Outsourcing Tax Services as a Financial Advisor: Working Less to Achieve More

As a business owner, it’s important to tune into the things that fuel you. Some advisors enjoy writing, creating content, and leveraging a podcast to grow their business. Others like to spend their time tinkering with technology to create a high-level of automation and efficiency in their business processes. But what about the tasks you don’t enjoy? That’s where outsourcing comes in handy.

You can outsource everything from web design, to bookkeeping, to yes, even tax services. Typically, advisors outsource the more technical and tedious aspects of running their businesses (compliance anyone?). We commonly see advisors leaning on a turnkey asset management platform (TAMP) to oversee clients’ investment accounts, outsourcing to a paraplanning service, and/or leaning on a virtual assistant. Decisions like these are everyday occurrences in our industry because solopreneurs simply can’t do it all.

The “why” behind every outsourcing decision you make is time. By now you’ve probably realized time is your most precious resource, and it’s often in short supply as a business owner. Outsourcing is one of the best ways to up your supply. Whether you are just getting started, reaching capacity, or building your team, decisions to outsource certain tasks are essential in your growth strategy. This is because the effects of using your time unwisely can be devastating to your business.

There are many outsourced solutions available to financial advisors in today’s world. A misconception about outsourcing is that you rely on an outsourced solution because your skillset doesn’t translate well to that service. For example, a financial advisor with a CFA would never use a TAMP because their education supports the ability to make strategic investment management decisions. Or, a CFP(R) would never rely on a paraplanner to prepare draft financial plans because they are competent and will do it themselves. An Enrolled Agent or CPA would never rely on an outsourced tax solution because they can project, prepare, and sign their tax returns. While you certainly can rely on an outsourced solution to make up for any gaps in knowledge, it ultimately comes down to your best use of time as an advisor and business owner.

In parallel to the importance of how you spend your time is how you design your service offerings to best demonstrate your expertise to your ideal clients. With new players in the fee-only space every day, differentiation is key. When I served as XYPN’s Financial Planning and Process Coach, I always coached on a core and satellite approach to service offerings. Some members lead with financial planning, and others with investment management. What this means is that a prospect is likely to find the member and hire that member because of their core offering. A satellite offering is a supplement, and, ideally, a complement to the core offering. For a financial-planning-focused advisor, a satellite offering might be investment management and another might be project work. I share this example with you because you will need to evaluate your offerings and create structure around your services to successfully leverage any outsourced solutions. In a recent #FASuccess podcast episode, XYPN member Emlen Miles-Mattingly talks about how he structures his monthly subscription, his firm’s tiered service offerings, and the positive effects that outsourced tax preparation had on his firm’s growth.

In this blog, we are going to spend some time talking about trends in the financial services industry, the benefits of outsourcing tax preparation and planning, and ultimately, how to incorporate these outsourced services in your practice. We want advisors to be able to offer tax preparation without sacrificing the time they ultimately need to run successful fee-only RIAs.

Benefits of Outsourcing

We acknowledge that outsourcing is a big step for some advisors. Sometimes, it’s difficult to trust that the outsourced party will do the right thing for your clients. We designed XY Tax Solutions (XYTS) to put the advisor/client experience first, knowing that not all firms are alike. Here are some benefits of leveraging an outsourced tax solution.

1. Capacity 

Capacity issues usually stem from the inability to outsource, hire, or automate processes within your business. This will look different for every financial advisor. You may have hit capacity due to client count (>75 clients), or you may have reached capacity simply because you are running an RIA on top of another business (accounting, divorce practice, financial coaching, etc.) This comes back to what we discussed in the introduction of the blog. What does your ideal week look like? What do you enjoy doing? What fuels you?  

If you recently bought a tax practice, have grown your tax practice to capacity, or are continually onboarding new tax clients, you can continue to grow the tax arm of your business by leveraging XYTS’s outsourced services.

2. Value Proposition

If you aren’t currently providing tax planning or tax preparation services for your clients, you may be missing out on a key component of a financial advisor’s value proposition. Tax planning is one of the most important components of providing comprehensive financial planning to your clients. However, we understand that tax services may limit your ability to provide financial planning to your clients. You need to be protective of your time. Being pulled in too many directions can ultimately impact your ability to achieve your growth goals.  

Perhaps you are an Enrolled Agent or CPA and are currently providing these services. You may run a separate accounting practice completely, or maybe you folded it into your RIA. In a perfect world, your planning and tax clients are one and the same. You can refer, generate new leads, and ultimately, provide a truly comprehensive level of service. You have mastered your value proposition. 

Financial advisors often work with clients all over the country, as well as internationally. Many advisors are running 100% virtual practices, and as a result, are location independent. With this newfound flexibility and independence, issues around reliable centers of influence (COIs) and multiple accountant relationships start to arise. By outsourcing your tax preparation, you will only need to coordinate engagements through one tax manager. Overall, this relationship consolidation improves communication and ensures that work is done on a timely basis.  

4. Retention

Many advisors provide both investment management services and financial planning. Due to the nature of the education advisors receive, many are confident in their ability to offer tax planning. Few, however, will go as far as preparing federal and state tax returns. Some clients will come to you with a pre-existing CPA relationship, while others will ask you who you recommend. As our industry evolves and consumer awareness grows, it’s common for clients to seek a one-stop-shop where they can receive support in investments, tax, and areas of financial planning. If you can deliver on all of these, high retention rates will follow.

The Different Roles You Can Play

Outsourcing tax services is a different experience than outsourcing bookkeeping or paraplanning. For starters, outsourced bookkeeping or paraplanning stays between you and that company. With outsourced tax services, there’s an added layer of complexity in that you are now bringing your client into the mix.

This can be risky as now your relationship with your client is on the line and, if anything goes wrong, your client may lose trust in your abilities as their financial advisor. Before you engage with an outsourced tax solution, you need to be confident that the company you’re engaging with has your clients’ best interest at heart. You need to understand the inner workings of the company—including their processes, their pricing structure, their technology—and how all of those components work in protecting your client and, more importantly, your business. 

That starts with knowing the different roles you can play as the advisor and how you will fit within the tax preparation/planning process.

Having analyzed the different interactions advisors and clients had with XYTS throughout the 2020 tax season, we boiled down all the levels of engagement an advisor can have into three main buckets:

• Advisor-only: The advisor was the sole point of contact with the outsourced party and the client was not involved.
• Integrated (Advisor/Client): Both the advisor and the client were involved and communicated with the outsourced party throughout the process.
• Client-only: The advisor was not involved and the client was the sole point of contact with the outsourced party.

Being the sole point of contact allows you to be in control throughout the process, to advocate for your clients, and to speak on behalf of your clients. Being deeply integrated with the process, you not only have seamless communication with the outsourced party but once the return is prepared, you have access to important information regarding your clients’ taxes. This ultimately paints a better financial picture for you, and empowers you to help your clients with their tax planning and provide better service.

2. Integrated 

With time being a commodity in today’s world and one of the main motivations for outsourcing, having your clients involved with the outsourced tax services alongside you allows you to not only be a part of the conversation, but to reclaim more of your time. Your clients can communicate with the outsourced party and you still can contribute to the conversation, either to clarify a point for your client, ask/answer any questions to the outsourced party, and also to advocate on behalf of your client.

3. Client-Only 

Although this option was not widely utilized during XY Tax Solutions’ 2020 tax season, it is still a relevant role an advisor can play when outsourcing tax services. This is a good option when you have relationships not directly connected with your firm, like family members, past clients, or prospects, but you still want to refer those people to a trusted CPA. You simply make the introduction between both parties and let them take the conversation from there. 

While there is not a lot of variation between each level of engagement, being aware that there are different roles you can play as an advisor better equips you to analyze the company’s processes from the perspective of each level/role. For example, within XY Tax Solutions’ onboarding process, we set up a client portal for each of the clients you sign up. This is a simple task, but if you are only engaging with XYTS at the “advisor-only” level, we have to ensure that you are the only one given access to the client portal. The same goes for the different levels: if you engage with XYTS at the “integrated” level, we give both you and your client(s) access to their client portal.

Even though the nuances between each level is subtle, they’re important. Knowing your outsourced tax solution has thought through such subtleties can be relieving and ultimately help you feel more comfortable that you and your clients are in good hands.

How to Charge

Advisors run their RIAs primarily through hourly work, one-time project fees, retainers, and/or AUM engagements. If you decide to outsource a service, you always have to consider how you are going to pay for it. Do you pass the fee along to your clients? Do you absorb the fee? Let’s explore some of this now.

For advisors with hourly and project work:

You will want to consider a direct billing option. In other words, relying on your outsourced tax solution as a referral relationship. If one of your clients needs an accountant, you can make the introduction and the team will work with the client throughout tax season and invoice them. This will be on an as-needed basis determined by you.

For example, a client has paid $3,000 for a 3-month, limited scope engagement. At the end of the engagement, your client is interested in a CPA referral. You provide your client with the outsource tax solution team and make an introduction. We can take it from there!

As the advisor, you may wish to fold in the cost of tax preparation into your existing financial planning service offering. You will outsource the tax work and collect a steady stream of revenue throughout the year.

For example, an advisor billing $199/month for financial planning services may wish to include an option at $249/month and include tax services. You would collect an additional $50/month, or $600/year. Come tax time, you remit payment to the outsourced solution and your clients won’t see a tax preparation bill come filing time.

You may wish to completely absorb the fee and not pass along the cost of tax preparation or tax planning to your client. 

For example, if you are billing your clients through an existing retainer or AUM engagement, you may wish to cover the costs of any tax prep and planning services.

Industry Trends 

Outsourced tax is a relatively new concept. For comparison, the TAMP movement first emerged in the 1980s. Since then, the financial services industry has welcomed outsourced investment management with open arms. If you want to learn more about the history of TAMPs, specifically the rising trend in the fee-only financial planning profession, you can learn more here. With multiple outsourced solutions available for compliance, bookkeeping, investment management, financial planning, and more, advisors have endless possibilities.

Why does all of this matter? Outsourced tax might feel new today, but we believe that industry trends will continue to prove that outsourcing is essential to long-term business viability. Advisors are in a great position to boost their value proposition, overcome capacity constraints, and strengthen client relationships through outsourcing.

About the Authors
As Director of XYTS, Emily Purdon leads our in-house team of tax experts, combining her experience as a financial planner with her talent for creating scalable processes to build a business where the client experience is the main priority.Emily has an extensive educational background, with an M.S. in Advanced Personal Financial Planning and a Financial Therapy Graduate Certificate from Kansas State University; she also completed Wharton’s Executive Education Program in Client Psychology and graduated from the FPA Residency Program.

Sara first started with XY Planning Network as a Member Experience Specialist where she served members in the Building/Scaling phase of their firm journey. She is now the Operations Specialist for XY Tax Solutions (XYTS), a role that merges her passion for building and refining processes with her love for helping members. She is honored to serve members in a different capacity and spends her days evaluating XYTS's processes/workflows and aligning its business operations with the needs of advisors and clients.

XYTS Disclosures
XY Tax Solutions, a division of XY Planning Network (XYPN), empowers independent financial advisors to strengthen client relationships and grow their firms through deep tax expertise. XYPN is the leading financial planning platform for fee-for-service financial advisors who want to serve Gen X and Gen Y clients, providing comprehensive financial planning services for a monthly subscription fee and without product sales or asset minimums. The Network offers a virtual community for new and established financial advisors who want to serve a younger clientele and provides its members with compliance support services, marketing support, business tools and templates, and a wide range of technology solutions.