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With the exception of tax preparation, how do you determine when a certified public accountant (CPA) is needed versus a financial advisor for financial guidance?
– Joyce
In many cases, most people would benefit from having both a certified public accountant (CPA) or other professional tax preparer and a financial advisor. Each has their own typical areas of expertise, but their services do sometimes overlap as well depending on the person. While you can’t always draw a hard line between the two, here are the common differences and situations when one is likely better suited to helping you than the other.
I think it’s helpful here to take a moment and clarify what a CPA is and what they do. We tend to think of CPAs as tax experts – and many are – but becoming a CPA requires developing expertise in a broad range of accounting topics. In fact, many CPAs don’t work in taxation at all.
The CPA exam comprises three four-hour sections on the following core topics:
Auditing and attestation: This section deals with internal business controls.
Financial accounting and reporting: This section covers the information related to accounting and reporting for business and nonprofit entities.
Taxation and regulation: This section focuses on U.S. tax compliance, the ethics and professional responsibilities related to tax practice, as well as business law.
The fourth section of the CPA exam tests candidates’ acumen in one of three disciplines of their choosing: business analysis and reporting, information systems and controls, and tax compliance and planning.
Why is this relevant to you? It provides insight into the topics and areas of finance in which a CPA may have expertise. Apart from tax filing, CPAs may be a good choice if you have other accounting needs such as bookkeeping or preparing financial statements.
For example, a CPA could assist a client with cash flow management for their small business. They would analyze the business’s income and expenses, identify areas of overspending, and create a plan to improve liquidity, ensuring the client can cover operational costs comfortably and make informed financial decisions for growth.
(Keep in mind that some financial advisors also work with small business owners and offer business planning services.)
I don’t know if your precise wording of “tax preparation” was intentional, but it’s an important to distinguish tax preparation from tax planning.
Most CPAs who prepare and file tax returns are doing precisely that – collecting your information from the past year, ensuring that it’s recorded properly on the tax forms and filing those forms. This is all done for the purpose of ensuring that you have complied with applicable tax laws and paid the appropriate amount of tax.
I like to clarify that because I often see CPAs taking undue criticism from clients who view the CPA’s role as getting them the lowest possible tax bill. Sure, CPAs should look for ways to ensure you don’t pay more than you must, but a tax preparer is bound by the tax code. Their job is to file accurate tax returns.
Tax planning, on the other hand, is a distinct service. It involves looking forward and making recommendations today that will affect future tax liability. CPAs may provide this service, but not all do. When they do, you should expect (rightfully) to pay more for that service than you would for tax filing. (Some financial advisors also offer tax planning services or can manage investments with tax efficiency in mind.)
Financial advisors typically provide personal financial advice that doesn’t include tax filing or other accounting functions.
Investments are a common area where most financial advisors offer help. When a financial advisor provides help in just a single area, this is likely it.
However, many financial advisors, especially financial planners who are Certified Financial Planners
™
(CFPs®) or hold other specialized credentials, offer help in a much broader range of areas. These often include guidance on:
Some advisors also specialize in serving a niche market. They may provide help to a very specific type of client such as teachers, employees of a particular employer, ultra-high-net-worth families or people in various stages of life. (And if you need help finding a financial advisor, consider matching with one using this free tool.)
As you can see, both CPAs and financial advisors have their core areas of expertise, and most people could probably benefit from both. However, there is often overlap between the CPAs and financial advisors. Some CPAs provide comprehensive financial planning, and some financial advisors do tax planning.
One easy way to check if this may the case is by looking at their credentials:
A CPA who also holds the PFS designation likely offers financial advice as well. Of course, they may hold other financial planning credentials that indicate this too, but the PFS is the most common.
Financial advisors may also be CPAs or enrolled agents. If so, they may offer tax preparation, tax planning or both.
CPAs generally offer tax and accounting services. Financial advisors typically offer investment advice and comprehensive personal financial planning guidance. However, there is sometimes overlap between the two, especially when the particular professional holds credentials in specific areas of finance.
If you’re interested in hiring a financial advisor, be sure to speak with several fiduciary advisors before settling on one. You’ll want to get a feel for their communication style, how they work with clients and their specific plans for you. Also, ask about how they’re compensated: solely from the fees that clients pay for advisory services, or by a combination of fees and sales commissions. The latter represents a conflict of interest and may be something you’ll want further clarification on.
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Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not an employee of SmartAsset and is not a participant in SmartAsset AMP. He has been compensated for this article.Some reader-submitted questions are edited for clarity or brevity.
