to take action. And I think one of the themes that went throughout this conversation is that regardless of the final outcome of whether you decide to buy a practice or just build better relationships, this all comes from pain around the tax side of a client’s life. And so I would ask you to think about it from that standpoint of as you think back to when this was way more pain than value, what are those action items? What’s that kind of thought process or mentality that advisors should go through to say, okay, how do I want to start addressing this pain?
Yeah, so the 1099 letter, I would say go back to that, and that’s number one. I would for sure, and I know you promote collecting the tax return, I would almost make it, I mean, I really do think that it should be a non-negotiable at this time for everybody. I mean, I can give you an example of where I collected 90% of the tax returns, including the ones that my firm does. And I had a client who just, she was not non-compliant. She had provided me tax returns for years and years and years, and she went maybe two or three years, I believe it was three years, where she had life kind of happen to her. There’s all kinds of things in her own life, and she just wasn’t able to provide, just didn’t get around to it. So I was chatting with her one day and I said, Hey, this is really, really important.
It’s actually to the point where we really can’t do our best work. We may not be able to work together as much as I love working with you and all that good stuff. And so she was able to kind of do that, and then we uncovered dozens of mistakes. But some of them were big enough to where QCDs weren’t reported at all or properly, and we were able to redo and amend those returns. But to the point where even the client said to me, she’s like, yeah, my accountant was telling me that. Why weren’t you withholding any taxes from these IRA withdrawals and things like that? Then it was just like, yeah, well, because we had it on your 1099. Anyway, so yeah, so collecting the tax returns, understanding what’s on, really trying to understand the strategies and making sure they’re being implemented properly, I think’s tremendous. And I think that will lead you down the next step, which would be having a potentially deeper collaboration with the account that you’re working for.
Yeah, I love that insight. Yeah, I definitely would echo those. Getting the tax for every single client every single year, I agree. It needs to be non-negotiable, and whether you call it a 1099 letter or whatever version you want to use, there are even some software platforms that will help you do it these days. But having some kind of annual reminder for your clients that they can provide to their tax repair of, here’s the great planning we did together, here’s the QCD, we did, whatever that might be, it’s going to be a huge step in the right direction. And I love how you ended that with, hey, even if you listen to all of this and you think, oh no, I can be like, Mike and I can have a successful experience, and maybe you can, there’s still so much value in building those relationships and maybe those relationships will even turn in to those opportunities. So Mike, I really appreciate your time. You’ve been willing to come in and share your experience and perspective, so thanks for being here.
Thanks a lot, Steven.
Really, really enjoyed it, honestly. And to everybody listening, until next time, good luck out there. And remember to tip your server, not the IRS.
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