As RIAs Look to Expand Services, Tax Planning Emerges as Crucial Venture
As registered investment advisors (RIAs) seek to attract clients and increase wallet share, holistic services like tax planning and preparation have become essential offerings. However, not all firms are embracing this trend, for various reasons.
According to research, approximately 1 in 6 firms now include tax preparation in the services they provide to clients. However, adoption rates vary significantly across the industry. A survey of 250 financial advisors conducted by Arizent revealed that firms with larger assets under management (AUM) figures ($500 million to $1 billion) are more likely to use tax preparation software compared to smaller firms with less than $100 million in AUM.
Among larger firms, tax preparation software is utilized 56% of the time, while at sub-$100 million AUM firms, this figure drops to just 24%. Advisors attribute this divide to differences in scale, resources, and client demand.
Can RIAs Serve as One-Stop Shops for Clients?
The concept of a holistic financial professional has gained popularity in recent years. A 2023 McKinsey survey revealed that the percentage of clients preferring a one-stop shop for their financial needs has increased by 60% since 2019, with tax preparation being a significant area of interest.
For some firms like Prosperity Capital Advisors, offering tax planning and preparation has been a fundamental aspect of their services. However, even for a $3.7 billion-AUM firm, handling every tax preparation instance in-house may not always be feasible. This is particularly true for clients with complex business structures, where collaboration with specialized CPA firms may be necessary.
Recognizing the demand for comprehensive financial services, The Planning Center, a national RIA, merged with a tax preparation business in 2012 to offer a wider range of services. While the firm now prepares taxes in-house for most clients, some still opt to work with external tax preparers.
Sometimes Clients Prefer Working with Multiple Professionals
Despite the industry trend towards holistic planning, many clients are comfortable engaging with a mix of professionals to address their financial needs. While the preference for a one-stop shop has grown, a significant portion of clients still have no specific preference for holistic financial planning, as per the McKinsey survey.
Some advisors, like Patrick Huey of Victory Independent Planning, have observed limited interest from clients in integrating tax preparation into their firm’s services. However, they remain open to adapting to changing client preferences in the future.
As Huey notes, the financial planning landscape is evolving rapidly, and firms need to stay agile to meet the shifting demands of clients. While tax preparation may not be a priority for some clients now, it could become a more sought-after service in the future.
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