“Will you please help me with my tax return?“ used to be the only thing new clients would ask James Frazier when he started out as a CPA. But preparing tax returns is more of a dessert than the main course now that he’s transitioned his Ohio-based tax business into a full-service advisory firm.

But are tax services an add-on for firms that are deeply rooted in accounting? That’s been Frazier’s plan. In the three decades since becoming a CPA, Frazier’s firm has evolved along with his clients’ increased financial needs. Frazier’s Financial Advisors is now a wealth management firm that happens to also prepare tax returns.

What you can learn: Taxes are a recurring topic for RIAs to handle, even when they’re not tax professionals. Frazier offers tax advice for advisors on the lookout for new clients. Frazier Financial Advisors is also a case study for advisors looking to logically add services as clients’ needs and wealth expand.

James Frazier, Managing Director, Frazier Financial Advisors

Be patient as you expand your tax skills

The shift from accountant to wealth planner has been a long one for Frazier. Thirty years ago, working as an auditor with large companies, he saw many executives’ personal tax needs go unmet. He decided to make a shift. Frazier earned his master’s in taxation with the goal of providing personalized tax service for individuals.

That was the first step. As clients looked to Frazier as more of financial advisor than just a “tax guy,” he earned his Certified Financial Planner designation and hired people with planning backgrounds into the firm. That included his son Joshua, a CFA charterholder, who joined the firm in 2007.

Now the firm can build a broader view of clients’ needs and add additional value that clients can benefit more from. Frazier says many of his competitors don’t have the same ability — at least not under one roof — to provide tax and wealth planning. Some have tax professionals in house, but Frazier’s clients can get tax help from their primary investor advisor, too, who are given income-tax training, Frazier says. There are also three members of the firm dedicated to tax issues.

The results have been profound. While 10 years ago, most clients came looking for tax help, now most new clients are primarily looking for broader financial advice. The firm now has 300 clients and assets under management of $300 million.

How RIAs can add value with taxes

RIAs who aren’t tax professionals will still need to refer clients. But advisors can still add value without giving advice by reminding clients of several tax tenets, including:

• The power of deferral. Clients often forget how postponing the payment of taxes can have a meaningful and extended benefit. For instance, Frazier often encounters clients who assume converting traditional IRAs to Roth IRAs is prudent. But as a CPA, he knows this move rarely makes sense for clients. “I just don’t see how it makes sense to prepay your tax. That kinda violates the first principle I talk about: you defer taxation because you can make money on the tax dollars you otherwise would have paid if you had that money still in an account,” he says.
• Don’t be motivated by taxes alone. Some clients are tempted to make financial moves that might make sense tax-wise, but not fit an overall strategy. Gifting is one area this comes up, if a client wants to give away money without considering what they’ll need. Other clients might look to investments that promise tax benefits, without factoring in the exposure to potential losses they’re taking on. “‘Why would you invest in something to lose money?’” he says, “They get too focused on trying to save tax in that respect.”
  Another example where clients get overly fixated on taxes is with 529 education planning. Clients often get obsessed using their home state’s plan, lured by the contribution deduction offered by some states. But it’s the RIA’s job to show how another state’s plan might offer benefits if better designed for a client’s goals, he says.
• Understand how tax considerations have ripple effects. Tax moves cannot be made in isolation. Frazier cites the example of capital gains’ interaction with Medicare payment calculations. If an advisor sells a qualified investment after holding it more than a year, those proceeds may qualify for the lower long-term capital gains rate. That may be tax smart, but payment foolish. The move could trigger an unexpected side-effect for older clients since the proceeds may “count against you” by increasing the clients’ monthly Medicare payment, he says. Similarly, income from some tax-exempt debt instruments, can increase Medicare payments.
• Consider asset location, not just asset allocation. RIAs who only focus on building asset allocations — picking the mix of stocks and bonds are missing an opportunity to add after-tax value. Placing the assets in the account with the right tax status — based on the tax treatment of income it generates — can add tremendous value, Frazier says. RIAs, similarly, often overlook planning opportunities that exist when the basis of assets can be adjusted for heirs upon death of a client.

How to plug in with CPAs

While advisors can make tax-aware decisions, many still need strong relationships with CPAs. Advisors who aren’t tax professionals can create partnerships with CPAs so clients get a more integrated experience. CPAs, too, can be a powerful source of referrals of new clients.

In Frazier’s experience, the best way for RIAs to connect with CPAs and forge a stronger relationship with them is by carefully handling cost basis information. This doesn’t just mean providing tax professionals with a year-end summary of long and short-term gains. RIAs should communicate with clients’ CPAs during the year about moves they’re making or planning to make.

Frazier knows he’s doing something right when clients tell him they appreciate how he marries smart investment management with tax consideration. Clients tell him: “We understand you can do all of this.” That’s actually what he wants to hear.

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