Is your financial advisor your personal CFO?


Originally published in American City Business Journals

By Jaime Eckels

You’re at a dinner party and one of your friends is talking about doing a back-door Roth IRA because their AGI is too high to make direct contributions.

Someone else is in the process of retitling their home into the name of their trust.

And another friend is converting from municipal to taxable bonds because they are now subject to AMT.

The conversation is starting to sound like a word salad. Even worse, you know you might soon face some of the same complicated issues.

Years ago, you could easily manage your investments and prepare your own tax return. But now, for very good reasons, those days are gone. You’ve progressed in your career, your family has grown, and your financial situation has gotten pretty complex, pretty fast.

People who are smart enough to read a legal document, do their taxes and think broadly about their financial future might react with skepticism to the idea that they need three professionals — a financial advisor, a CPA/tax preparer and an estate planning attorney —t o help them manage their financial situation. They might be more skeptical still at the idea that those three need to talk to each other.

Having a strong financial team, though, is more about improving coordination among existing professionals than paying new ones.

A good 80% of my clients already have a CPA or outside tax preparer doing their annual taxes, and everyone with children and significant assets should already have brought on a lawyer for their estate planning. The real key is to make sure they are talking to one another, ideally with your financial advisor taking the lead.

Doing so doesn’t just improve your life. It also increases the possibility that they’ll find better outcomes, discovering efficiencies or strategies that wouldn’t have been possible if they’d been forced to stay apart.

Skeptics might say there’s too much risk involved when it comes to handing over the details of your life to an entire team. Privacy concerns are valid, and there’s no doubt that it can be difficult emotionally for some people to share their deepest financial and family secrets. But think of the returns.

It can be a huge relief to outsource much of the thinking about death and taxes. Estate planning, in particular, is something that even financially astute families put off for years or fail to update even after their circumstances change, because facing reality is too painful.

By empowering your financial advisor to act as the quarterback for your team, you can sit back and let him or her strategize with your estate and tax professionals, with you looped in, of course.

Your advisor likely isn’t a law or tax expert, but should know enough about both fields to be asking the right questions and to keep up with relevant changes — questions that include acronyms like AGI (adjusted gross income) or AMT (alternative minimum tax) that you might not have the time nor the patience to master.

It helps to think of your financial advisor as the CFO to you, the CEO. Their job isn’t just about managing your investment portfolio, it’s about designing a financial strategy that aligns with your short-term and long-term goals. To do that properly, your advisors needs to work as closely as possible with everyone else who serves you and your family.

The core relationship here exists between your financial advisor and your CPA. In many ways, it’s impossible for an advisor to optimize your investment or charitable giving strategy without having good visibility into your tax situation and a healthy dialogue with your accountant.

The importance of an estate lawyer is generally front-loaded, though they should always be brought in again when circumstances like estate law changes, starting a business, marriage, divorce, kids, or any other big life change, demand it. Tax advice and strategy is an evergreen need.

Anyone starting a business, for example, needs to get their advisor and their CPA in the same room to talk about corporate structure. Each kind, be it an S- or C-Corp, carries its own ramifications.

Similarly, it may make sense for a business owner to boost their tax-deferred savings by shifting from an individual IRA to a SEP IRA or a solo 401(k), which allows for much higher annual contributions. But that depends on a lot of other factors, some of which may only be known by one of the two parties.

Your advisor should connect with your CPA regularly so that you don’t have to. Half my job around tax deadline day is to check in with my client’s tax preparer’s right as some key decisions have to be made. A client might want to make a Roth IRA contribution, for example, but their ability to do so depends if they are below the phase-out income level. That’s information that lives with the CPA, but it shouldn’t be the client’s responsibility to find it out; that burden should rest with the advisor paid not just to dig up answers, but to do something thoughtful with them that keeps the client’s best interests in mind.

Investment portfolios also benefit from close advisor-CPA/tax-preparer coordination, particularly the mix between tax-free municipal bonds and taxable bonds. Factors like income changes or being caught by the alternative minimum tax can dramatically change investment options, and cost you a lot of money and heartache, which means your CPA and advisor don’t just need to talk, they need to talk often.

Unfortunately, a lot of financial advisors are resistant to this idea of coordination. For them, a quick check on your top marginal tax rate and a few keystrokes into some software may be the extent of what they deem necessary.

But those half-measures are no substitute for genuine coordination and teamwork. It wouldn’t be acceptable for any normal CFO, and it shouldn’t be acceptable for yours.

Jaime Eckels, CFP®, is a relationship manager with Plante Moran Financial Advisors, an independent registered investment advisor.