The Good, The Bad, and The Ugly of Using Your Tax Preparer as Your Wealth Manager

Nick Hodges, CPA/PFS, MBA, CFP

Your tax preparer is one of your most important advisors. You see them annually to manage the largest bill you will have over your lifetime: your taxes.

The person that prepares your taxes knows your deepest secrets, things even your family may not know about you. When you meet with them, they know how to ask you clear questions, can be trusted to keep your answers confidential, and will use that information to YOUR advantage while staying within the bounds of the law. You trust your tax preparer. You make sure to call them whenever you are going to make a financial decision because you know that they see how all the moving parts of your financial world fit together.

This brings up the obvious consideration that your tax preparer might be your best choice as a wealth manager. They already know you. They have a broad understanding of how your tax and financial worlds integrate. They give you advice based on what’s best for you. They try not to sell you something you don’t need. And, you already trust them. All of this is good, right? Of course it is.

Let’s look deeper into how this tax management relationship pertains to your wealth management needs.

The Good: Their STYLE
Your tax preparer has been trained to be a problem-solver and an educator, not a financial salesman. They seek to understand YOUR unique situation (what are YOUR problems) before they offer you solutions. They analyze, provide options, and deliver an objective perspective. They understand that many financial and investment products help mitigate your personal, business, and estate taxes – in fact, they will recommend them to you from time-to-time. Moreover, they struggle with what is known in the industry as ‘conflict of interest’ ethics. A conflict of interest is a situation in which financial or other considerations have the potential to compromise or bias the professional’s judgment and objectivity. What that means is that BEFORE they offer you a solution that will result in more money in their pockets, they will ask themselves if it is really BEST for YOU. Lastly, your tax preparer nurtures long-term relationships; they know you better and longer than any other financial advisor ever will.

The Bad: Their NATURE
Tax preparers, Enrolled Agents, and Certified Public Accountants bring certain skill sets and professional comfort zones to the table when they work with you. However, when a good (or even great) tax preparer steps into the wealth management arena, the very traits that have brought them success with their tax clients, can limit them in being an effective wealth manager. Here’s why:

Tax Preparer Traits:
Factual: Works with historical data
Analysis: Uses formulas and charts to analyze, classify, and report
Clarity: Likes specific answers to clear questions
Closure: Works best with deadlines
Breadth: Operates with generalized knowledge of broad interactions
Guidance: Relies on clear regulatory guides and situational directives

Wealth Manager Traits:
Open-ended: Comfortable dealing with future probabilities and ranges of outcomes
Emotion based: Likes interactive aspect of defining client goals, dreams, and aspirations
Changing market: Interested in constantly evolving client needs and product options
Open-ended Service: Enjoys on-demand services based on client requests and needs
Conduct: Strong regulatory agencies define general conduct policies rather than situational directives
Depth: Develops detailed, vertical knowledge of investments within the same product range

The scope of their general knowledge and preference for historical analysis quickly turns bad when you need a specific investment. While a tax preparer understands the impact of a particular investment type, they do not have the depth of information needed to recommend an individual investment product that might suit you. When they do take on the task of comparing the details of various investment offerings, they often become paralyzed by over-analysis. This is because they do not want to jeopardize their long-term relationship with you. As a result, they avoid giving direct advice in arenas for which they cannot predict the future. The very attributes you appreciate in them as your tax preparer often hinders their ability to be the wealth manager you need.

The Ugly: Their METHOD
The objectivity and independence that you value so highly in your tax preparer turns ugly when you seek to use them as your wealth manager. Because they are uncomfortable with the uncertainty of predicting the future (The Bad), they leave the execution and implementation of their recommendations to others (The Ugly.)

Every tax preparer in the 1980’s has horror stories about making an investment recommendation to a client and referring them to a local financial salesman to implement it. All too often, the client came back the next year with a limited partnership, something the financial salesman told them was ‘better’ than the preparer’s recommendation. The reality was that the client was now invested in something they didn’t need, had no relationship to the recommendation, and would probably lose their money, BUT it had generated a huge commission for the financial salesman.

Remember, a financial salesman has a product to sell. His job is to convince you to buy it. Because your tax preparer has not made a specific product recommendation to you, the financial salesman will happily provide you with more details than you could possibly understand about the product they have to sell. In fact, they may even give you several choices between similar products. However, your tax preparer’s methodology has left you unable to apply the investment details to your unique situation so you can make the best decision for YOU.

Without the licenses and experience to help you evaluate the details of the financial salesman’s products, your trusted tax preparer cannot effectively comment to your choices. Their unwillingness to say anything specific until they know everything about a subject limits their ability to guide you through the decision-making process. Shackled by their comfort zones, they fall down in their ability to make specific recommendations to you and properly execute them on your behalf. As a result, you will likely buy an investment product that could negatively impact your tax picture and still NOT accomplish what your tax preparer recommended. This is where the bad becomes the ugly when relying on your tax preparer to be your wealth manager.

Tax preparers have some of the best characteristics needed in a good Wealth Manager: they are financially integrated, relationship-based, and have a consultative style. We believe that the next evolution in wealth management will come from tax preparers that learn to operate outside of their comfort zones, become educated to provide you with specific investment recommendations, and acquire the licenses necessary to assist you in implementing them.