Yet, for investment advisors, tax season can be a powerful opportunity to strengthen relationships with clients, capture additional assets and expand referral networks of financial professionals.
While advisors have to be sensitive to privacy issues, securing tax returns from clients can be a powerful way to glean information that can play a big role in making investment recommendations. Experienced advisors even say managing clients’ assets without reviewing their tax returns is comparable to a doctor recommending treatments without fully understanding a patient’s health history.
Among other benefits, reviewing a client’s tax returns can help an advisor determine if tax free municipal bonds, rather than taxable bonds, are most appropriate. Muni bonds, of course, typically have lower yields than corporate bonds. However, on an after-tax basis, the tax-free bonds may be more attractive than other fixed-income securities.
Tax returns may also show that a client has a capital loss carryover that can offset taxes on realized capital gains. By offsetting taxes on capital gains, making a portfolio allocation or changing mutual funds may become more appealing because the capital gains offset may lessen the tax consequences resulting from the transactions.
Advisors can also use tax returns to assess if a client is making sufficient donations to a qualified retirement program or other savings plans. At the same time, information from tax returns can provide insight on the appropriateness of using a Roth or Traditional IRA. Tax documents may also reveal other insights into clients’ values. Clients that have made considerable donations to environmental organizations, for example, may be interested in socially responsible mutual funds and clients that make donations to churches may be interested in sin free funds.
Tax returns may also reveal other investment assets that clients are managing themselves or have placed with other advisors. For advisors, there are numerous advantages of learning about such assets.
First, advisors may want to consider the assets when projecting if a client is on track for reaching long-term savings goals. Second, advisors may want to incorporate those assets in financial planning. The assets not under an advisor’s management may be in liquid accounts, such as savings accounts and can therefore serve as emerging funds. Or, if the assets are in long-term investments, advisors may want to include the information when developing target asset allocations.
Advisors, of course, may also offer to manage the newly discovered assets. By actively coordinating investments with tax concerns, advisors may appear to be taking extra measures to help their clients. In creating that image, advisors may be well suited to take assets away from other advisors who have not gone the extra mile by scrutinizing tax returns.
In some cases, clients may simply authorize their accountants to freely discuss their tax returns with investment advisors. In such cases, advisors have a unique opportunity to develop relationships with accountants. In doing so, advisors may position themselves to receive referrals from tax preparation professionals.
One potential pitfall of reviewing tax returns is that clients may feel that advisors’ who request the information are being intrusive. With that in mind, advisors must use finesse when asking for the documents by first explaining that they want to take a holistic, or comprehensive, approach to help their clients with investment planning.
Without disclosing other clients’ identities, advisors can provide example of how reviewing tax documents have helped them improve their investment recommendations and coordinate asset management with tax concerns. Advisors can also tell clients that they can block out certain information, such as the names of other investment providers, Social Security numbers and other matters that may be sensitive.
