Financial planning software is the hub of many firms’ advisor technology platforms today, and firms are working hard on enhancing their financial planning software with additional technology that can boost outcomes for advisors and clients.
Tax planning is one of the most important enhancements to financial planning and is the most impactful addition a firm can make to its advisor tech stack. When accumulation and decumulation are executed through a tax lens, everyone benefits.
Advisors have been taught to avoid talking about taxes. “I can’t be giving tax advice because I’m not a CPA” is a common objection we hear. It’s listed in the disclosures on everything we share and in the fine print of every agreement we enter. But there are in fact huge tax consequences to giving financial planning and investment advice. Therefore, it’s important to note that there is a BIG difference between tax planning and tax advice, and it’s important for advisors to know how to walk that line.
According to Orion and Forbes, “86% of financial advisors believe that being able to quantify and report to clients the ongoing effect of tax management is essential to growing their financial advice businesses. But it would seem a much smaller number provides anything coming close to real tax planning. Few financial advisors even take the time to collect and review their clients’ tax returns.”
Financial advisors should ideally work with a client’s CPA to cover the full spectrum. We’ve found that Advisors that consider the tax consequences of their recommendations are better prepared to collaborate and get more referrals from CPA partners. Isn’t something as simple as recommending that a client max out their 401k contribution to get an employer match tax planning?
In summary, tax planning involves financial planning and investment strategies designed to maximize a client’s outcomes while attempting to minimize their investment tax liability over the course of their lifetime. In oversimplified language, tax advice refers to the process of filing your taxes, using various tactics and deductions to determine the precise amount a client needs to pay the IRS.
Tax planning is often an afterthought – “Don’t let the tax tail wag the investment dog” – but the reality is that it should have an influence on every financial plan. After all, every recommendation around an investment has an impact on taxes eventually. When thinking about retirement, many costs come to mind immediately: housing, healthcare, traveling, and transportation, to name a few. But it’s the hidden cost of tax drag on a portfolio that can really plague an investor and cut their runway short.
Unlike financial planning, which has become ingrained in the process for many advisors, taxes are still often a black box that advisors avoid. Apart from estimating future tax rates and potential tax brackets, this topic is often glazed over as general rules and not included in a financial planning exercise. Tax management gets left for the investment management process, which is often far too disconnected from the plan.
Implementation matters. Without the right tools to execute a tax-smart financial plan and help guide the subsequent conversations with clients, advisors are left hanging in the wind, talking to clients about a “hidden” nemesis (taxes) they can’t quantify or explain.
Dynamic tax management software can automate this. Especially when discussing a financial plan for clients, taxes need to be accounted for at every turn, in every withdrawal, and in any financial decision advisors help their clients make. In the end, this type of planning can add 33% of value to the life of a portfolio and can be the difference between running out of money and greatly changing your spending or a successful retirement.
Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it”.
Financial planning is more than just investment advisory, more than providing a view with all accounts aggregated into a client portal and more than building virtual spending buckets. Financial Planning is often the pillar of value that is intended to improve outcomes for your clients, which means it must be accurate and implemented. Financial planning through a tax lens can help you plan realistically for what your clients will get to keep and supercharge the benefits of compound interest.
Creating a financial plan with a technology partner (like MoneyGuidePro, NaviPlan and eMoney) involves a complex, multi-step process that includes:
Goal setting is key to many financial plans today and is often the North Star for financial advisors to use when managing a client’s portfolio. A complete, goals-based financial plan will aggregate accounts, create a balance sheet, set goals, determine the appropriate asset allocation to meet those goals and monitor progress toward achieving those goals on an ongoing basis.
This process is extremely complicated, and without the necessary technology, near impossible to get right. The innovations and accessibility from the firms named above have made financial planning the cornerstone for so many advisors.
Most advisors would like to meet with their clients monthly, quarterly, or semiannually, depending on the time horizon, financial goals, and a client’s investment complexity. During these meetings, advisors should use financial planning software to help track the progress of their client’s portfolios related to their goals. With the assistance of this technology, advisors can also discuss complex topics like tax management and tax planning with ease and simultaneously justify the value of the ongoing work they do for each client.
LifeYield is a technology provider specializing in software for tax-efficient investing and tax-smart retirement income planning.