Accounting

How to unlock tax savings in incoming client portfolios

Published

7 months ago

September 26, 2024

An incoming client could turn into a lifetime customer if their new financial advisor or tax professional finds savings on their payments to Uncle Sam during the transition.

Continuing industry consolidation through recruiting moves and M&A deals test advisory practices’ scale and onboarding abilities. That influx of client portfolios to a different wealth management firm or technology platform presents opportunities for tax savings through strategies such as loss harvesting, winding down big stock concentrations and rebalancing of their asset allocations, advisors and other industry experts told Financial Planning.

“If the financial advisor is also a tax professional, it’s a single touchpoint for managing the customer relationship and guiding the client through suggested changes while explaining the rationale,” Rupa Pereira, the founder of Apex, North Carolina-based FWJ Planning, said in an email. “In other cases, it’s a facilitative process so the client is informed of the current state and federal tax implications of no action and gets recommended changes in order of urgency. The advisor and tax professional will need to tag-team so it’s a seamless process for the client.”

After ensuring that the portfolio aligns to the clients’ goals, advisors could begin checking the tax efficiency of their overall financial picture by looking at their latest Schedule D to see if there are any capital losses they’re carrying over from the prior year and examining the investment holdings for any unrealized gains or declines, according to Jack Oujo, founder of Wall, New Jersey- and Fort Lauderdale, Florida-based Oujo Wealth Strategies.

Large, highly appreciated stock concentrations equate to “tax bombs” that need defusing through charitable giving with donor-advised funds or charitable remainder trusts, he noted in an interview. In the case of older, wealthier clients, they could also hold that stock until their deaths so their heirs avoid paying taxes on the appreciation through the step-up in basis, Oujo said. With time, some of that yield may fall in a down market for stocks as well.

“Sometimes we let a portfolio go without being rebalanced if it will hurt a client from a tax point of view,” he said. “If we sell off these positions, we’ll be creating our own crash with all the taxes we’ll have to pay.”

The combination of industry consolidation and healthy stock values over roughly an entire decade after the Great Recession create “more of a scale problem than ever before” for advisors and their clients, according to Anton Honikman, CEO of MyVest, a wealth management technology subsidiary of TIAA. That means transitions to a new firm often pose tax implications.

When an advisor “has multiple clients that are in transition at any point,” they can work with the tax overlay team at MyVest or other technology firms that are increasingly offering that service to offset capital gains with losses to ensure there is a “consistency of care across the book of business” without trying to handle the entire workload, Honikman said.

“Any losses give you more gains that you can harvest. We provide the technology to automatically apply all of them,” Honikman said in an interview. “The ongoing implementation can be done by someone else.”

As part of this evaluation of new clients’ portfolios from a tax perspective, advisors should keep in mind that long-term capital gains in stocks and dividends often bring lower rates than bond income, Pereira noted. However, in taxable brokerage accounts, municipal bonds as well as stock indexes “are tax-friendly choices,” she said. The timing of any rebalancing and distributions and the location of the assets loom large in importance as advisors confront the typical tax pitfalls of incoming clients’ accounts.

“The most common area is the asset selection between taxable/deferred and tax-exempt accounts where the investment selection may not always be tax-optimal for respective asset location,” Pereira said. “Another common area is not accounting for overall portfolio allocation across all the individual client accounts that could lead to asset imbalance relative to risk tolerance.”

Planners may consider setting up a technology-assisted “gains budget” for the new client to decide how quickly to liquidate concentrated stock, Honikman suggested. Since the tax savings represent “a really helpful share-of-wallet enhancer,” the management of the timing of the selloff each quarter or year can create the optimal short- and long-term capital gains, he said.

“You’re highly likely to see embedded gains coming in. It’s just something one should expect,” Honikman said. “There is a balancing act to staging that diversification over time.”

Above all, advisors can use the transition time to coach clients on the value they can unlock through the tax savings on stock losses, so that, “When the red arrows are on CNBC, they don’t have to call us and panic and scream,” Oujo said.

For whatever reason, the comprehensive calculation of losses and gains against cash flow from individual retirement account distributions in the pre- and post-retirement phase tends to register with women more easily than men, Oujo noted.

“If a man goes from $2 million to $1.8 million, they don’t like it. If you can explain to them that their interest and dividends are still there, it’s like a magic trick,” he said. “Cash flow is a big deal to a retiree, and doing it in a tax-efficient way is very important.”

Accounting

IAASB tweaks standards on working with outside experts

Published

1 day ago

April 25, 2025

Business Finance News

The International Auditing and Assurance Standards Board is proposing to tailor some of its standards to align with recent additions to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants when it comes to using the work of an external expert.

The proposed narrow-scope amendments involve minor changes to several IAASB standards:

ISA 620, Using the Work of an Auditor’s Expert;
ISRE 2400 (Revised), Engagements to Review Historical Financial Statements;
ISAE 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information;
ISRS 4400 (Revised), Agreed-upon Procedures Engagements.

The IAASB is asking for comments via a digital response template that can be found on the IAASB website by July 24, 2025.

In December 2023, the IESBA approved an exposure draft for proposed revisions to the IESBA’s Code of Ethics related to using the work of an external expert. The proposals included three new sections to the Code of Ethics, including provisions for professional accountants in public practice; professional accountants in business and sustainability assurance practitioners. The IESBA approved the provisions on using the work of an external expert at its December 2024 meeting, establishing an ethical framework to guide accountants and sustainability assurance practitioners in evaluating whether an external expert has the necessary competence, capabilities and objectivity to use their work, as well as provisions on applying the Ethics Code’s conceptual framework when using the work of an outside expert.

Accounting

Tariffs will hit low-income Americans harder than richest, report says

Published

1 day ago

April 25, 2025

Business Finance News

President Donald Trump’s tariffs would effectively cause a tax increase for low-income families that is more than three times higher than what wealthier Americans would pay, according to an analysis from the Institute on Taxation and Economic Policy.

The report from the progressive think tank outlined the outcomes for Americans of all backgrounds if the tariffs currently in effect remain in place next year. Those making $28,600 or less would have to spend 6.2% more of their income due to higher prices, while the richest Americans with income of at least $914,900 are expected to spend 1.7% more. Middle-income families making between $55,100 and $94,100 would pay 5% more of their earnings.

Trump has imposed the steepest U.S. duties in more than a century, including a 145% tariff on many products from China, a 25% rate on most imports from Canada and Mexico, duties on some sectors such as steel and aluminum and a baseline 10% tariff on the rest of the country’s trading partners. He suspended higher, customized tariffs on most countries for 90 days.

Economists have warned that costs from tariff increases would ultimately be passed on to U.S. consumers. And while prices will rise for everyone, lower-income families are expected to lose a larger portion of their budgets because they tend to spend more of their earnings on goods, including food and other necessities, compared to wealthier individuals.

Food prices could rise by 2.6% in the short run due to tariffs, according to an estimate from the Yale Budget Lab. Among all goods impacted, consumers are expected to face the steepest price hikes for clothing at 64%, the report showed.

The Yale Budget Lab projected that the tariffs would result in a loss of $4,700 a year on average for American households.

Accounting

At Schellman, AI reshapes a firm’s staffing needs

Published

1 day ago

April 25, 2025

Business Finance News

Artificial intelligence is just getting started in the accounting world, but it is already helping firms like technology specialist Schellman do more things with fewer people, allowing the firm to scale back hiring and reduce headcount in certain areas through natural attrition.

Schellman CEO Avani Desai said there have definitely been some shifts in headcount at the Top 100 Firm, though she stressed it was nothing dramatic, as it mostly reflects natural attrition combined with being more selective with hiring. She said the firm has already made an internal decision to not reduce headcount in force, as that just indicates they didn’t hire properly the first time.

“It hasn’t been about reducing roles but evolving how we do work, so there wasn’t one specific date where we ‘started’ the reduction. It’s been more case by case. We’ve held back on refilling certain roles when we saw opportunities to streamline, especially with the use of new technologies like AI,” she said.

One area where the firm has found such opportunities has been in the testing of certain cybersecurity controls, particularly within the SOC framework. The firm examined all the controls it tests on the service side and asked which ones require human judgment or deep expertise. The answer was a lot of them. But for the ones that don’t, AI algorithms have been able to significantly lighten the load.

“[If] we don’t refill a role, it’s because the need actually has changed, or the process has improved so significantly [that] the workload is lighter or shared across the smarter system. So that’s what’s happening,” said Desai.

Outside of client services like SOC control testing and reporting, the firm has found efficiencies in administrative functions as well as certain internal operational processes. On the latter point, Desai noted that Schellman’s engineers, including the chief information officer, have been using AI to help develop code, which means they’re not relying as much on outside expertise on the internal service delivery side of things. There are still people in the development process, but their roles are changing: They’re writing less code, and doing more reviewing of code before it gets pushed into production, saving time and creating efficiencies.

“The best way for me to say this is, to us, this has been intentional. We paused hiring in a few areas where we saw overlaps, where technology was really working,” said Desai.

However, even in an age awash with AI, Schellman acknowledges there are certain jobs that need a human, at least for now. For example, the firm does assessments for the FedRAMP program, which is needed for cloud service providers to contract with certain government agencies. These assessments, even in the most stable of times, can be long and complex engagements, to say nothing of the less predictable nature of the current government. As such, it does not make as much sense to reduce human staff in this area.

“The way it is right now for us to do FedRAMP engagements, it’s a very manual process. There’s a lot of back and forth between us and a third party, the government, and we don’t see a lot of overall application or technology help… We’re in the federal space and you can imagine, [with] what’s going on right now, there’s a big changing market condition for clients and their pricing pressure,” said Desai.

As Schellman reduces staff levels in some places, it is increasing them in others. Desai said the firm is actively hiring in certain areas. In particular, it’s adding staff in technical cybersecurity (e.g., penetration testers), the aforementioned FedRAMP engagements, AI assessment (in line with recently becoming an ISO 42001 certification body) and in some client-facing roles like marketing and sales.

“So, to me, this isn’t about doing more with less … It’s about doing more of the right things with the right people,” said Desai.

While these moves have resulted in savings, she said that was never really the point, so whatever the firm has saved from staffing efficiencies it has reinvested in its tech stack to build its service line further. When asked for an example, she said the firm would like to focus more on penetration testing by building a SaaS tool for it. While Schellman has a proof of concept developed, she noted it would take a lot of money and time to deploy a full solution — both of which the firm now has more of because of its efficiency moves.

“What is the ‘why’ behind these decisions? The ‘why’ for us isn’t what I think you traditionally see, which is ‘We need to get profitability high. We need to have less people do more things.’ That’s not what it is like,” said Desai. “I want to be able to focus on quality. And the only way I think I can focus on quality is if my people are not focusing on things that don’t matter … I feel like I’m in a much better place because the smart people that I’ve hired are working on the riskiest and most complicated things.”