How Financial Advisors Can (and Can't) Provide Tax Advice

In today's complex financial landscape, tax planning has become an increasingly important aspect of holistic financial investment services. According to a recent survey of nearly 1,600 investors, 90% voiced their need for tax planning assistance. However, advisors seem to be playing catch-up, with just 73% offering tax planning services.¹

As an advisor, you can gain a competitive distinction in your market, deepen relationships with current clients, and potentially attract new clients by integrating tax planning into your services. But first, it’s crucial to understand the boundaries between tax preparation, legal tax advice, and tax planning strategies. Here’s what you need to know to stay in compliance.

What Advisors Can and Cannot Do When It Comes to Taxes

According to the Internal Revenue Service (IRS), financial advisors can give general tax planning advice, but they must avoid giving specific tax preparation or legal tax advice. Following these best practices can help you avoid regulatory issues.

Familiarize yourself with your firm’s guidelines and policies in this area. Some wealth management firms prohibit financial advisors from engaging in tax advice because of the potential legal and financial risk that could arise from a client compliant. If this is the case at your firm, tax planning could be an alternative approach to helping ensure that your clients’ income is taxed more efficiently. Consult your compliance department for guidance around the types of advice you’re permitted to give and best practices for discussing these strategies with your clients.
Always include disclaimers in your tax planning discussions to avoid client misconceptions. For example, you might state, "While I can provide general tax planning guidance, specific tax advice should be sought from a qualified tax professional."
Stay updated on compliance rules by regularly consulting with legal and tax professionals. By involving Certified Public Accountants (CPA) and attorneys in the tax planning process, you can ensure that clients receive comprehensive and accurate tax advice. This collaboration also helps you stay within regulatory boundaries and avoid legal and financial liabilities.

Timely Strategies to Maximize Tax Savings for Your Clients

Engaging in critical tax-season conversations with clients can ensure they are well-prepared and can take full advantage of available opportunities, reduce their tax liability, and enhance their financial well-being. Consider adding these topics to your client meeting agendas and tax season communications:

Maximize IRA/401(k) contributions: Encourage clients to maximize their contributions to IRA and 401(k) retirement accounts. This can provide significant tax benefits and help them build a more secure financial future.
Review deductions and credits: Help clients identify and maximize deductions and credits, such as education expenses and home office expenses, that can significantly reduce their tax liability.
Capital gains management strategies: For high-net-worth clients, discuss how strategies such as tax-loss harvesting and timing asset sales can help minimize their tax liability.
Tax-efficient charitable giving: Educate clients on strategies like donor-advised funds and qualified charitable distributions that can provide both tax benefits and the satisfaction of supporting causes that align with their values.

Your clients will likely have questions about their tax situation, so make sure you’re prepared for these conversations by following these steps:

Stay informed: Consider partnering with licensed professionals, subscribing to updates from the IRS, and networking with professional organizations for tax and financial planning professionals.
Summarize information for clients: Summarize tax law changes in a way that’s easy for clients to understand. Provide clear implications and recommendations on actions they can take to optimize their tax situation.
Focus on niche strategies: Ensure that niche strategies like backdoor Roth IRAs, Roth Conversion Ladders, and the triple-tax benefits of HSAs are a focus for high-earners. These tax advantaged accounts can be an effective part of clients’ overall financial strategy.

Year-Round Planning Strategies

As an advisor, you can continue adding tax value long after your clients file their returns. Here are a few tips for integrating short- and long-term tax planning into your client conversations and overall investment strategies.

Proactive tax management

Schedule quarterly check-ins: Schedule quarterly check-ins to review the tax implications of life changes, such as marriage, inheritance, or significant financial transactions. This proactive approach can help clients stay on track with their financial goals and minimize tax liabilities.
Discuss tax-loss harvesting opportunities: Identify and discuss tax-loss harvesting opportunities to help offset capital gains and reduce overall tax liability.

Educating clients on tax-efficient investments

Consider asset placement: Inform clients about how the placement of assets into tax-advantaged accounts like Roth IRAs or municipal bonds can help minimize tax liability and maximize returns.
Use lifecycle events as a framework: Use lifecycle events, such as retirement income shifts, as a framework to revisit and adjust tax strategies. This ensures that clients' tax plans remain aligned with their changing financial situations.

Estate and long-term planning

Leverage advanced techniques: Explain advanced techniques like leveraging the step-up in basis for beneficiaries. This can help reduce long-term tax burdens and ensure a smoother transition of wealth.
Review gifting and estate exemptions: Review options for gifting and estate exemptions to help reduce long-term tax burdens. This can include strategies such as annual gifting and establishing trusts.
Stay updated on IRS and SEC guidance: Highlight recent updates or shifts in IRS or SEC guidance. Staying informed about these changes can help you provide the most current and effective guidance to your clients.

Tax Planning Services at LPL Financial

Ready to stand apart from the competition by integrating tax planning into your services? LPL can help. Contact LPL to explore how we can help you elevate your value proposition with tax planning support.