Avoiding Tax Advice Liability: 9 Things Advisors Must Know

There is pervasive myth in the financial planning community that advisors can’t legally give tax advice. According to Ben Henry-Moreland, a certified financial planner and senior financial planning nerd at Kitces.com, the reality is that financial advice has tax consequences — whether advisors acknowledge it or not.

As Henry-Moreland explained during a recent Kitces.com webinar, almost every financial planning issue has tax considerations, and advisors can provide a great deal of added value by helping clients plan to pay income and capital gains taxes in the most efficient manner.

Despite the prominent role of taxes in financial planning, Henry-Moreland said, advisors are often prohibited by their compliance departments from making recommendations for a specific course of action on a certain tax strategy. This in turn means that advisors are often left to figure out on their own how to guide their clients on tax-related matters without crossing the line into “what the IRS considers capital ‘T’ and capital ‘A’ Tax Advice.”

According to Henry-Moreland, it is important for advisors to understand that many of the tax strategies that they would recommend are not meant to shelter income to avoid taxation altogether. They are instead designed to ensure that income is taxed efficiently, such as by optimizing the timing or nature of income when it is taxed. Such advisory insights are perfectly legal and are increasingly expected by clients working with planning professionals.

The key point is that understanding what constitutes tax advice as opposed to tax planning that doesn’t go so far as to make a recommendation can help advisors more confidently engage with their clients on tax matters without violating the rules set in place by their compliance departments, Henry-Moreland said.

See the accompanying slideshow for a review of nine key tax facts and considerations for wealth management professionals, especially those seeking to work with wealthier and more sophisticated clients who are expecting support on such matters. As Henry-Moreland emphasized, the potential for adding value via tax planning is tremendous, so long as advisors are careful to avoid legal pitfalls.