Choosing the right financial advisor is a serious decision, with major ramifications.
You have a dizzying array of options, fee structures, and qualifications from which to make your selection.
What qualifications are most relevant to your particular situation? Do you need to retain a financial advisor and Certified Public Accountant (CPA)? Are there benefits to retaining one of the relatively few financial advisors who are also CPAs?
What is a financial advisor?
Financial advisors are trained and licensed professionals in the business of providing not just investment services, but also financial planning and advice. Advisors who are registered with the SEC are legally obligated to act in the best interest of their clients.
Those in the market for a financial advisor might want to look for practitioners with the Chartered Financial Analyst (CFA), Certified Financial Planner (CFP), Certified Public Accountant (CPA), or other qualifications that attest to a high level of education, experience, and knowledge in the field. Candidates for the CFA® designation must pass three examinations requiring, on average, over 300 hours of study in advance of successfully passing each level.
A capable financial advisor can help you knit together all the strands of your financial life, working with you to develop a plan that covers: budgeting and saving; investments; education; estate and retirement planning; insurance needs; and, yes, even guidance on the tax implications of all of the above.
What is an accountant?
Accountants are professionals who perform accounting functions. They have a legal and ethical responsibility to be trustworthy and honest in their duties. Those duties include account analysis, conducting audits, preparing and reviewing financial statements, and providing risk analysis and financial forecasts.
Most of us think of accountants as the professionals who prepare our annual tax returns, but accountants can also provide valuable insights regarding our investments and our estate, retirement, and education issues. They can also help us understand the all-important tax implications in every aspect of our financial life.
As with financial advisors, not all accountants are created equal. There are several advanced certifications for accountants, the best known of which is the Certified Public Account (CPA) accreditation. Like CFAs® and CFPs®, CPAs must satisfy rigorous education, experience, and testing requirements to earn their certification.
Making a choice: The Differences between a CPA and a financial advisor
So which one should you hire?
The skill sets of accountants and financial advisors skew toward different facets of finance. Accountants have the knowledge and experience necessary to negotiate complex tax situations. Given the ever-shifting complexities of the tax code, which is now over 2,600 pages long, almost everyone’s tax situation is complex, often overwhelmingly so.
A financial advisor has the training and experience to help you integrate and coordinate the various aspects of your financial life.
There’s also a lot of overlap in the type of help accountants and financial advisors are able to provide. For instance, the choice between hiring an accountant or a financial advisor for guidance on buying a home, starting a business or retirement and estate planning could well be a toss-up.
It certainly makes sense for your accountant to be completely familiar with your investment and financial landscape in order to manage your taxes and possible difficulties with the IRS.
Conversely, attempts at tax reduction or remediation by financial advisors are too often retrospective. True tax planning requires a forward-looking understanding of your tax situation. Your financial advisor may not have ready access to this information.
Are Two Heads Better Than One?
Most areas of financial life can benefit from both a financial advisor and an accountant. When tax and finance professionals work together, they can provide their clients with a more complete picture of their current situation and how to achieve their goals.
Having a two-pronged approach to financial planning can also lead to a more inspired result.
Many financial advisors do work with their clients’ tax professionals, and vice versa, to ensure that the tax and other financial considerations are fully integrated in their recommendations.
The combination can be especially effective in evaluating complex issues like:
- Comparing taxable and tax-free investments;
- Assessing alternative minimum tax (AMT) tax triggers;
- Determining social security tax thresholds;
- Projecting tax-loss harvesting opportunities before the end of the tax year;
- The pros and cons of buying a home vs. renting.
What if you could combine the two in a single person? Some financial professionals do in fact wear both hats, serving as both financial advisors and accountants for their clients.
Hiring such a person can help simplify your life by providing both a one-stop shop for your financial and tax planning needs and a comprehensive view of how your financial decisions impact your tax situation.
Hiring a financial advisor who is also a CPA may be the exception to the rule that two heads are better than one. Know more about how a CPA financial advisor through Allied Integrated Wealth.