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Tax Planning: In House or Out?

For the past few years, Mark Kemp has offered low-cost income-tax preparation services to the mostly middle-income clientele of his Plymouth Meeting, Pa., advisory firm. Now, with his tax specialist about to go on medical leave, he's not sure how to continue the service or even if he should. For advice, we turned to our expert panel: Philip Palaveev, senior manager for Moss Adams, a Seattle-based

For the past few years, Mark Kemp has offered low-cost income-tax preparation services to the mostly middle-income clientele of his Plymouth Meeting, Pa., advisory firm. Now, with his tax specialist about to go on medical leave, he's not sure how to continue the service — or even if he should. For advice, we turned to our expert panel: Philip Palaveev, senior manager for Moss Adams, a Seattle-based accounting firm specializing in financial advisors; Hellen Davis, president of Indaba Training Specialists, a management consulting and training firm in Treasure Island, Fla.; and Chip Roame, managing principal of Tiburon Strategic Advisors, a Tiburon, Calif.-based market-research and strategy-consulting firm for financial institutions and investment managers.


Mark Kemp turned his life insurance agency into a financial-planning firm about 10 years ago, aiming to target a group of mostly middle-class Verizon employees. “The guys in the buckets,” is how he describes them. Then, three years ago, he expanded his services by hiring another planner (who was also an enrolled agent) to do his clients' taxes for a small fee. It's been a big hit: About half of his 400 clients use the service. But his tax guy is about to take time off for health reasons, leaving Kemp, whose Kemp & Associates Retirement Services has about $125 million in assets under management, in a quandary. Should he outsource the job to a pricey outside firm? Hire a part-timer to come into his already crowded office? Or should he just put a hold on the service?

Kemp became a financial advisor through a most unlikely path. After graduating from Pillsbury Baptist Bible College in Owatonna, Minn., in 1988, he intended to become a minister, working his way through graduate school. His plan was to sell life insurance for a while, then move to Philadelphia to attend a seminary in the area; he'd go to school at night, and continue selling during the day. But when his employer reneged on a promise to transfer him out east, he quit, affiliated with another agency, and moved to Philadelphia, figuring he'd sell insurance full time for a year before starting his studies. And in the process, Kemp realized he loved the job, and abandoned his ambitions to be a minister.

Career Switch

About 10 years later, however, Kemp figured he'd had enough of life as a captive insurance agent. At the same time, he read about two successful advisors in California who had targeted telecommunications workers in their area. The upshot: He decided to affiliate with a broker/dealer — the same one his role models had used — and turn his firm into a financial advisory. The business was to be aimed at a similar target-client-type in the Philadelphia area: blue-collar Verizon employees with net worth below $750,000. “My motto is, I came from a working-class neighborhood, and that's whom I'm going to serve,” he says. What's more, Kemp figured that with most of his competitors going after higher-net-worth clients, his more modest base was underserved — it would be a fertile market for clients in need of financial help.

The Tax-Man Hitch

The strategy worked well, and about three years ago Kemp took a liking to a financial planner he'd met, and invited him to join the firm. The man was also an enrolled agent, and Kemp figured he could do his clients' taxes, charging “a little under what H&R Block charges,” he says. While it wouldn't be a big money maker, he would eliminate the constant phone conversations with clients' accountants, explaining to them the same company-stock tax issues every time. Plus, he would be able to get a more thorough view of his clients' assets than he would have otherwise.

Clients have loved the service, according to Kemp. But his tax preparer is now taking a leave of absence, and is likely to be gone through tax season. Therefore, Kemp faces a dilemma: On the one hand, he doesn't want to drop the service. On the other, while he could use an outside firm, he fears he won't be able to find a reputable place willing to charge the fees his clients are used to. He could, instead, bring in a part-timer. But he's not sure where he would put the hire, with seven full- and part-time employees already packed into a small office space. He's already constructing a new 4,000 square foot building, but that won't be ready to move into for another year.


Philip Palaveev

I think it's great that he offers tax service. There is a tremendous amount of information you can learn just by being involved with a tax return for a client. There's really nowhere else that you can see their financial life as fully. You see their medical bills, and all of their accounts — including bank and broker accounts. Plus, everything is accurate since you're reporting to the government. And you can use all that information as an opportunity to find different solutions for the client, and to identify financial-planning needs that you would not have been able to address without it. To take just one example, you could print out the names of all of your clients who don't have life-insurance policies, and discuss that with them. There aren't many advisors who could come up with such a list of clients so easily.

I would say: Find a tax professional to come in, and do the job while the other person is on medical leave. Let's maintain the firm's ability to provide that service, and to keep it in house. If space is an issue, then the hire can rent an executive office or a conference room — perhaps in the same building — for tax season. However should Kemp decide to outsource, he needs to find a firm that uses the same software he already uses.

The Right Price

I also think the tax service should make more money; it should be profitable. Is he perhaps not charging enough? An outside accounting firm would probably charge $1,200 to $1,300 per return. And an average return at H&R Block costs about $300 to $400 per client. I think there's some middle ground that he should try. The question is: How complex are the returns? Are they very labor-intensive? I would guess they're relatively simple.

Another possibility is to bundle the tax-preparation services into a single package with financial planning. It would be easier to justify the cost to the client. There may be some compliance and liability issues related to that, but he should look into it.

Hellen Davis

If he doesn't keep the tax service, his clients will probably leave. Because what they're used to in the telecommunications industry, the way they've been trained, is to have one-stop shopping. You don't go to four different places for services.

The best plan is for him to bring in a part timer, and then take care of the space problem. He can arrange to give up some office space, or the conference room at a certain time of the day for tax clients. Perhaps after 4 p.m. (when most of the clients finish with work) until around 9 p.m. The tax preparer can do the bulk of the work at home, taking the client files with him.

A Client Compromise

But he should also raise his prices. The service shouldn't be a loss leader. I think he can raise it slightly this year. If it's $100, then he should hike it to $115. And I would suggest he raise it again the year after that. He can simply explain to clients that tax preparation has become a more expensive part of his practice, so he needs to change the fee structure. I'd also suggest he add another element: Clients who can provide him with referrals won't get hit with the fee increase. He just needs to put a nice letter together, laying out the new policy in a non-threatening way. Then he should keep the new policy in force when his tax guy, who's on leave, comes back.

Chip Roame

The tax-accounting business is almost unique in its ability to allow financial advisors to ask endless financial questions of their clients. For example: “I see you have a statement from Merrill Lynch. Do you have an account there?” Or, “I see you have money in a bank account earning 1 percent. Could we talk about how we could do better than that?” And that is an incredibly important part of building successful client relationships, something he should never abandon. That's a key part of his business.

More Tax Biz, Not Less

I don't think he needs to use an outside firm. But he should definitely get someone new in there, and maybe not as a temporary measure, but as something permanent. In fact, I think he should consider keeping the new person, and using that additional professional to expand the tax business. At the same time, he probably needs to raise the price. He'll have to figure out the elasticity of demand — just how much he can up the fee before consumers are alienated. But I think the fee should be increased.

He can work around the space issue. That one shouldn't be a problem. People can meet in a Starbucks. I wouldn't make any big changes simply because I didn't have a conference room free.

Fix My Practice is a quarterly feature that seeks solutions to real-world advisory problems from a group of consultants and industry insiders. Submit your questions to [email protected]

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