Like many financial planners, Dave Morgan and his colleagues at High Net Worth Advisory Group was hearing more and more clients ask questions about taxes.
Processing Content
For years, the Naples, Florida-based firm would refer those inquiries to a small group of trusted certified public accountants. Over time, though, those local CPAs had become fully booked.
The firm’s solution? Bring some of those CPAs onto the payroll to serve clients through a new division: the High Net Worth Tax Advisory Group.
“Being the control freaks that we are, and I say that as a compliment to ourselves, we don’t want to commoditize the experience,” Morgan said. “We want a customized experience. So we’ve decided to build it in-house.”
Tax prep pitfalls and how to avoid them
In hiring CPAs, Morgan and his colleagues were taking one of several steps RIAs and other firms are increasingly relying on to mitigate the legal and regulatory liabilities that arise when they hold themselves out to the public as tax specialists. Those risks are particularly acute for wealth managers who move beyond basic tax planning and portray themselves as experts in the much more fraught field of tax preparation, said Richard Chen, an advisor advocate and the founder of Brightstar Law Group in New York.
Tax preparation most often involves helping clients complete their tax returns, a procedure that subjects filers to IRS rules requiring that the information submitted for deductions and other claims be accurate.
“I think a lot of people think of tax returns as administrative and filing paperwork,” Chen said. “But there are decisions to be made. So depending on whether or not you limit your responsibility for judgment calls, if you come up with an improper interpretation, theoretically it can create liability if the client gets hit with penalties.”
In a recent post on LinkedIn, Chen outlined three provisions he thinks RIAs should include in client contracts before venturing into tax preparation:
A clear statement of the firm’s tax-related responsibilities. Clients often assume their financial planner will assist with amended returns or help defend them in the event of an RIA audit. “Your agreement should define exactly what is included in the tax-prep service, what is excluded, and confirm that the firm will not be liable for IRS or state actions beyond the agreed-upon preparation of the return,” Chen wrote.A statement disclaiming responsibility for inaccurate information provided by a client. “Even when the mistake originates entirely with the client, an RIA can be blamed for a ‘faulty return,'” Chen wrote.Explicit client consent for using tax information beyond tax prep purposes. “Sharing or using a client’s tax return information, even internally to provide investment advisory services, can potentially trigger criminal penalties if the client hasn’t provided proper consent,” Chen wrote.
Perhaps reflecting these risks, many RIAs and smaller firms limit themselves to the less legally exposed practice of tax planning. That work typically entails lessening the amount owed the IRS through tactics like tax-loss harvesting, which involves using losses from stock sales to offset gains realized on other assets.
Client demand for help with taxes is only growing
But even as many firms no doubt recognize the risks of trying to extend their tax expertise, the pressure is on to add services beyond basic wealth management. And of all the possible add-ons, tax assistance is among the most in demand.
A report released in October by the research firm Cerulli found that among clients with $2 million or more in investable assets (a group it labels as “affluent”), nearly 70% expect some sort of tax assistance from their financial advisors. But supply is lagging, research suggests. Only about 47% of financial planners offer services to lighten their clients’ tax load, according to Cerulli’s poll of 26 industry executives conducted this year in conjunction with Morgan Stanley’s tax management subsidiary Parametric.
Cerulli’s report says that clients are now more likely than in the past to broach the topic of taxes with their financial advisors.
“This, at least in part, stems from the greater concentration of total U.S. assets in high net worth (HNW) households, or those with more than $5 million in investable assets,” the researchers wrote. “These clients are more likely to require customization and care most about the impact of taxes.”
Want to hire CPAs? Consider paying them like advisors
At High Net Worth Advisory Group, Morgan thinks many CPAs and other tax specialists are eager to break into the often more lucrative field of wealth management. He is trying to entice accountants to the firm in part by compensating them more like advisors, who tend to receive a consistent share of firm revenue tied to managed assets.
“I’m just using round numbers for math, but if I have CPAs producing $800,000 in revenue, what will they make in a year?” Morgan said. “I’ve heard anywhere from $200,000 to $275,000. And I said, ‘What if I paid them like financial advisors and paid them $400,000 on that $800,000 in revenue?'”
So far, High Net Worth Advisory Group has hired one certified public accountant and one enrolled agent, a type of tax specialist recognized by the IRS. Growth has been quick, and he expects to bring on more soon.
Morgan founded High Net Worth Advisory in 2020 with a group of other advisors who had broken off from Raymond James. The firm has since gone from having roughly $385 million under management to about $870 million today, Morgan said.
Like many RIAs, High Net Worth Advisory has been approached by private equity-backed aggregators and other acquirers seeking to buy wealth firms and improve their profit margins. Morgan said he feels no temptation to sell.
“I’ve talked to private equity firms, I’ve talked to regional accounting firms, I’ve talked to national accounting firms,” Morgan said. “What I have found across the board is they wanted to control the wealth management side. Having built this from scratch with my partners, that was not something we were comfortable with.”
The case for finding a larger partner
For some, though, joining a larger firm is the easiest way to add to their fields of expertise, including tax assistance. In its “RIA M&A Outlook Survey” for this year, the consulting and valuation firm DeVoe & Co. found that nearly 40% of the more 100 RIA owners and other industry representatives it polled were considering selling their businesses so they could provide a “broader set of services.” That goal lagged behind others cited in the survey, which was conducted between July and December 2024.
Sixty-five percent of the respondents said they would sell because they wanted to quicken their firm’s growth, for instance, and 55% said they needed “liquidity,” meaning cash. Yet recent moves by some RIA acquirers show these firms view themselves as offering much more than capital.
In November, for instance, the large RIA integrator Mercer Advisors announced it had bought the Los Angeles-based accounting firm Beach Freeman Lim & Cleland. The addition brought Mercer, which has more than $90 billion under management, roughly 20 tax professionals and marked the start of the firm’s plans to extend its “planning and preparation capabilities through tax firm partnerships.”
Jeremiah Barlow, chief solutions officer at Mercer, said Mercer’s expertise in taxes actually originates in the firm’s founding nearly 40 years ago. Mercer was started in 1985 by Kendrick “Rick” Mercer, a tax and estate lawyer.
Over the years, clients’ demand for tax services from Mercer has grown as the number of CPAs who could provide that help independently has dwindled.
“There’s a big gap in talent and ability in firms that are to serve the clients that are in this $1 million to $20 million range,” Barlow said. “So they’re turning to their financial advisor to say, ‘Can you help me?'”
And it’s not just help with taxes that clients want. They’re also calling for wealth managers to provide services related to everything from insurance to estate planning.
Many firms will struggle to meet that demand without the help of a larger partner, he said.
“You might have a smaller practice where maybe the principal came from a Big Four accounting firm at one point and broke away and has really strong, say, tax expertise,” Barlow said. “But the clients have the same need for the same level of expertise with estate planning, financial planning, balance sheets and all these other components that need just as much care, right?”
Tax help provides insight into client assets
For firms wanting to extend their tax expertise without joining a larger firm, a word of caution is likely warranted. Chen at Brightstar Law Group said becoming more useful to clients is only one of the reasons why the RIAs he works with are adding tax services.
“They also want to have more visibility in the client assets because they want to figure out how they can expand their footprint and perhaps their assets under management,” he said.
Chen said a substantial number of RIAs have come to acknowledge the risks inherent in giving tax advice and decided to bring in CPAs and other professionals as a result. His worry is that those who choose to go it alone may not know what they’re getting themselves into.
“It’s underappreciated, the level of risk,” Chen said. “It’s a lot easier to tell if there’s a problem with tax planning and tax preparation than with investment management. And if you screw up an investment, the client loses money. But you’re not faced with an IRS audit or IRS penalty.”
