While advisory services are interchangeable because they feel similar, they are quite different. In this article, we will make clear how these two functions differ, and tax professionals can better define them for customers.
A tax advisor and a financial advisor play unique roles, though they are by definition interrelated in managing personal finance. A tax advisor, with specialized training in tax law, provides advice on tax matters, ensures tax compliance, and strategizes to minimize tax liabilities. They focus on tax-efficient approaches to financial transactions, inheritance, and business sales, offering potentially substantial tax savings.
On the other hand, a financial advisor navigates broader financial strategies. They guide on matters such as retirement planning, investment management, and insurance needs, working towards achieving clients' financial goals.
Their role encompasses all aspects of personal finance.
Both roles are pivotal and frequently require working in tandem. Tax advisors ensure tax efficiency in the strategies laid out by a financial advisor. Although there are major differences between tax planning and advisory services, taxes are still a central component of financial planning. Almost every financial planning issue, such as retirement, investments, cash flow, insurance, and estate planning, has tax considerations. Advisors provide a great deal of value in helping clients minimize their overall tax burden.
And yet, despite the prominent role of taxes in financial planning, tax advisors can be prohibited by their compliance departments from making recommendations for a specific course of action on handling taxes. This means that advisors are often left to figure out on their own how to guide their clients on tax-related matters without crossing the line, which can potentially create problems for the advisor and their firm.
Unlike investment advice, advisory firms are not required to create policies and procedures around properly given tax advice (unless they specifically employ designated tax practitioners), so there is often no clear-cut way to ensure tax advice is given correctly. The consequences for incorrect tax advice can include legal and financial penalties if a client were to be harmed by the wrong advice.
For advisors who steer clear of giving tax advice, tax planning is an approach to discussing tax matters with clients. Tax planning can range from giving general, nonspecific information on tax laws and regulations to creating detailed projections for clients and comparing the outcomes of potential tax strategies – so long as the planning does not also include a recommendation of a specific course of action that would constitute tax advice.
Generally, the more detailed the analysis, the likelier the client could construe it as a recommendation – which is what ultimately matters since a presentation that the client understands to be tax advice is as good as actually giving tax advice. In these circumstances, safeguards such as upfront disclosures and collaboration with the client’s tax professional may be necessary to ensure that the tax professional – and not the advisor – makes the actual recommendation.
The key point is that understanding what constitutes tax advice versus tax planning that doesn’t go so far as to make a recommendation can help advisors more confidently engage with their clients on tax matters without violating the unique rules set in place by their compliance departments. Having a framework for the types of advice to give and for the language to use when communicating strategies to clients can reduce the confusion of being obliged to guide taxes while being prohibited from giving actual tax advice. Because ultimately, the question around tax planning (if not outright advice) isn’t whether it should be offered, but how it can be delivered to provide the most value to clients while protecting the client, advisor, and firm.
All of the above issues can make for some complicated scenarios. To make things much clearer, below we cover the main differences between a tax planner and a financial advisor.
Frequency of Services
While proactive, tax planning usually occurs once or twice a year. One encounter with a client can often get the job done, but if there are major financial events, other meetings can be arranged.
Advisory services often require several meetings with clients. The work of a financial advisor is an ongoing activity because it covers so much, including answering questions, guiding clients to understand the tax implications of their decisions, and being available much more frequently than a tax planner.
Scope of the Work
How does the scope between tax planning and tax advisory differ?
Tax planning: During tax planning discussions with clients, the theme of the conversation is usually centered on eliminating surprises, anticipated income and life changes, and foreseeing future tax liabilities.
Tax advisory: Tax advisory focuses on everything from tax liabilities to tax savings and the initiatives that are important to the client. These may include saving for retirement, preparing kids for college, and building wealth. Instead of solely planning for the tax bill, the focus is on the bigger picture.
Proactivity in Tax Panning vs Advisory Services
Tax planning is proactive and involves concentrating on the next one to three years. The main theme is to minimize a client’s tax liability.
Tax advisory is proactive. Of course, an advisor is concerned with the upcoming year but that’s not the main goal. Advisors think ahead and discuss with clients such things as; changes in future tax laws, thinking further out, and retirement.
Education and Focus
The main focus of tax planning is on providing the best service for clients when it comes to their taxes. Guidance is typically centered on optimizing tax outcomes within the current tax environment.
Tax advisory is more about teaching the client to make the best possible financial decisions. Equipping the client with knowledge so they can understand the big picture, is the reason advisors exist. It’s taking the focus solely off of shrinking the tax bill to create proactive conversations. Clients then begin to learn more about decision-making and data.
These Differences Empower You and Your Clients
Often, accountants bring industry experience, accounting technology and process expertise, financial acumen, and an understanding of the client to develop personalized recommendations. Accountants help business owners prosper by providing advisory services, such as tax planning, technology implementation and maintenance, management reporting, cash flow forecasting, key performance indicator dashboards, industry benchmarking, business performance reviews, process automation, budgeting and goal tracking, strategic planning, product price testing, profitability consulting, wealth management, and more.
Tax planning and tax advisory are integral components of effective financial management, each serving its purpose. When tax professionals create a harmonious tax cycle for their firm and clients, they can plan and price more appropriately.
While tax planning can reduce tax liabilities, penalties, and unforeseen events through laser-focused arrangements of financial activities, tax advisory offers continuing guidance for a host of financial considerations. Understanding the differences between these two offerings empowers everyone involved, ensuring a detailed and proactive approach to financial success for your firm and your clients.
Sources
- https://www.cpapracticeadvisor.com/2023/12/10/decoding-the-difference-tax-planning-vs-advisory/98971/
- https://www.financestrategists.com/financial-advisor/advisor-types/tax-advisor-vs-financial-advisor/
- https://www.kitces.com/blog/tax-planning-strategies-client-communication-prohibited-advice-financial-advisors-compliance-irs-rules/
- https://accountants.intuit.com/taxprocenter/practice-management/what-are-advisory-services-and-what-do-they-mean-for-your-practice/#:~:text=What%20are%20advisory%20services%20in,their%20financial%20and%20operational%20goals.
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