Effortlessly Build a Tax Practice in Less than 1 Year

Published April 10th, 2019 in Blog |

Building a tax practice

The most successful advisors are always thinking about growth.

As a business owner, growth can be divided into two primary categories:

  1. Find new prospects to whom you can sell your existing services, or
  2. Expand your services and sell more to your existing clients.

You can accomplish both at the same time, without adding a lot of personal time and effort, by building a tax practice within your financial services business.

Why start a tax practice?

If you offer both investments and insurance, your revenue probably looks something like this:

Financial Services Revenue

If you serve 100 families and have gross revenue of $300,000, you could have:

  • $150,000 from insurance sales such as life, LTC, DI, and annuities
  • $120,000 from investment advisory fees
  • $30,000 from financial planning fees

You have one support staff and want to hire an associate advisor so that you are not the sole rainmaker. You meet with about 20 new prospects per year and convert about 50% into clients.

Adding a tax practice will add tremendous value to your business within 12 months, with a proven roadmap to grow over the next 3-5 years. Attracting tax preparation clients is much easier than prospecting for financial planning or wealth management clients. Everyone needs to file taxes, but not everyone realizes they need a financial advisor. Your marketing should be very targeted, as we don’t recommend offering tax preparation services to just anyone. Target your tax preparation services to the type of consumers you want to meet for financial services opportunities.

Here are some conservative assumptions to show the progress you can make:

Year 1:

  • 30% of your 100 existing financial clients use your tax preparation service
    • Gross tax preparation revenue $2,970
  • Targeted marketing efforts generate 100 new tax clients (individuals age 50+ with a targeted level of investable assets)
    • Gross tax preparation revenue $9,900

Between existing and new tax clients, about $13,000 additional gross tax revenue is added to your business. After paying for the tax preparer, supplies, and software, you clear a very modest net profit.

But here’s the kicker…

If the new tax clients each have an average of $250,000 of investable assets, you just added $25,000,000 of potential business for your company. If you can convert 5% of that business into a financial client your first year, you just added $1,250,000 new financial business to your firm.

Calculate the amount of revenue you would earn on $1,250,000 of new client assets, and you can see the tax practice pays for itself.

Year 2:

  • Another 10% of your 100 existing financial clients use your tax preparation service
    • Gross tax preparation revenue $990
  • Of 100 initial tax clients (acquired in year 1), 90% return in year 2 (10% attrition).
    • Gross tax preparation revenue $8,910
  • Targeted marketing efforts generate 150 new tax clients (age 50+ with a targeted level of investable assets)
    • Gross tax preparation revenue $14,850

About $25,000 of gross tax revenue has been added to your business. After paying for the tax preparer, supplies, and software, your net profit improves and you now have 250 tax clients with whom to share the other services you offer. If each tax client has on average $250,000, you have $62,500,000 of assets to potentially convert into financial business. If you convert another 5% of that business, you have added $3,125,000 of new assets to your firm. With 250 potential first appointments coming to your office each year to pick up their completed tax returns (which the advisor delivers), you now have a steady flow of prospects for yourself and for that associate advisor you wanted to hire.

Year 3:

  • Another 10% of your 100 existing financial clients use your tax preparation service
    • Gross tax preparation revenue $22,275
  • Of 250 tax clients (acquired between year 1 and 2), 90% return in year 3 (10% attrition).
  • Targeted marketing efforts generate 200 new tax clients (age 50+ with a targeted level of investable assets)
    • Gross tax preparation revenue $19,800

Now you’ve added about $43,000 of gross tax revenue to your business and are experiencing net profit margins of $15,000+. You also have 435 tax clients and a potential asset base of $108,750,000 (using an average of $250,000 per client). A 5% conversion rate results in $5,000,000 of new assets into your company.

The tax practice brings in a new revenue stream and a greater stream of new prospects to whom you can cross-sell financial planning services. This is “Profitable Lead Generation.”

Here is a case study in action:

In 2008, one of our model offices launched their tax practice. By 2018, they accumulated 1,929 tax clients. The total income from tax preparation was $188,196 and they spent:

  • Advertising: $7,366
  • Tax preparers: $92,756
  • Additional staff hours: $15,971
  • Supplies: $11,952

Total expense: $128,045

The business owner had a net profit of $60,151. They also averaged $10m-$12m of new business from their tax clients each year over the last three years. In 2018 alone, they gathered $5.4m of annuity premiums, $5m of AUM, and over $80,000 of target life insurance premium from tax clients who also needed financial services, all without spending a dime on marketing!

After categorizing all the tax clients in their CRM, they now have segmented 384 A-list clients (over $500k investable assets), 681 B-list clients (there is an opportunity for financial business, but not sure exactly how much they have), and 804-C list clients (probably not a financial services opportunity). The amount of activity keeps four financial advisors stacked with opportunities throughout the year.

You can see the massive opportunity, but a tax practice certainly isn’t for everyone.

A tax practice might be a great addition to your business IF you meet the following requirements:

  1. You are entrepreneurial and looking to grow
  2. You are or aspire to become a holistic advisor
  3. You want a lot of prospects coming into your office
  4. You want to provide better advice to your clients by integrated tax planning
  5. You want to add additional rainmakers to your business

If you don’t meet all of these requirements, do NOT start a tax practice!

The one requirement you do not need is a tax background. We have helped many financial advisors who were not initially strong in taxation. The financial advisor is not doing any tax preparation – that’s why you hire a tax preparer. But by having a tax practice, the advisor becomes more competent in tax planning, ultimately adding value to the advice they provide their clients.

If you answered yes to each of the requirements above, your next step is to determine how you will do it, and what resources you need.

Clarity 2 Prosperity has created The Tax Practice Builder®, an eight-step process that gives you everything needed to successfully build a tax practice.

The Tax Practice BuilderIn addition to the online eLearning platform, you have access to subject matter expert advisors and mentors who have already built a tax practice to guide you along the way.

This is just one of our 21 proven processes financial advisors are using every day to increase efficiency, client conversions and retention. Learn more today by downloading our 21 Turnkey Processes Whitepaper below.

Dave Alison

Dave Alison is an accomplished industry visionary, entrepreneur and investment advisor. Dave is the Founding Partner & EVP of C2P Enterprises in addition to the Founder & President of Alison Wealth Management.

To validate his commitment to furthering his education and competency in the advice he provides, Dave has earned the CERTIFIED FINANCIAL PLANNER™ designation, Enrolled Agent and Certified Financial Fiduciary® designation.

He has served as a mentor and trainer to hundreds of financial planners, CPAs and estate planning attorneys as well as a frequent speaker at industry conferences through the United States.

He is regularly called upon as a public speaker and by the media to share his knowledge on holistic financial planning, including Bloomberg, MarketWatch, Forbes Investor’s Business Daily, US News and World Report, Financial Planning Magazine and more.