Every year at tax time many of us submit our income receipts to accountants and trust that they will prepare our financial statements and tax returns in accordance with the latest laws and our best interests. That’s inherent in the professional service, right?
Except increasingly we have noticed a disturbing trend of accountants in the investment advice business. In a world dangerously obsessed with ‘cross-selling’ to increase revenues, many accounting firms have formed ‘wealth management advisory’ divisions and are making unsolicited recommendations of products and services to their clients.
This is problematic on many fronts. First all because tax advisors are using their privileged position and information as our accountants to increase their own fees by selling investment management services. Second, accountants know lots about tax efficiency and nothing about managing capital risk of publicly traded security portfolios.
The most classic example, is accountants saying we should buy and hold, but not sell assets, where doing so triggers capital gains tax. What about the fact that market cycles drive asset prices up and then the gains are given back in the down cycle? Sure taxable gains disappear when prices mean-revert, but how is that progress? Remember Nortel anyone? Bad things happen to capital, when tax planning dictates investment timing decisions.
Another classic example, is the recommendation that we should put cash into dividend paying securities rather than bonds and guaranteed deposits because dividends are given a preferential tax rate. Sure, but what about the downside risk, where companies go bankrupt and shares can go to zero, or over-valued common and preferred shares drop 50% in a market downturn as they did in 2000-3 and 2008-09? How does a lower tax rate on income help, when capital losses evaporate years of it and chunks of our principle each market cycle.
Finally, the ‘genius’ of tax shelters recommended by accountants or tax lawyers have frequently harmed those who bought them over the years. When tax authorities reassess these securities or ‘strategies’, the taxes owing, penalties and compound interest falls on the clients not the tax experts or fees they collected for their recommendations. I have personally known of several people who were reassessed with devastating financial impacts, years after the fact, in some cases after they had already retired and could not afford to make the repayments. I know of two people who actually committed suicide thereafter. This is no joking matter.
As investment counsel, portfolio managers, we spend all our time focused on the best, unbiased financial advice for our clients and what will grow their net equity, while minimizing losses, in a world full of harmful advice, huge capital risk and lots of product salespeople. We have quite extensive tax planning education and understanding, but we never try to overstep our expertise and hand out the accounting advice to our clients. Nor do we try and channel them to a different accounting firm that has offered to pay us referral fees for the favor. We should all be very wary of accountants and tax lawyers who seek to overstep their own expertise and make investment management recommendations and referrals.
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