A proven way to grow your existing financial services business is to add a tax practice. Preparing taxes and providing tax advice is probably the biggest opportunity that financial planners have today. In most cases, clients regard taxes as their largest expense, and they are uncertain about the financial landscape and the best way to take advantage of it. Delivering ongoing advice – taxes aren’t a one-time thing – and deeper solutions to their tax concerns is a way to differentiate yourself as a unique, multi-solution financial advisor. It also showcases the capabilities of your firm to a new group of potential clients.
Even though it is eventually a profitable venture, starting a tax practice from the ground up can be daunting, even for a seasoned professional. Do you jump in with both feet or should you test the waters first before fully committing? There are pros and cons to both approaches.
Building Your Own Tax Practice
There are two ways to build a tax practice – you either build it within your own firm or you buy an existing practice. Let’s focus on building one within your firm.
The goal of building your tax practice is to eventually convert those tax clients to full financial services clients. You position yourself in front of them once a year and have the opportunity to not only review their taxes, but to also give them an overview of how you could include their tax strategy as part of a holistic financial plan. The tax client might not be ready for your other services at first, but you’ll be there when they are ready.
There are several steps involved in establishing and expanding your tax practice:
- Build the foundation – get everything in place to have your own tax practice, from office space to software to pens and pencils.
- Hire an accountant to prepare taxes in your office.
- Market the new tax practice to bring new tax clients into your office.
- Hire someone to answer the phone and set appointments for tax services.
Your first year or two (Stage 1) of tax preparation will more than likely be modest, with you and two accountants handling all the business at hand – between 100-400 returns. By Stage 2, you’ll be processing 400-1000 returns, and you’ll need to hire an additional advisor and maybe even a tax practice manager. By the time you reach Stage 3, your office will have 1000-2000 tax clients, with the potential addition of yet another advisor and more accountants. Over time, possibly up to 30% of your new business will be written with clients who initially worked with your tax practice.
A key factor to remember as you are building your tax practice: while the CPA initially meets with the client and prepares the taxes, it’s the financial advisor who should present the completed tax documents. This is the time to go over the services that your financial practice can provide, outline any tax strategies, and work on building a relationship with the client from year to year.
Advantages to owning your tax practice:
- It brings revenue directly to the firm.
- Tax practice revenue is net profit.
- The cost of getting a potential client in front of you is very low.
- It’s a profitable lead generation solution.
- You control the business and how the returns are delivered.
- You become a better holistic planner because you incorporate the tax element.
- Your firm becomes a magnet for financial advisors who want to join because you’re creating so much activity.
Disadvantages to owning your tax practice:
- As previously mentioned, it’s a lot of work.
- It takes a lot of time – time that you could be using to focus on financial planning.
- You will need to hire more team members to handle the business.
- Until the practice grows enough to warrant hiring a tax practice manager, you will be responsible for overseeing the day-to-day operations of the practice.
Partnering with Another Firm
One way to find out if a tax practice will work for you is to partner with a tax firm. You offer tax services and holistic financial planning to their clients and use their accountants for tax preparation. You or one of your associates will then meet with the clients to go over the return and lay out tax planning strategies for the coming year. This gives you an excellent platform from which to attract new clients to your financial services firm. You set up a cost-sharing arrangement so that, as part of the agreement, 20% of any new business written goes back to the host tax firm. Consider the “Find, Mined and Grind” mindset: “Find” brings the client in; “Mined” formulates recommendations and closes the sale; and “Grind” manages the financial services portion moving forward. The owner of the tax practice earns the “Find.”
One way to make some inroads into this new market of existing tax clients/potential financial services clients, as well as new prospects in general, is through a series of workshops – for example, Social Security, Medicare, long-term care and tax workshops. These are a great way to put yourself in front of a new audience and demonstrate your financial expertise without a large cash outlay.
As with setting up your own tax practice, there are advantages and disadvantages to “renting” one:
Advantages to partnering with a tax firm:
- You are approaching an audience that is already made up of tax clients.
- Staffing is already managed, so you don’t have the expense of added accountants for tax season.
- The tax firm office can serve as your second office for meetings with potential financial services clients.
- If the tax practice owner ever decides to sell and/or retire, you’re right there and already ingrained as the next buyer.
Disadvantages to partnering with a tax firm:
- Limited penetration in the surrounding area, since you don’t control the marketing.
- You have little to no say in the staff hired.
Regardless of which approach you take, you will always need to demonstrate to the client that you understand the order of money (the best accumulation and distribution strategies for maximum tax efficiency); the measurement of tax brackets for income and capital gains; the elimination of marginal tax traps; the allocation of tax-sensitive assets; gifting strategies; and the “pay now vs. pay later” analysis. The client must know why they need to hire you – because you’re going to manage their dynamic tax bracket every single year moving forward.
Listen to our podcast today and learn how building a tax practice is a team effort and how it provides the opportunity to get in front of potential clients while making money to do so. As a way to differentiate yourself while expanding your reach in your market, building a tax practice should not be overlooked and our experts here at Clarity 2 Prosperity can help you get started.
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