Key differences between a financial advisor and a tax advisor

As a CPA, many of my clients come to me for tax and accounting advice. Every now and then, I am asked what I think of their investment portfolio, and how they should be managing their stocks and bonds. For those questions, I reach out to my colleagues, who are financial professionals. Most of them are also Certified Financial Planners (CFPs).

As a CPA who specializes in income tax planning and compliance, I am focused on how to account for my client’s investments on their tax returns, while their financial advisor is responsible for managing their investments. In this article, I’ll  explain the differences between a financial advisor and a tax (and accounting) advisor. To keep it simple, I will focus on the requirements to be a CFP and a CPA.

Professional requirements

CFPs require a bachelor’s degree or higher. Their exam requirement covers main topics, including: 

• Professional Conduct and Regulation (8%) 
• General Principles of Financial Planning (15%)
• Risk Management and Insurance Planning (11%)
• Investment Planning (17%)
• Tax Planning (14%)
• Retirement Savings and Income Planning (18%)
• Estate Planning (10%)
• Psychology of Financial Planning (7%)

CPAs also require a bachelor’s degree, and most states require 150 credits to sit for the exam. There are four main parts to the exam:

1.     Auditing and Attestation

• Ethics, Professional Responsibilities and General Principles
• Assessing Risk and Developing a Planned Response
• Performing Further Procedures and Obtaining Evidence
• Forming Conclusions and Reporting 

2.     Business Environment and Concepts

• Enterprise Risk Management, Internal Controls and Business Processes
• Economics
• Financial Management
• Information Technology
• Operations Management

3.     Financial Accounting and Reporting

• Conceptual Framework, Standard-Setting and Financial Reporting
• Select Financial Statement Accounts
• Select Transactions
• State and Local Governments

4.     Regulation

• Ethics, Professional Responsibilities and Federal Tax Procedures
• Business Law
• Federal Taxation of Property Transactions
• Federal Taxation of Individuals
• Federal Taxation of Entities

Key differences

It’s often a misconception that all CPAs can prepare tax returns. Because of the broad subjects that CPAs study, most specialize in a certain area. For example, my area is tax, but being a CPA allows me to do one thing that no other professional can do: provide an opinion on a financial statement, including the balance sheet, income statement, statement of cash flows, and related reporting. 

As a tax advisor, I can do advanced tax planning for federal and state purposes, as well as assist with accounting and bookkeeping work. Most firms bill their customers based on 6- or 15-minute intervals for time spent on their return or project. Other firms, like mine, charge an annual fixed fee price for services.

A CFP focuses more on the financial plan of the individual, and primarily works in registered investment advisory (RIA) firms, specializing in investment advisory and financial planning services. They typically charge a percentage based on assets under management (AUM). There are RIA firms that also specialize in selling insurance products or specific investments that produce commissions or kickbacks to the advisor. Some other RIA firms will be “fee only” planners, which means they receive compensation solely from the fees that clients pay for their services. A fee-only structure reduces a potential conflict of interest, which is why these types of advisors are often preferable to the commission-only structure. 

What to look for in a financial advisor and a tax/accounting advisor

My focus is on my client’s peace of mind, as it relates to their taxes. I have a financial advisor who I hired to provide me peace of mind, when it comes to my investments. 

If I were to put myself in a potential client’s shoes, I would want to look for a tax/accounting professional who I can trust and is willing to grow with me. I would also look for a person who has capacity and can call me back if I have a question.

But, most importantly, I would say the greatest character trait to look for is empathy. With the rise of technology, we have lost the art of being human. Empathy is a trait that technology can never mimic. As someone who just started my own firm, I believe empathy is the penultimate core value because it’s entirely human. Today, we live in a world where a robot can prepare your taxes, or you can hire a “robo-advisor” to manage your assets, but what we professionals can offer that no robot can is a relationship.

I became a CPA because it allows me to be a part of the most intimate part of people’s lives – their finances. I didn’t become a CPA because I just love the Internal Revenue Code. I became a CPA to have a relationship with my clients. How much people make is normally hidden from their closest friends, but as a CPA, people pay me to be part of their lives and see everything (and I mean everything).

I’ve been in meetings with excited newlyweds who are anxious to start their business together, as well as meetings with couples trying to unravel their relationship and separate their assets from each other. There are days I am a cheerleader, and there are days I am the referee. 

But whether your clients engage the services of a CPA or CFP, the main thing you want to have is the relationship. We navigate the ups and the downs through wherever life takes our clients, so make sure your clients have this trusted relationship. Whether it’s you or someone else, it’s your job to look after the best interests of your clients.

Editor’s note: This article is also available in Spanish.