Categories
Tax & Estate Planning
Building a practice on tax
James Frazier
Managing Director, Frazier Financial Advisors
KEY TAKEAWAYS
  • RIAs can bring value when it comes to tax issues without being accountants.
  • One advisor shows how he grew from being a tax professional to head of a broader wealth management firm.
  • Clients’ changing needs will guide what proficiencies you should add as your practice evolves.

 


“Will you please help me with my tax return?“ used to be the only thing new clients would ask James Frazier when he started out as a CPA. But preparing tax returns is more of a dessert than the main course now that he’s transitioned his Ohio-based tax business into a full-service advisory firm.


But are tax services an add-on for firms that are deeply rooted in accounting? That’s been Frazier’s plan. In the three decades since becoming a CPA, Frazier’s firm has evolved along with his clients’ increased financial needs. Frazier’s Financial Advisors is now a wealth management firm that happens to also prepare tax returns.


What you can learn: Taxes are a recurring topic for RIAs to handle, even when they’re not tax professionals. Frazier offers tax advice for advisors on the lookout for new clients. Frazier Financial Advisors is also a case study for advisors looking to logically add services as clients’ needs and wealth expand.




James Frazier, Managing Director, Frazier Financial Advisors


Be patient as you expand your tax skills


The shift from accountant to wealth planner has been a long one for Frazier. Thirty years ago, working as an auditor with large companies, he saw many executives’ personal tax needs go unmet. He decided to make a shift. Frazier earned his master’s in taxation with the goal of providing personalized tax service for individuals.


That was the first step. As clients looked to Frazier as more of financial advisor than just a “tax guy,” he earned his Certified Financial Planner designation and hired people with planning backgrounds into the firm. That included his son Joshua, a CFA charterholder, who joined the firm in 2007.


Now the firm can build a broader view of clients’ needs and add additional value that clients can benefit more from. Frazier says many of his competitors don’t have the same ability — at least not under one roof — to provide tax and wealth planning. Some have tax professionals in house, but Frazier’s clients can get tax help from their primary investor advisor, too, who are given income-tax training, Frazier says. There are also three members of the firm dedicated to tax issues.


The results have been profound. While 10 years ago, most clients came looking for tax help, now most new clients are primarily looking for broader financial advice. The firm now has 300 clients and assets under management of $300 million.



How RIAs can add value with taxes


RIAs who aren’t tax professionals will still need to refer clients. But advisors can still add value without giving advice by reminding clients of several tax tenets, including:

  • The power of deferral. Clients often forget how postponing the payment of taxes can have a meaningful and extended benefit. For instance, Frazier often encounters clients who assume converting traditional IRAs to Roth IRAs is prudent. But as a CPA, he knows this move rarely makes sense for clients. “I just don’t see how it makes sense to prepay your tax. That kinda violates the first principle I talk about: you defer taxation because you can make money on the tax dollars you otherwise would have paid if you had that money still in an account,” he says.
  • Don’t be motivated by taxes alone. Some clients are tempted to make financial moves that might make sense tax-wise, but not fit an overall strategy. Gifting is one area this comes up, if a client wants to give away money without considering what they’ll need. Other clients might look to investments that promise tax benefits, without factoring in the exposure to potential losses they’re taking on. “‘Why would you invest in something to lose money?’” he says, “They get too focused on trying to save tax in that respect.”
    Another example where clients get overly fixated on taxes is with 529 education planning. Clients often get obsessed using their home state’s plan, lured by the contribution deduction offered by some states. But it’s the RIA’s job to show how another state’s plan might offer benefits if better designed for a client’s goals, he says.
  • Understand how tax considerations have ripple effects. Tax moves cannot be made in isolation. Frazier cites the example of capital gains’ interaction with Medicare payment calculations. If an advisor sells a qualified investment after holding it more than a year, those proceeds may qualify for the lower long-term capital gains rate. That may be tax smart, but payment foolish. The move could trigger an unexpected side-effect for older clients since the proceeds may “count against you” by increasing the clients’ monthly Medicare payment, he says. Similarly, income from some tax-exempt debt instruments, can increase Medicare payments.
  • Consider asset location, not just asset allocation. RIAs who only focus on building asset allocations — picking the mix of stocks and bonds are missing an opportunity to add after-tax value. Placing the assets in the account with the right tax status — based on the tax treatment of income it generates — can add tremendous value, Frazier says. RIAs, similarly, often overlook planning opportunities that exist when the basis of assets can be adjusted for heirs upon death of a client.


How to plug in with CPAs


While advisors can make tax-aware decisions, many still need strong relationships with CPAs. Advisors who aren’t tax professionals can create partnerships with CPAs so clients get a more integrated experience. CPAs, too, can be a powerful source of referrals of new clients.


In Frazier’s experience, the best way for RIAs to connect with CPAs and forge a stronger relationship with them is by carefully handling cost basis information. This doesn’t just mean providing tax professionals with a year-end summary of long and short-term gains. RIAs should communicate with clients’ CPAs during the year about moves they’re making or planning to make.


Frazier knows he’s doing something right when clients tell him they appreciate how he marries smart investment management with tax consideration. Clients tell him: “We understand you can do all of this.” That’s actually what he wants to hear.

Video 


Building an IRA Practice on Tax

Matt Krantz:

Capital Group is here at the Charles Schwab Impact 2017 Conference, and I'm here with Jim Frazier of Frazier Financial. He's going to be talking about tax issues and how that affects investment management. Thanks for joining us. I appreciate it.

Jim Frazier:

Great, Matt. Great to be here.

Matt Krantz:

So, tell me about your background. It sounds like you've come from a CPA background and that helped shape the way that your firm was created and that, and the value that you add for your clients.

Jim Frazier:

That, that's correct, Matt. I start out 30-some years ago as a traditional CPA. I just felt my clients were being somewhat underserved. There was a disconnect between their investment strategies and their tax matters. So, I became properly licensed and registered and built my firm around providing the whole tax and we've been adding within the investment management.

Matt Krantz:

That's interesting. How did you transition from CPA to investment management? How did that work?

Jim Frazier:

Well, it, it was difficult at first because I had that CPA mindset that, frankly, I got my own way a lot of times. But after I was able to shed through a lot of that, uh, just meet with clients, it was all about sitting with clients, meet with them and plan out their goals, dreams to help them with that.

Matt Krantz:

How did you transition your clients from expect, changing their mindset of you as their tax guy to someone that could have a more holistic view of their entire financial picture?

Jim Frazier:

That, that was a challenge. I think that was more a, a mindset for me than it was them. But they saw me as a trusted adviser and what I could articulate about various investment matters or ask them why they were doing what they were doing or, "Hey, I can help you." It became a natural fit with it.

Matt Krantz:

Now, how does your tax, uh, background assist you in what you're doing now with a more, a broader picture for clients?

Jim Frazier:

Well, it's, it's very essential right now. In fact, a lot of our, uh, referral sent to you, they come to us and say, "Well, we understand you can do all of this. You can actually pull the tax matters together with the investment matters and we don't have to go to several different advisers and get conflicting stories." So, it, it works out very well.

Matt Krantz:

What, what do you think, what advice would you give for an RIA who may not be a tax professional, but wants to kind of be involved in that centers of influence-

Jim Frazier:

Yeah.

Matt Krantz:

... and be valuable to a tax professional?

Jim Frazier:

Yeah.

Matt Krantz:

Is there something a planner, should you do both, that a planner could do to be valuable to a CPA?

Jim Frazier:

Yeah. It, uh, help, help the CPA with, um, the cost basis information, uh, be very communicative with the CPA on your moves, if you will, what you're doing, what, what you're recommending for the client, uh, involve them in the process along the way. Just, just good old communications.

Matt Krantz:

That's interesting because a lot of our RIA say they get a lot of referrals from a, from tax professionals-

Jim Frazier:

Right.

Matt Krantz:

... and vice versa. What's a good way to keep that, uh, working relationship? How do you reach out to the CPA community, say in your area, to reach out to?

Jim Frazier:

Well, it would just be a matter of, you know, find out who your clients work with on the CPA side and just asking your client to introduce you to their CPA.

Matt Krantz:

And ask-

Jim Frazier:

And then, from there, just, you, you want to become a trusted adviser of that CPA, uh, not that you're trying to sell them something, you know, have them feel that you're there to help. You know, you want to be part of the team.

Matt Krantz:

Well, thanks for coming to talk tax with us, we really appreciate it.

Jim Frazier:

Thanks, Matt. It's good talking with you.

Matt Krantz:

That’s great. Thank you. That was Jim Frazier here at the Schwab Impact Conference talking about how to use taxes to optimize an investment portfolio.



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