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Steven is joined in this episode by the one and only Michael Kitces to talk about the progression of tax planning in a financial advisor’s practice and how the industry as a whole is shifting to better incorporate taxes. They both share their perspective on how Advisors can make sure they are delivering true value and not just beating their clients over the head with volume. Steven and Michael also discuss how even though BDs seem to be getting on board with allowing tax planning there is still tremendous opportunity to set yourself apart with tax planning, if you are intentional.
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 firstname.lastname@example.org.
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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 in this week’s episode, very excited to welcome to the show, not other than the blue shirt himself, Michael Kitces. Well, Michael Kitces, welcome to the show. So excited that you join me to talk about who would guess it, but taxes.
I love talking taxes, appreciate the opportunity. Thank you for helping me out Steven.
You and I could probably spend the next six days talking nonstop about taxes and still only scratch the surface. So we’re going to have to really narrow it down and pick something that we can both kind of nerd out about and provide some value to the audience here. And so two pieces that I’d love to get your insight on is you spend so much time across the industry and one of those things is kind of diving into what the progression of tax planning through an advisor’s career looks like because this might not be top priority on day one.
And then also the shifts that I know I’m seeing in the industry of compliance becoming less and less of a brick wall, hard stop. I can’t ever talk about taxes even at the biggest firms in the country. So maybe let’s just start on the individual advisor side first of from your experience, what does that progression look like and how do advisors identify where they’re at and how to take the next step?
I feel like you almost have to break this up into a couple of groups who shows up in the advisor. We start our traditional advisor, brethren, in the past I started out insurance or a brokerage firm. Now maybe I’m starting on to run an RA channel, but I got my CFP marks. I’m becoming a financial advisor. I’m starting to work with clients and provide my various flavors of comprehensive financial planning advice.
And for most of us, when you come out of the gate and get started as an advisor, priority number one is some combination of just get clients if you’re hanging your own shingle, clients and revenue matter more than anything getting started. And if not that, then number two is just figure out how I do advice. Okay, I’m getting clients and they’re paying me something. I’ve really got to figure out what is my planning process, what is my offering, what are my deliverables. And for most advisors, our first 10, 20, 30 clients is just kind of figuring out that and getting into some kind of routine about that and whatever that is for us, our style of delivering a plan. However we charge whatever we do ongoing, we’re just kind of figuring out our stuff. Then we get there, okay, I kind of got a thing I know how to talk about with prospects.
A reasonable number of them say yes, I’m growing and adding to my business. We just start scaling up for a while and growing. You hit some wall where it’s kind of getting busy. I don’t have so much spare time anymore. So we hire some admin support. We get a little more capacity now we’re getting crowded clients again, we might hire an associate advisor and then at some point you got a team member or two and usually by now a relatively large number of clients, things are getting a little kind of crowded and hectic and we’re trying to figure out how do we grow the next level, but the realities like income and profitability are okay, but often not great at this stage in part because we have a lot of clients that we took on early on that probably are not paying us the full value of what we’re really worth right now, particularly with all the expanded capabilities we have with this team that we’ve grown and we hit a little bit of a wall where you’ve got to figure out how to restructure your practice or partial book sales or graduate some clients.
We got to do something around the clients that are not really a great fit for where the practice is. For most advisors I find when we get through that, we start saying, okay, I want to keep growing. I want to keep moving up. How do I do more? How do I add more? Now I’m basically down to a suite of really good clients and I don’t want them to leave either. And so that this pressure I find just starts growing I kind of want to get more valuable clients. I want to do more valuable things to the clients I’ve got. I want to make sure I can really get the full value of what I’m worth. Maybe I’d like to charge a little bit more, but then I’ve got to do more to charge more. And this sort of more pressure starts to build up and getting to your initial comment, we’re increasingly seeing that more pressure get vented is maybe I could do tax returns for my client, maybe I could do tax planning for my clients.
Maybe I could do tax returns for my clients. Maybe I can get a lot deeper into their taxes because there is a certain appeal I find for in our planning realm like I’m going to help you with your retirement plan 30 years from now you will so thank me for this. I’m going to help you stay the course on your investments. You’ll never actually know what good I did for you because we can’t prove the counterfactual of how much you would’ve blown yourself up without me. We just sort of know it was probably good. So I got all this intangible in theory, this was really better for you and you’ll thank me in the long run and in an alternate universe, things would’ve gone horribly for you without me, but I also just saved you $7,822 on your taxes. I can point to the line item on your tax return that says I saved you this much money and that might be some most or all of my fee.
There’s this allure of taxes of tax planning and doing the tax work that just I can show you exactly how much money you saved and you have to deal with this every year. So maybe I’ll even just do that for you. And, you just see this kind of sharp lurch that’s emerging now where advisors are getting much deeper into the tax side of the business. We see advisors getting EAs, you see advisors hiring tax preparers internally. We see the growth of outsourced businesses that are doing tax preparation for financial advisors and their clients. You see the explosion, positive explosion that is HolistiPlan going bonkers as everybody is trying to find tools to help make their tax plan more efficient. We even rolled out a how to review a client’s tax return course on the Kitces platform for advice that we’re trying to figure out how to do this and all of this we just seen picking up over the past few years.
I think it’s just this collective pressure of so many advisors do comprehensive financial planning for individual clients based on the needs and circumstances working with relatively Apple people, which they do with their years of experience and their credentials and their fiduciary mindset. And we all start sounding the same good things but all start sounding the same. And I think to me at the purest sense, there’s just this pressure of, okay, so many other advisors are doing comprehensive planning. My practice is a pretty good place. I kind of want to keep moving up and get to what’s next, what’s next? Well, the thing where I could point to the line item on their tax return and say I saved you this many dollars has gotten really appealing for a lot of us all at the same time.
I can’t help but think as you described that, and this comes to mind quite often, I appreciate your tone as you described, that you give that elevator pitch that we’ve all heard so many times, but it should seem a little ironic to everyone that so many advisors describe themselves as comprehensive but are also looking for the next thing to add. Those don’t actually work together.
We were more comprehensive. I mean to me that’s actually a great distinction. I mean you put it in its context. We started comprehensive in a world where most advisors in air quotes were stockbrokers or insurance and annuity agents. They sold one product I talk about often. I started out selling VUL was not comprehensive. I literally had one arrow in my quiver and I shot it at everybody. I met everybody and that was how a lot of us started. And so in that realm, 10 to 20 years ago when you did a comprehensive financial plan, it was so much more comprehensive than everybody who was firing single arrow quivers. It was a meaningful differentiator. Now to me, yes, we’re sort of in this battle of like, well, comprehensive is largely undefined as Angie Herbers has been beating the drum lately.
So we’re basically on this battle of who can be the most comprehensive or advisor than all the other comprehensive advisors. We literally see this in our research. The last advisor productivity study we did on the Kitces platform, the number of advisors who are doing these ultra comprehensive, we cover 13 to 15 different areas of your financial life has skyrocketed in just the past two to three years. But it’s going to the point that we can actually see productivity and profitability metrics falling because advisor are so trying to out comprehensive everybody else, we’re getting to the point where clients aren’t even paying us for that level of comprehensiveness, which I now colloquially call the sledgehammer or value. I’m not even going to figure out what’s most valuable for you. I’m just going to give you as many things that could possibly be valuable at once until it’s like a sledgehammer to the head that you must feel my value by the sheer volume of valuable things that I’m sending in your general direction.
And again, I’m not trying to make light of it. This is literally where the majority of us are trying to figure out how do we do more and be more comprehensive to differentiate from others and make sure that we hold onto the clients that we’ve got. But to me, there is this collective angst pressure that’s building for us and just taxes increasingly is becoming one of the major venues and outputs for it.
That’s really interesting and I totally hear where you’re coming from with the value sledgehammer. I like to have fun with that term now. And I think one of the distinctions there is that really what people are getting carried away with is volume and obviously taxes is the piece I focus on. And so one of the things that I see advisors miss specific to taxes is they’ll do that upfront planning along with the 15 or 17 other things they do, which they get carried away in the volume and they miss the value piece and part of that to me is making sure that it all gets executed and that it all gets reported and that we come back later and we connect for our clients. When we talked about saving you $7,822, here are the steps we took, and oh, by the way, here’s where it shows up on your tax return. Quite often what advisors are doing is they’re coming out of the gate with this wildly comprehensive whatever that word means, plan and beating them over the head with volume and then it’s, okay, well what do I do next? And again, part of the allure of taxes is not only can we point to something now, but we can point to something every year for the next 30 years because Aunt IRS never goes away. She comes back every single year asking for more.
You highlight a good piece there. Frankly, I think we collectively tend to struggle with in our advisor realm. I know part is probably just the forward-looking nature of being an advisor where we’re always looking through the windshield, what comes next, where next we do something to add value and don’t always do the best job of going back and looking in the rearview mirror to say, Hey, just take a moment. Here’s what we did for you last year. Here’s the strategy we engaged in. I’m just going to pull your text. Here’s the line where this line would’ve been bigger but it’s smaller because of the thing that we did and just actually taking a moment to point back and reflect, here’s the things we did for you and the actual impact it had. Again, to me, the power of the tax planning work that you can show it on the tax return in, well, it’s usually hard dollar tax savings because then we always get the jokes unless it was a Roth conversion where I made your tax bill bigger, and I promise you’ll thank me in the future, maybe not as exciting to pull your tax return point on the July item of that year.
But I think you have a good point that we have a tendency to, look at what we’re going to do next for the clients that we’re not always the best at taking a moment to say, let’s just actually catalog all the things that we did for you in the past year. I mean tax planning wise and other. Otherwise you’ve noted pull out the return and points, the line items is a particularly good opportunity.
And for advisors listening, sometimes this can feel like, Hey, let’s take a minute and pat ourselves on the back. But that’s really not what it is. It is making sure we keep our value proposition in front of the client and it’s what we like to call the dishwasher rule. It’s making sure they know the things that we’ve done for them because that helps solidify the peace of mind, the security, the comfort that comes along with this. If we never revisit the things we’ve done for them in the past, it’s like we’re starting over every single year we work with them that’s counter to the point of having an ongoing relationship.
And I think ironically, a lot of this comes from the ongoing relationship pressure thing. I think that just cropped up. You sit across some clients enough years in a row and occasionally some ask even if they don’t ask. I think we’d all start feeling this question like, well, I’m afraid they’re going to ask What have you done for me lately? I want to preempt by showing what I’ve done for you lately or the new things I’m doing and offering and rolling out. It wasn’t something that cropped up when we were in a more transactional realm. What I did for you lately is the thing I just sold you. That’s why I came out to your house to deliver it to you. There was a sort of natural connection of payment and meetings and activity and a commission-based model that looks different when you’re in ongoing relationship models.
So if we shift just a little bit, because I know we both spend a lot of time in the RIA space, but we speak more broadly to the industry. We work with people across the industry and one of the trends I’ve certainly seen over the last couple of years is the bigger BD is that historically RIA advisors would basically hold out and say, well, I’m not them and I can do all these comprehensive things and guess what? It maybe moves a little slower, but they’re catching up. Compliance at those bigger firms is embracing that. I’m seeing this with advisors working on our platform from the biggest broker-dealers in the country a lot of times with direct approval if not with indirect, the condoning of it.
And so to me, this is exciting for the industry, it’s exciting for the consumer. They’re going to get better planning, but it also presents this moment of if you thought you were ahead of the game by saying, I do tax planning or these other 17 things you list on your website, this is where you really got to think, am I delivering value there or is this just a volume game? I’m throwing spaghetti at the wall and seeing what sticks because if it’s not intentional and deliberate, this is going to stop being a differentiator.
Taxes showing up in a lot of different places right now. So on the one hand, yes, you’ve got some of the large firms in the brokerage environment that I would say I’ve been really cold to this in the past and are starting to fall a little around it. The mentality, and I would still hear this in a lot of brokerage firms, something to the effect of like, well, you can’t do tax advice for your clients.
That’s illegal. And because it says at the bottom of everything I get from my broker deal, this is not tax advice. You’re a CPA. It’s like, well, no, it’s actually not illegal at all. I mean there is a certain licensing to the IRS. If you are actually giving written tax opinions or practicing in front of the IRS where you are signing off on a tax return or you’re representing a client to the IRS, that is an actual legally registered licensed activity, you got to be a CPA or an enrolled agent or an attorney, but doing tax planning offering, we call the little TA tax advice, not the tax advice. I’m providing you official opinions to the IRS. Yeah, let’s talk about the consequences of your Roth conversion. There’s nothing that limits financial advisors from doing that from any legal licensing perspective. There’s never been anything that limited advisors from doing it.
The reason why most large firms prevented it historically is if their advisors go out there and give the wrong advice, there is likely going to be a lawsuit. And if you’re a relatively large firm, every plaintiff’s attorney is going to name your large firm on that large lawsuit because the advisor’s side of the target at that point, the large firm with the deep pocket is the target. And so a lot of firms I think had these blanket policies. We don’t want our reps to give tax advice, not because it was illegal, but basically, they were trying to protect themselves because they knew their reps were not particularly trained in advice. They were mostly trained in product sales. It was probably just about out of time for them to get sued very badly by letting product salespeople give rampant tax advice. So they really tamped it down.
Well, now we’re living, as you know, this new world where firms are increasingly getting comprehensive up and down and across the spectrum. Models are increasingly going recurring revenue. We’re all trying to add value, small firm and large. So while Arch was realized like, well, today I’ve got much more highly trained advisors, I’ve got more systems oversight and process clients are clearly asking for some tax planning and advice and they may not necessarily be doing tax preparation in those large brokerage firms anytime soon, but they’re increasingly becoming open to the pure advice end to say, look, let’s be honest, a layer of it was happening already. I mean, there’s very little that we touch in the financial advisor, even in our product roots that didn’t have tax consequences, whether it was insurance and annuity recommendations, parentheses tax deferral, or it was an investment recommendation for MCs capital gains.
It was already kind of there. I think part of it’s we’re just acknowledging it, but I do see there’s this thawing in large firms to get more open to tax planning and at least the not fully legal, not fully registered in front of the IRS version of tax advice. And at the same time, frankly, we’re seeing more and more people from the CPA and enrolled agent realm that have been doing tax returns and are not particularly enjoying the purely transactional high volume, very margin pressured, fewer tax prep business, looking at advisors with their stable recurring revenue and lovely client bases and better profit margins and saying, I got all these people that come to me for tax returns. Why don’t I start doing more comprehensive financial planning advice for them? Because a lot of them already look at me as their finance guy or gal, and so I actually see it coming from both directions.
There’s large firms that are migrating more into the tax planning end, but there’s also a lot of CPAs and enrolled agents that are migrating into the financial planning and wealth management end. And so tax is kind of converging from both directions at once right now.
I absolutely agree. We had our first annual Tax Planning Summit a couple of months ago and there was a CPA that attended, and that was his takeaway when I was talking to him afterwards. He said, biggest thing I learned was that I should probably be a financial advisor. All the advisors are talking about how they want to still do more for their clients, but take more time off. That’s a foreign concept to CPAs. And so the idea of I can provide more value and maybe not work 60 hours a week year round, those sound phenomenal to a CPA. And to your point, for most consumers, the CPA is still the more trusted designation. So those people coming into the industry with a CPA background really have a leg up when it comes to prospecting.
And there’s even a version of this that I’m seeing showing up with some, I guess this particularly enterprising advisors who’ve gone out there and saying like, well, the ultimate version of this trend is CPA practices because of those high work hours limited margins, transactional business also just typically are not the most valuable businesses like economically enterprise value does not get the multiples in the tax prep world as advisory firms do. And so I’m even seeing some advisors go out there and say like, I’m going to go acquire tax practice, like pure tax practices and then go into their tax book and try to convert some of them to advisory clients because I can go into a tax practice, lose two thirds of the clients and convert one third of the clients and have more enterprise value at the end than I did for the thing that I acquired where more than half the tax prep clients left because they weren’t interested because advisory revenues are worth so much more than tax revenues from a pure business valuation end.
So there’s an M and A angle now that’s starting to emerge as well. Like, oh, and by the way, you get to bring in some CPAs s who can now do tax work for your clients, so you can offer ongoing tax preparation for the clients who convert and decide to stay with your advisory firm. I do see the melding come together, although I think the most near-term dividing line on it is going to be those of us who I’ll say just like in quotes, just want to do the planning and advice work, and those of us who are actually trying to figure out are we and how are we going to bundle tax preparation into the offering either insourced or outsourced, do I want to put that under my umbrella or do I want to say I’m just doing the advice and planning part where I can have the impact and I’ll let someone else do the, I’ll say the rote tax return execution.
I don’t mean that with disrespect because I know what you do as someone who prepares returns is more complex than that. Our advisor version of it. I don’t want to have to do the filling out the forms and the preparation. Someone can do that work for each of the tax returns repeated times of the tax returns. I want to do the forward looking planning stuff. And so some of us are staying there and some of us are saying, no, no, I actually want to really bundle tax preparation into my offering.
Yeah, one of my takeaways out of this conversation is jokingly talking about words like comprehensive, but ultimately at the end of the day, we’re all looking to add value to our clients. This isn’t about looking at what three or seven or 12 new services I can offer. It’s what can I best, most uniquely offer my clients and go deeper on because the volume game is not going to work long-term.
You’ve got to be delivering meaningful value around these things, and you’re absolutely right that we are preparing tax returns. We’re very committed to doing that. It is a lot more complicated in practice than it seems like it should be in theory, but we’re very committed to continuing to expand what we’re offering to advisors. Michael, before we wrap up here, if you had a magic wand for just a second and you could wave it across the financial planning industry, what is the top thing you wish you could see every advisor doing when it comes to taxes?
So many answers that come to mind. I mean the big two I see in practice just practically from the advisor-end work we do with clients. I live as a business owner myself. Most advisors do not do enough tax planning work with their business owner clients. There’s so much on the table.
It’s a little more complex than just my classic W2 employee clients or my retired clients. But there’s so much value that gets added to tax planning for business owners. And what I find overwhelmingly, they all have a tax person. You have to at the size that you’ve got a business. But in the purest sense, most accountants account an account by definition is backward looking. You are accounting for things that have happened and occurred in the past. And so even great accountants often do very little forward-looking planning. Here’s what’s going on in this year into the coming year and here are some things that we could be doing or employing or exercising into the business. And yes, there are some great CPAs out there that do great forward-looking planning, but I see this all the time across business owner alliance. I even see the inbound solicitations I get as a business owner.
Very few people really effectively talk forward-looking tax planning for business owners. The second domain to me on this, or slightly overlapping just because it’s where I spent a lot of my time doing work and research over the years, we so under do the opportunities to optimize retirement distributions across multiple accounts, across multiple types, partial Roth conversions overlapping that with when social security starts overlapping that with RMDs begin overlapping that with Medicare sur-taxes plus all the other things that’s going on in the client’s financial life, you get the working years, the post-work years before other income streams begin. Then it kicks up the social security and RMDs begin. There’s so much planning that can happen when you get income that has really significant swings as they go through those stages and you can mostly control it. It’s the timing of IRA distributions or Roth conversions.
And to me, that whole domain is very under plans for how proactive you can actually be to have really material impact on increasing client wealth. And it’s not a create new investment returns. It’s just like it’s not investment off it’s tax alpha of I’m just literally going to draw your accounts in different orders and sequences and you finish with more money at the end. It’s a glorious thing.
Yeah. Which back to the points you made earlier, that’s more quantifiable. It’s more tangible. It’s easier to show clients here are things we did to move the needle. Michael, I so very much appreciate your time today, everything you’re doing for the industry. I always love being able to connect with you at conferences. Yeah, thanks for coming on the podcast.
My pleasure. Thank you.
So for all of our listeners, the other thing that I would add if I also got to wave a magic wand of course, comes no surprise getting tax returns from every single client every single year. That’s really going to help to demonstrate where that value is coming from that we talked about to identify those tangible savings and areas for additional planning. The other thing I’ll say that really helps with this is, and this is somewhat selfish or shameless plug here, you don’t need to commit these things to memory, but you need to have good references. So as we’re getting towards the end of the year, we’ve already published our 2024 desktop tax reference guide. This is free. I just want your email so that I can send you other great tax stuff. Go to retirementtaxservices.com. It’s on the homepage. You can download the 2024 RTS tax guide. I’ve got a laminated copy on my desk because I use it constantly. You don’t have to have these things committed to memory. So thanks again for being here. Until next time, good luck out there. And remember to tip your server, not the IRS!
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