04.26.21

Aided By Fintech, Advisors Up Their Tax Game

by: Rich Blake

With the Internal Revenue Service postponing the federal income tax filing due date for individuals to May 17, bank and credit union advisors have had that much more time to confer with clients.

It’s an enlarged window in which to patiently go over IRA contributions and related filings, with those deadlines also having been extended.

And in addition to more time, advisors have new tools.

Last month, FP Alpha, a financial AI firm, announced the launch of “Tax Snapshot,” a tool that allows advisors to analyze tax returns and supporting documents like account statements, trusts, and wills.

New York-based software firm 55ip, meanwhile, is upping its game in terms of being able to provide tax-optimization solutions, specifically in the context of a bank-advisor-led strategy.

The software is underpinned by automation, intuitively executing "tax smart" trading across portfolios, with synchronized reporting, akin to commonly used "model portfolio" deployment. And did we mention that at the end of last year, 55ip was acquired by JP Morgan?

Saving Advisors’ Time

Perhaps it is not surprising that enhanced tax solutions capabilities are at the top of advisors’ must-have lists.

The financial technology, or “fintech,” market for tax planning and management services, among advisors, has ballooned in recent years.

This market is expected to reach $27 billion per year by 2024, according to industry estimates calculated before the pandemic.

COVID-19-related lockdowns this past year have accelerated digital transformation across a wide variety of industries, including financial services. 

The past year proved to be a period when many new tax products came online at major software vendors and platforms. This past fall, SEI announced tax reporting tools designed to provide advisors ongoing assessments of estimated taxes saved through automated tax loss harvesting for ETF and equity portfolios.

The trend that we keep hearing so much about–the so-called “digital transformation”–is rapidly changing the way that bank advisors and agents enhance the tax efficiency part of overall planning.

The ability to factor tax analysis into client services at the advisor level is crucial for planning services.

According to an Envestnet financial planning survey, more than half (55%) of U.S. investors who engage an advisor do so for both asset management and financial planning.

Automatic Analysis, Ideas

FP Alpha’s platform provides an automated system to analyze and present actionable recommendations, with the goal being to let the machine worry about the heavy lift, freeing advisors to focus on asset gathering. FP claims that the accuracy of their software in analyzing tax documentation is on par with even the most fastidious human planners. 

"The Tax Snapshot lets the technology efficiently capture and present the information for the advisor so that they can focus on growing their business." said Joel Bruckenstein, founder of Technology Tools for Today (T3).  

In a statement, FP Alpha's Founder and CEO Andrew Altfest reiterated that the Tax Snapshot was designed purposely so that no human intervention was needed when extracting data from the tax returns. That’s not the easiest feat to pull off. 

“We needed to make sure that our software had a high degree of accuracy, which it does," Altfest continues. 

This was done to ensure the highest level of client privacy as well.  “As advisors, we need to protect our client's personal, identifiable information (PII)," said Altfest, who is also the President of Altfest Personal Wealth, a $1.5 billion dollar RIA based in New York City.

Advisors Get Personal

More personalized advice on strategies to help mitigate tax burdens during retirement has been a focus over the past year as well.

Last tax season, Envestnet/MoneyGuide launched a new tax planning feature, enabling advisors to have deeper conversations with clients regarding different strategies via interactive graphics, illustrating potential impact across retirement plans.

"Our goal was to deliver a solution that helps advisors feel confident in having these conversations," said Tony Leal, president of Envestnet/MoneyGuide. 

Using the personalized breakdown as a backdrop, advisors can discuss the tradeoffs of taking qualified distributions early in retirement–when tax brackets may be lower–to avoid being pushed into higher tax brackets later and the overall potential tax savings if implemented in the plan.

Based on the client's goal–whether it's to lower taxes during retirement, improve lifetime tax savings, or maximize the amount to their heirs–advisors can calculate Roth Conversions, Qualified Charitable Distributions (QCDs), and Qualified Distributions.