Expectation management in tax season

Advisor explains what more he can do for clients during tax season, and highlights why he coaches them to understand that owing tax in April is better than a refund

Expectation management in tax season

Adam Schacter does more than your typical advisor during tax season. Schacter is a Financial and Investment Advisor and Associate Portfolio Manager at Embark Wealth of Designed Securities Ltd. Within his broad range of service offerings and qualifications, he manages tax filings for his clients, connecting them with licensed accountants. That work adds efficiency and saves money both for his clients and their accountants, but it puts Schacter on the business-end of tax season.

Because he offers this additional tax-related service, Schacter has to prepare his clients for tax season. That means marshalling their documents and collecting all their income streams. It also means managing their expectations. Many clients see a tax refund as an absolute victory, seeing that payment emotionally as a bit of free money. Schacter teaches them to think otherwise.

“That’s lending money to the CRA for zero per cent interest for a year,” Schacter says. “I would caution against that. I’d advocate for building better habits or giving the client a tax account to contribute to instead of giving it to the CRA. When they have a big amount owing, you can just take it from there. I don’t advise anybody to loan any money to any entity at zero per cent.”

Schacter cites the example of a $27,000 annual tax bill. If the client had planned appropriately that money should be worth more than $27,000 by the time the bill comes due, leaving the client with the difference. Because he serves as both a financial planner and the go-between during tax season, Schacter can ensure that his clients never overpay and find themselves in that 0 per cent loan situation.

While taking this approach seems rational and obvious when he lays it out, Schacter recognizes that there is an emotional aspect that needs to be managed during tax season. He will sometimes get calls from clients asking him why their tax bill was ‘so much higher this year.’ In fact, he says, those clients often paid less in tax during the year than they did the year before, but this year they have an amount owing where last year they had a refund.

“Money represents things to people, and those things help with your happiness factor,” Schacter says. “Money doesn’t equal happiness, but it’s connected to your anxiety and your happiness. So if someone is freaked out by a tax bill owing and it supersedes all the benefits of not giving the CRA the money during the year, then they’re missing the point.”

In certain cases, when the emotional relationship with that tax refund takes precedence, Schacter says that advisors may need to focus more on managing that client’s emotions. That might mean allowing them to make the poor financial decision of overpaying on their taxes — provided the outcome is not too detrimental — so they can feel good.

Nevertheless, Schacter tries to train his clients to think differently about their tax bills and refunds. He works to maintain tax efficiency in their investment accounts and remind them that better financial habits throughout the year can help ensure they aren’t loaning the CRA thousands of dollars at no interest.

In describing his work to clients, Schacter likes to use the analogy of a night out at a bar. At this bar you go in and drop $100 upfront to the bartender and then say, ‘let me know what’s left over or I owe you after the night is done.’ That $100, he says, is like the tax bill itself which many clients don’t factor into their idea of the tax return. They are more focused on any additional bills or any refund. Schater wants them to focus more on the core bill.

Most advisors have already played their role for this tax season. Now, as their clients’ refunds and tax bills come filtering in, Schacter sees an opportunity to open conversations about how clients are paying tax through the year, and what their money might do for them between now and when the next tax bill comes due.

“Having those conversations in advance is key,” Schacter says. “If you already know that tax time is coming, and you know your clients  because you've been working with them, and you know that they have pain points here, then you have the conversations before they that the pain occurs. But that's the biggest thing is just talk to your clients, ask them questions, figure out what they're concerned about, and try to solve them before the issues pop up. That's what we do for a living.”