Changing Financial Advisors? What You Need to Know About Taxes

When changing financial advisors, a common concern among clients is the tax impact. It’s a valid consideration: Decisions should be made with a comprehensive understanding of their financial implications, including taxes. This article covers the potential tax issues of changing financial advisors and underscores the importance of selecting an advisor with a robust tax planning approach.

Do You Pay Taxes When You Change Financial Advisors?

The initial switch: On its surface, changing from one financial advisor to another does not trigger taxes. This is because the change in advisory does not constitute a taxable event.

Yet this move can indirectly lead to tax consequences. It’s not the change of advisor that the tax code is concerned with, but rather the financial transactions that might occur within your accounts due to this change.

These transactions can include selling investments, which could generate capital gains or losses, or changing the composition of your investment portfolio, which may affect your tax liabilities.

Portfolio adjustments: When you onboard with a new financial advisor, a common step is to review your investment portfolio to help ensure it aligns with your financial goals, risk tolerance, and investment strategy. This review can lead to adjustments, such as selling certain assets or reallocating investments.

These transactions—selling assets, for instance—can result in capital gains taxes if the assets sold have appreciated since their purchase. The tax rate on these gains varies depending on how long you’ve held the assets and your income level.

Short-term capital gains (on assets held for one year or less) are taxed as ordinary income, while long-term capital gains (on assets held for more than one year) benefit from lower tax rates.

Ideally, your new advisor will take these tax considerations into account and suggest strategies to minimize the burden.

Custodian and account changes: Another potential tax implication arises when your new financial advisor moves your accounts to a different financial institution or custodian. This move can require the sale of investments, especially if the new institution does not offer the same investments or if there are incompatibilities between the investment strategies of your old and new advisors.

Changing the type of account can result in taxes as well. Such moves need to be handled with care to avoid unintended taxable distributions or penalties. For instance, a direct rollover from a 401(k) to an IRA is generally a non-taxable event, but withdrawing funds in order to move them can trigger taxes and penalties.

The Critical Role of Tax Planning

Given these potential tax consequences, you may want to consider a financial advisor who prioritizes tax planning as part of their comprehensive wealth management service. An advisor well-versed in tax implications can guide you through portfolio adjustments in a manner that helps minimize tax liability.

When evaluating potential advisors, consider their qualifications and approach to tax planning. Credentials such as the Enrolled Agent (EA) or Certified Public Accountant (CPA) status can indicate a professional’s expertise in tax matters.

For instance, our wealth management firm has two Enrolled Agents on the team, underscoring our commitment to navigating the complexities of tax implications for our clients. In addition, our advisors all have the CERTIFIED FINANCIAL PLANNER™ certification, a highly respected credential for its emphasis on comprehensive financial planning, including taxes.

When you interview potential advisors, ask about tax considerations when switching to their firm. Ask about specific taxes you can expect and how the advisor will help mitigate them.

Final Thoughts

Changing financial advisors doesn’t have to mean unwelcome tax surprises. By focusing on a financial planner with a proactive approach to tax considerations, you can navigate the transition more smoothly, helping to ensure that your financial strategy remains tax-efficient.

Effective tax planning goes beyond the immediate concerns of changing advisors. It encompasses a wide range of financial activities, from investment decisions and retirement planning to estate considerations. An advisor who takes a comprehensive approach that puts your best interests first can be valuable. This approach can help you feel confident that all aspects of your financial life align with your goals and tax efficiency.

Schedule a complimentary, 15-minute chat with a fee-only, fiduciary financial advisor today to discuss your personal situation.

This material was written in collaboration with artificial intelligence (ChatGPT) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.

Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor with offices in Granite Bay and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.