Advisers Beware and Be Cautious When Talking Taxes in 2018

Speaking to a mixed audience of retirement plan and wealth management advisers, Joe Elsasser, president of Covisum, shared a strong warning for those listening in regarding the crucial difference between tax advice and financial advice.

As Elsasser laid out, the passage in late 2017 of the Tax Cuts and Jobs Act represented the most significant change to the U.S. personal and business tax codes seen in a generation. As such, it is only natural that advisory clients are looking for specific guidance and general education about how their tax picture will change under the new rates and rules.

“As an adviser you undoubtedly will be put in the position this year of having to know exactly what tax advice is and exactly what financial advice is,” Elsasser said. “I am sure that those people listening in on this presentation all have a disclosure that says they don’t give tax advice. I am less sure that advisers listening in would be able to clearly and concisely explain to a client the difference between what they offer, financial advice, and what clients will be seeking more and more in 2018, which is tax advice.”  

Most advisers, Elsasser suggested, have never gotten any real or formal training on where the line between financial advice and tax advice stands—or how to explain this to a client. He urged that “advisers need to be front and center about the fact that they cannot offer tax advice, and as such they need to be building relationships with folks who are able to give tax advice, so that they can provide a sense of security for clients.”

While there is widespread agreement that the line between financial advice and tax advice is critically important, there is actually very little sense that the line is perfectly well defined, experts agreed. They also agreed that advisers should not be afraid to tell clients of their limitations in this respect, and that being able to provide for clients a shortlist of trusted partners that do offer tax advice can be a huge value-add. 

“The only thing like a clear direct definition we can probably give here is that advisers in general are not authorized to represent clients in front of the Internal Revenue Service (IRS), which means by definition, the advice they give must not be tax advice,” Elsasser said. “So unlike a CPA, for example, an adviser could not represent their client during an audit, or even as they prepare their normal return, and so their financial advice must not venture into that sort of territory.”

Of course, this does not at all mean advisers should ignore the impact that anticipated taxes or potential changes in various tax rates will have on client investing decisions moving forward. In fact, as Elsasser noted, routine financial planning work generally must consider a broad set of tax issues and how these relate to the advice that is being give.

“There are tax-related competencies that are at the heart of what advisers do,” Elsasser said. “But that does not mean that we can provide advice that will serve as the basis for clients’ specific tax-related decisions.”