There are many different variables to consider when selecting an advisor. One important component that determines a financial advisor’s success is how well they can manage investments. Financial advisors need to understand how to minimize taxes related to the investment recommendations they are providing to their clients to manage investments effectively; to help clients minimize taxes, an advisor needs to have a complete picture of their client’s financial situation.
Many data points need to be collected to obtain a complete picture of a client’s financial situation. If a financial advisor or a Certified Public Accountant (CPA) is not collecting these data points, it is impossible to identify several types of tax minimization opportunities. Unfortunately, in our experience, most investors are under the impression that if they have a financial advisor and a CPA, these data points are actively being updated and monitored to employ effective tax minimization strategies on an annual basis.
Our firm believes tax minimization strategies are missed because of something we call “The Gap.” The Gap occurs because people typically pay their CPAs to provide tax preparation or accounting services. They frequently do not pay their CPAs to provide tax planning services. Tax planning is generally a service that a CPA will provide upon request for an additional fee.
Similarly, many people do not receive comprehensive tax planning services from financial advisors who primarily generate their compensation based on investment management services. In essence, this creates a situation where nobody is collecting the necessary data that is required to provide a variety of different tax minimization strategies. One way to help identify if you are missing out on tax minimization strategies because of The Gap is by determining if your advisor is actively maintaining essential data points.
The type of data that is required to provide comprehensive tax minimization strategies includes but is not limited to:
Current income streams
Expected future income streams
Net worth statement
Annual contributions to retirement accounts
Health insurance needs following retirement but before Medicare
All available retirement plan options along with contribution limits
Anticipated business sale(s)
Anticipated retirement date
Anticipated large expenditures
Future estate aspirations
Other financial goals
If you are working with a financial advisor or CPA who is not actively maintaining the data points listed above, there is a good chance you are experiencing ‘The Gap.’ This occurs because there are many tax minimization strategies that can only be identified if the data listed above are known and are current. Unfortunately, many advisors do not actively maintain current information on the above information, and tax minimization opportunities are lost.
Take Action
Most of the tax minimization strategies that our firm discovers can be attributed to The Gap. To prevent this issue, it is crucial to verify that your financial advisor is actively maintaining the information listed above to ensure you are not missing out on tax minimization opportunities. We would define active maintenance as updating the data at least annually. Fortunately, a growing number of financial advisors and CPAs are taking a more proactive approach toward holistic tax planning.
This is an updated version of Ty Bernicke’s article originally published in Forbes on October 18, 2021.
The use of Ty Bernicke’s research or publication of articles he has written does not indicate an endorsement of his work as an Investment Advisor. The publications did not receive compensation for publishing Mr. Bernicke’s work.
The views expressed represent the opinion of Bernicke Wealth Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Bernicke Wealth Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Bernicke Wealth Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations.
