Client coaching, CPA referrals can ease tax season stress

Tax season is a busy time for financial advisors, but it also brings overlooked opportunities for client coaching on year-round tax savings and for future growth via CPA referral agreements.

With the right outreach and shared professional dedication to clients, certified public accountants and enrolled agents who prepare returns could turn into key long-term collaborators, sending prospect leads to advisors and vice versa. And clients who see tax planning as a short-term pain confined to a few months each year may be missing strategies that could reduce their payments to Uncle Sam.

By the time clients file their annual returns to the IRS, they are "just recounting history for the most part," said Terry Parham, financial planner and chief financial officer of California, Maryland-based Innovative Wealth Building. "If April 15 comes around and you don't like the result, then yesterday we should have done something about it. But today's the next best thing."

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Pursuing growth and savings

CPA referrals sometimes come with a steep cost — like those charged to registered investment advisory firms by custodians — but they often don't have any financial aspect beyond a friendly agreement between the advisor and the tax pro to send clients both ways, according to Parham and Mike Byrnes, the founder of advisor growth consulting firm Byrnes Consulting. The referral dealmakers and their clients reap benefits as the advisors "start to quarterback all of the professionals that go into a wealthy person's life," Byrnes said.

"Once you start to expand that way, it's a multiplier. You're all helping each other's businesses and it really can flourish," he said. "Direct mail, for example, is expensive, but the more the professionals start to combine into something the less money it costs."

And those incoming and existing clients could greet future tax seasons with much less dread, as advisors' teamwork, long-term planning and the accelerating use of optimization technology boosts the customers' bottom lines and nest eggs for retirement. Currently, many view taxes with about as much enthusiasm as a weeklong visit to their in-laws or a trip to the Department of Motor Vehicles, according to Andy Smith, the executive director of financial planning in the Indianapolis office of Edelman Financial Engines.

A survey commissioned by Edelman Financial found that at least 44% of respondents said they only think about taxes during filing season. (The survey included 1,500 adults over 30 years old, with an oversampling of respondents aged 55 or above, with more than $100,000 in assets.) More than half, 52%, believe they're missing opportunities for savings and a wealth boost from tax planning, while only 16% graded themselves with an "A" in that area and 42% said they were at a "C" level. Meanwhile, Edelman Financial's planning and software for tax-optimized retirement drawdown strategies identified more than $1 billion in possible savings for a pool of 4,000 clients between January 2023 and Feb. 20, according to the firm.

"What we found is that there are a lot of people failing to realize that these are year-long conversations that likely need to be had," Smith said. "It's already a stressful time. Now you couple that with feeling like you're missing something."

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Tax questions take longer than a form

The savings that they're losing out on could include openings to a capital gains rate of 0% if their annual income falls low enough in retirement, the avoidance of taxes or penalties tied to Social Security or Medicare benefits or the use of loans that are duty-free with the help of a home or another asset as collateral, Parham noted.  

"There are all these things that happen where people are just unaware," he said. "The longer I've done this, the more I've seen that there really is a gap."

Edelman Financial carries out its tax planning for clients' retirement as "a one-size-fits-none approach" that plays out over decades after thoughtful planning that takes much longer than the filing season, according to Smith. Planning for traditional individual retirement accounts, possible Roth conversions, strategies for required minimum distributions, any possible pension questions, the client's cash flow needs in retirement and accompanying tax analysis over every aspect of the equation yields those savings to customers, he said. In other words, the traditional 4% rule for retirement drawdowns just won't cut it.  

"This isn't necessarily a product — it is part of a process where people can find themselves, and then it's also modular and changeable," Smith said. "It's trying to get your arms around, what do you have to do, what would you like to do and what's that pie-in-the-sky stuff? … We spend a lot of time building that cash flow and retirement plan, then we do an overlay with that tax analysis."

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Cultivating CPAs referrals without hitting the wrong notes

To be sure, tax season still poses demands that leave many CPAs feeling "just overwhelmed, super stressed and they don't have a lot of time," Byrnes said. So advisors could send over some food or drink with a friendly note telling the tax pro, "'Hey, I know you have a lot on your plate right now, and I just want to help you get through it,'" he said. An invitation to celebrate the end of filing season could be effective as well. 

Outside of tax season, advisors may lend a marketing advantage to a CPA by inviting them on a podcast, interviewing them for a written blog or social media video or holding a webinar or in-person event to discuss certain strategies or common questions.

"A new advisor doesn't have a lead to exchange, so that's where all those marketing tips can be really helpful," Byrnes said.

Surveys on either side of the equation could identify the CPA customers' satisfaction with any wealth management company they use or the degree that the advisors' clients see their tax needs being met.

"Imagine you're coming out of tax season. As an advisor, you know that a third of your clients are unhappy with their accountants because you did this survey," Byrnes said. "It's a great way to exchange leads."

But some advisors "struggle to connect with CPAs" because they "have to have the knowledge, you have to acquire the experience, you have to build the relationship with the accountant and recognize that they're super busy," Parham said. Part of that is understanding the risks to CPAs or other tax pros that the advisor "could make their life harder and hurt the client," he said. 

While there are sometimes financial arrangements based on asset levels or the number of clients, the suggestion of one could backfire on advisors as well.

"It's, 'You send people, I send people,' and everyone's happy. The vast majority of those relationships are informal and sporadic," Parham said. "A lot of accountants, it actually turns them off if you offer to pay them. If they're getting paid to refer, it feels gross, and now they don't want to do it as much."