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Tax Knowledge - Going Deeper for Clients


There are two specific areas that have a tremendous impact on the success or failure or your investing experience which most advisors ignore.  One of them is relatively easy to control and the other takes quite a bit of specialized knowledge.  I’ve already tackled the first and am now embarking on getting a deeper understanding of the latter.

The first is simply the fees you pay.  Paying 1% in fees to your advisor for investment management only and then another 1% in fees for the investment products themselves may not feel like it would add up to much, however, we know the math reveals the truth.  One of my favorite examples comes from Jack Bogle of Vanguard:

"Let's assume the stock market gives a 7% return over 50 years. If you get to 7%, each $1 goes up to $30. If you get to 5% (that would be 7% less the industry's typical 2% all-in costs), you get $10.”

"So $10 versus $30. You put up 100% of the capital, you took 100% of the risk, and you got 33% of the return! As I say to people, if that strikes you as a good deal, by all means do it!"

I have also been over how so many advisors are fearful of shifting to a flat-fee model.  Most rely on charging an assets under management (AUM) percentage fee or commissions because it is what the financial services industry says is best.  But, is that best for the advisor or the client? 

For clients who want a flat fee advisor, we do exist.  However, there are not that many of us.  Heck, as far as I know, I am the only flat-fee CFP® in the state of Ohio.  Ultimately, it is relatively easy for a client to switch to a flat fee advisor, as long as you are willing to take on the world’s most dangerous six-letter word – CHANGE.

Now, onto the second item which requires a deeper knowledge – TAXES.  Ah, everyone’s favorite subject, right.  Over the years I realize how important this is to clients and what impact it can have on your investment goals.  I have also realized simply saying – “talk to your CPA” isn’t a good enough answer as clients expect me to have a solid understanding of taxes, which I do.  I review the tax returns every year for my clients, however, I want to continue to improve my knowledge.  That is why I have decided to go through some more training.

In this case, it is for what is called the Enrolled Agent (EA) designation.  Now, you know I feel there are too many designations out there.  I mean, there are only somewhere around 200 designations for advisors, but I digress.  In my opinion, the EA is one of the good ones.

You may be wondering what is an Enrolled Agent.  It is a “federally-authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of the Treasury to represent taxpayers before all administrative levels—examination, collection, and appeals—of the Internal Revenue Service. In addition to taxpayer representation, enrolled agents often provide tax consultation services and prepare a wide range of federal and state tax returns.”  You like that definition?  Basically, it means I can do tax returns and/or represent clients in front of the IRS.  However, I will be doing NEITHER of those things.  Those will still be left to the CPAs I work with.

My goal with the EA designation is to deepen my tax knowledge as it is too important to ignore, especially as the tax rules continuously change.  As an example, SEI Investments did a study a couple of years ago that failure to manage for taxes properly in a taxable account can result in an investor losing 60% of their gains to taxes.  Combine this with the facts above from Vanguard and imagine the devastation that could happen to most portfolios, both before and during retirement. 

They recommend it takes two years to complete the EA coursework and exams.  I am hoping to complete this in a year, but who knows.  All I know is that some of my CPA clients are questioning my sanity in pursuing this designation, but also know it is good for my practice and my clients.  So, wish me luck on this journey and be prepared for more articles talking about taxes.Although I will try to keep them entertaining.  Not that taxes aren’t fun😊 

Ultimately, remember it isn’t what you make, it’s what you keep!