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Adviser-Client Relationships following Repeal of Deductions

The tax law overhaul just passed by Congress appears to affect how we do business with our clients in some interesting ways. It will be important for us to consider the law changes and what steps we might want to take in response.
For example, the changes in allowable deductions mean that investment clients will no longer be able to deduct investment advisory fees from their taxable income. This will make a real difference for those clients who pay substantial fees for services on their large accounts. Such clients may seek out low fee or no fee investments for a portion of their portfolio or may seek to renegotiate the adviser’s fees. Advisers may look at their fee and service arrangements and change their approach to charging for financial advice and investment recommendations. Showing the value of services will grow even more important for advisers.
On the other side of the client adviser relationship is the practice of advisers entertaining clients and other persons such as vendors and providers of third-party services. The new law provides for the non-deductibility going forward of business entertainment expenses. Many advisers currently provide business entertainment and deduct the allowable portion of such expenses. Without that deduction, the effective cost of those activities will be increased and may cause some advisers to reduce their expenditures or otherwise change their approach to business entertainment.
Of course, by taking consideration of tax savings out of the equation, a person’s choice to provide business entertainment to clients or to invest with a particular firm is a clearer showing of interest and confidence in the recipient and the relationship. Perhaps the simplification resulting from the repeal of these deductions will make tax return preparation and record keeping a bit easier for both advisers and clients; another benefit of the law change.


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