FINANCIAL ADVISORS LIKE TO BE A one-stop shop for all things financial for their clients. But unless you have particular expertise in tax matters, there comes a time when the risks of overstepping the boundaries of your knowledge in this complicated area outweighs the rewards.
One of the biggest downsides to giving tax advice can be liability issues, according to Dan Hallett, vice president and director of asset management with Oakville, Ont.-based investment counseling firm HighView Financial Group. And dealers, no matter what regulatory basket they fall into, will be sensitive to the kind of advice their representatives are dispensing to clients. “[Firms] might not regulate it internally, but there will be a certain amount of internal vetting,” Hallett says. “[The dealers] want to make sure they’re protected.”
As a result, all advisors need to know their limitations and the extent of the tax advice they should be giving, and be able to recognize when a client’s situation is beyond the scope of the advisor’s expertise. “You might know about a certain topic area,” Hallett cautions, “but you might not know where your knowledge ends. It’s a fine line.”
Crossing that line and providing inappropriate tax advice can cause your client’s situation to go off the rails, which, in turn, can lead to lawsuits. “If you didn’t have the advice vetted by a [chartered accountant] who is a tax specialist and it runs afoul of CRA [Canada Revenue Agency] rules or guidelines, there certainly could be a backlash to the advisor,” Hallett adds. “If there are penalties levied on the client, [that] could come back to haunt the advisor. There are a lot of grey areas in taxation.”
So, what’s an advisor to do? If you work for a firm that’s big enough, you can access in-house tax experts. But if you don’t, you should seek outside professionals to whom you can turn or refer your clients.
Jack Courtney, assistant vice president, advanced financial planning, with Winnipeg-based Investors Group Inc., says many advisors are very familiar with basic personal income tax credits and could give advice and general information to clients who don’t have an accountant.
An advisor’s role should be to identify tax issues and problems, as well as potential strategies to deal with them. In many cases, Courtney says, that could involve bringing a tax expert into the conversation.
“It’s always a matter of good practice to say to your clients,” says Courtney, “particularly when getting into more complex scenarios: ‘You need to sit down with a tax professional.’ From a professional development standpoint, it’s good practice to say, ‘Let me work together with your other professional advisors and let’s bounce these ideas off them’.”
Although recommending a meeting with a lawyer or accountant to discuss complex tax matters might seem counterintuitive, such advice is part of the value you provide.
“You can outline the potential savings for [the client],” Courtney says. “It could be money well worth spending.”
Many accountants have been formally trained and continuously upgrade their education on tax matters, says John Carpenter, CEO of Certified General Accountants Alberta. These experts are subject to peer reviews, so it’s expected that they will remain competent in tax matters. A code of ethics also applies. “There are consequences to accountants who either neglect their practice or are careless about it,” he says. “If clients get to the point at which tax issues are complex or they’re high stakes, they probably seek advice from people who are formally trained.”
Carpenter says that many accountants are used to dealing with the CRA. As well, there are many accountants interested in building and maintaining relationships with financial advisors to receive referrals for tax work.
“If I could give any advice to advisors,” he adds, “it would be: ‘You probably want to get to know those [accountants]’.”
© 2012 Investment Executive. All rights reserved.