In Brief

The use of technology continues to increase. In the financial service industry alone, electronic applications and signatures, robo-advisors, and client management systems are all becoming more prevalent, and blockchain will soon follow. CPAs must embrace technology and use it to best serve clients. But no two clients are the same; each is unique, with different sets of values and financial goals. By aggregating client data into a common structure, CPA firms can build an information base that allows them to offer the appropriate financial services to each client. The authors discuss the advantages of using data analytics technology to build such an information base, starting with the information provided in a taxpayer’s Form 1040 and extrapolating from there.

To provide proper financial advice, an advisor needs objective and subjective information from the client. Often, a taxpayer’s Form 1040 can provide the objective information needed to start the process. The advisor’s task here is to efficiently extrapolate certain data points from the tax return and, most importantly, understand how best to use them to meet the client’s financial planning needs.

When utilizing tax return information to generate revenue or provide value-added advice, there are two options. The first is to manually review individual tax returns to obtain necessary information, but this is time consuming and inefficient. The second option is to use aggregating software that will merge specific financial data from tax preparation software into an efficient client management system as illustrated in Exhibits 15 below.

This article explains the process and benefits of using data analytics to aggregate client data so that CPA financial advisors can quickly determine which financial planning services best suit each client’s needs.

Form 1040: General Information

Filing status and exemptions.

Family status is important. An individual with many dependents (e.g., children, parents, qualifying relatives) will likely have more expenses than a single person. Family status is also important in determining the risk management needs, such as the amount and type of life insurance, disability income, or long-term care insurance needed.

The personal data revealed on the 1040 is vital to getting to know a client. The occupation and personal income will help determine whether income is constant, may increase over time, or is subject to dramatic changes based on business profit, bonuses, market condition, or other factors.


Much time and effort must be devoted to this section, in order to shed light on uncovered needs, such as taxable interest, dividend income, business income, capital gains, pension and IRA distributions, property income, and Social Security income.

Adjusted gross income (AGI).

If the client is a business owner, have there been contributions to an employer-sponsored plan or an IRA? Is a traditional or a Roth IRA contribution appropriate? Is there income to contribute more? Are there any key employees with special deferred compensation arrangements? Is there a buy-sell plan in place for the business, and how is it being funded?

Gifts to charity.

Has the client made significant gifts to charity? Is there a better strategy for the charity and the client? Depending on the situation, taking out a life insurance policy with the charity as the beneficiary may be a good strategy.

Reducing income tax liability.

There are five basic strategies that taxpayers can utilize to reduce and defer income tax liability on investment income or salary: elective deferrals [401(k) plans and Savings Incentive Match Plan for Employees of Small Employers (Simple) arrangements], nonqualified deferred compensation, deferred annuities, cash-value life insurance, and stocks and bonds with preferential tax treatment. These strategies will be familiar to most CPAs, and full discussion is outside the scope of this article; however, it is worth noting that such strategies will be reflected in a client’s return.

Leveraging Data Analytics to Practice Management

In the current complex financial environment, however, the needs of a CPA’s clients are changing. Millions of baby boomers are approaching retirement, and the focus is shifting from accumulation to preservation, distribution, and wealth transfer. Trillions of dollars are at stake, and clients are increasingly asking CPAs to help manage their wealth in addition to prepare their taxes. Business owners are asking for merger and acquisition help, as well as help with key executive benefits and employer retirement plans.

Forms 1040, 1120, and 1120S provide valuable information about taxpayers. Tax planning and financial planning thus become part of the tax preparation process. As firms begin to work with clients, they must also follow the AICPA and IRC section 7216 regulations and procedures on protecting clients’ confidential information.

Data analytics will become important to all CPA firms, uncovering multiple opportunities to provide value through various strategies. Possibilities include reallocating investments that can generate tax savings, helping clients with RMDs or retirement planning, working with business owners who have unique opportunities, and broadening and enhancing the firm’s services through working with a professional advisor.

Trying to manage this manually is an inefficient approach. By incorporating client data into a common structure, CPA firms can build a knowledge base that allows them to manage clients by office or by partner and offer more appropriate financial and client service transformation initiatives. This will require technology specifically designed to align the accounting firms’ data with the expertise of a highly qualified tax planner or financial advisor. Such alignment will also require interfacing key client data from income tax forms, importing income tax data into a confidential contact management program, analyzing the data to identify clients who may have specific financial needs, and generating targeted solutions.

Understanding a Firm’s Client Base

CPA firms today should realize their clients and the clients’ assets add value to the firm’s practice.

By using a practice management system, CPAs can total the number of clients they have who report taxable income and estimate the total amount of investments each client has based on the amount reported on the 1040. Naturally, a firm might have many clients who will show little or no reportable interest or dividends, while others may report much more than averaged. This analysis will show whether the accounting CPA firm has a client base with substantial wealth, which creates opportunities for the firm to play a more active role in tax planning and financial planning. As outlined above, the line items on individual 1040, 1120, or 1120 S tax returns can reveal areas where clients need tax or financial planning. Aggregating client data from returns can reveal more than just client wealth; it can help advisors understand the needs with the client base. The goal of effective client management is to start with client profiles and understand how the CPA, tax planner, or advisor can add value to the service the firm provides those clients.

A common theme among CPA firms is the primary interest in helping clients make good decisions. How much time does a firm actually put into analyzing its client base? Firms generally have three groupings of clients: high net worth, business owners, and middle-income families. These groupings, however, can be better defined by age, income level, and wealth. This reveals four groupings that more closely define where clients lie and the services they need:

  • Wealth accumulation: Net worth and financial independence planning to accumulate funds to achieve income for life. A key focus would include clients ages 45–60 with AGI over $100,000.
  • Wealth protection: Specific assets that may need to be repositioned and principal protected. Distribution planning can help individuals develop strategies that may reduce the likelihood that they will experience a financial hardship in retirements. These clients are typically 50–70 years old and could be already retired, thinking of retirement, or concerned about running out of money in retirement.
  • Wealth distribution and transfer: Ensure a long-term sustainable wealth for future generations. Advisors should work diligently to set up an estate and trust plan that is customized to each client’s needs. This includes high-net-worth individuals thinking about leaving a legacy or who need help transferring wealth to the next generation.
  • Business owners: Running a business or a partnership. Most business owners tend to be older and may be nearing retirement. The firm needs to understand their succession strategy and time-line for retirement.

As the number of partners in a CPA firm increases, the number of clients also increases. Understanding the 1040 client base and those clients’ need for wealth accumulation, wealth protection, retirement and distribution planning, and estate planning will affect the direction the firm takes.

Tax planning and financial planning needs typically are associated with certain ages and income levels. Likewise, a marketing strategy in the insurance or investment business will typically identify individuals (or married couples) at a certain age as well as a certain income.

Technology can help a firm define how many clients fit a certain profile. For example, suppose a firm wants to review clients with AGI over $250,000 who pay the additional 3.8% net investment income tax on certain line items and investments. These clients can be aggregated using data mining to capture any clients with AGI over $250,000 and interest or dividend income over $20,000. This becomes an easy way to profile clients in need of tax planning to reduce taxes on certain investments, or possibly a more comprehensive financial planning solution. Looking at interest and dividend income also provides the firm with an opportunity to offer a second opinion on investment strategies.

To be effective, a firm needs to understand the breakdown of 1040 clients by age group and by partner. Technology and data management will play an important role in this exercise, as Exhibits 1 and 2 demonstrate. Understanding the age of each partner’s clients will help the firm understand the direction it should take, as well as which partner needs to be in certain meetings. For example, distribution planning meetings should include the partners with clients over 60, and meetings about business clients should include the partners who preparer Schedule C or 1120S tax returns.

Exhibit 1

1040 Clients by Age Group

Exhibit 2

Clients by Partner

Wealth Accumulation

All individuals want to accumulate wealth, but some are more successful than others. It is a simple process to examine 1040 returns as they are prepared in order to understand how much clients are making and what they are doing with that income. This can lead to more effective tax planning or financial planning opportunities for these clients.

A strong practice management database program can interface with the client tax program and provide reports such as the one shown in Exhibit 3. This provides insight into how many clients might be affected by proposed legislation, or who is moving from employment to retirement or wealth transfer and how much money they should be saving or putting away for retirement.

Exhibit 3

Data Aggregation Directed at Wealth Accumulation

Preparer; Client ID; Age; AGI; Taxable Interest; Tax Exempt; Taxable Dividends Amie; 12-654635; 49; $457,054; $1,872; $26,570; $186,723 Alice; 12-654635; 53; $473,515; $; $3,635; $15,127 Tom; 12-654637; 46; $393,143; $11,677; $100; $3,695 Jim; 12-654638; 47; $368,946; $1,533; $; $7,402 Clyde; 12-654639; 63; $464,430; $28,801; $; $2,694 Clyde; 12-654640; 48; $291,628; $1,687; $98; $13,486 Amie; 12-654641; 62; $396,978; $36; $; $340 Jim; 12-654642; 58; $341,690; $40; $; $75 Amie; 12-654643; 55; $319,588; $681; $4,620; $7,140 Amie; 12-654644; 48; $288,520; $154; $10; $ Peyton; 12-654645; 58; $250,000; $; $; $ Jim; 12-654646; 58; $292,860; $712; $; $161 Jim; 12-654647; 63; $294,569; $218; $; $ Tom; 12-654648; 46; $269,472; $; $; $ Clyde; 12-654649; 44; $266,631; $328; $; $265 Tom; 12-654650; 51; $339,080; $2,299; $; $30,200 Tom; 12-654651; 59; $324,267; $625; $; $ Bob; 12-654652; 56; $337,863; $1,289; $; $ Tom; 12-654653; 64; $305,716; $1,657; $; $1,728 Amie; 12-654654; 54; $308,587; $3,084; $; $

Wealth Protection

Individuals who achieve a certain level of income or wealth start thinking about protecting it. Insurance plays a valuable role in this, and many CPA firms work with experienced insurance agents to offer policies on buy-sell funding, key person insurance, or individual protection for self-employed clients. The AICPA suggests that CPA firms offer policy reviews to their clients to make sure they have the right policy and the correct beneficiaries. Policy reviews can be completed at a higher level by several areas; clients over 45 with income over $100,000 are an example of a good profile, as are Schedule C clients whose sole source of income is their business. Again, making sure that the clients have signed use and consent forms in accordance with IRC section 7216 provides a great opportunity to help those clients. Using a good database program permits the definition of age, AGI, and interest or dividend income to help make sure a client has appropriate protection.

Wealth Distribution and Transfer

Older clients are often forgotten by CPA firms, because they are retired, are no longer high-income earners, or spend part of the year in another state. Many of these clients will need help with distribution planning, charitable donations, or even wealth transfer. Business owners will have additional needs, and CPAs can help in many areas. A program that can provide the details associated with tax legislation, income sources, and client age groups puts CPAs in an advantageous position when analyzing client data. With the type of detail shown in Exhibit 4, advisors can easily see who may need retirement planning, distribution planning, or tax planning help, giving them talking points to use when meeting with those clients.

Exhibit 4

Data Aggregation Directed at Wealth Distirbution and Transfer

Wealth Transfer IRA; CLIENT ID; AGE; AGI; TAXABLE INTEREST; TAX-EXEMPT INTEREST; TAXABLE DIVIDENDS; SPOUSE IRA; SP IRA TAXABLE; TOTAL IRA; TOTAL IRA TAXABLE Arnie; 12-12356; 70; $66,216; $13; $; $; $; $6,160; $15,871; $14,257 Tom; 12-12357; 70; $187,446; $70; $; $; $; $; $; $61,000 Jim; 12-12358; 72; $59,211; $2,608; $1,020; $4,676; $; $; $15,664; $10,664 Tom; 12-12359; 72; $60,161; $43; $; $; $; $; $28,744; $21,946 Jim; 12-12360; 73; $181,197; $494; $205,675; $80,313; $; $; $; $28,369 Arnie; 12-12361; 74; $258,017; $52,439; $22,362; $104,435; $; $; $; $71,788 Arnie; 12-12362; 75; $67,606; $6,871; $4,073; $9,739; $; $; $; $27,763 Bob; 12-12363; 75; $820,731; $239; $18,165; $44,571; $; $; $649,068; $53,263 Arnie; 12-12364; 77; $251,666; $33; $; $; $; $1,470; $; $13,024 Clyde; 12-12365; 77; $341,037; $426; $; $777; $291; $; $10,000 Tom; 12-12366; 77; $66,740; $200; $; $539; $; $; $; $44,640 Jim; 12-12367; 78; $233,702; $422; $; $2,446; $; $; $; $125,000 Tom; 12-12368; 79; $76,720; $22,663; $; $2,282; $15,840; $; $; $13,947 Bob; 12-12369; 80; $174,987; $2,580; $10; $11,248; $15,840; $; $; $104,472 Clyde; 12-12370; 82; $61,303; $30; $; $; $; $; $; $34,783

Business Owners

Business owners are key to the success of many CPA firms; they typically pay higher fees. When the business is sold, however, the firm loses not only a client but also key accounting and income tax revenue. As result, understanding more about business owners is important to a firm’s success.

For example, assume client ABC Corp. comes in to have its taxes prepared and informs the assigned CPA the business is being sold. Since the firm has not been involved in the sale, it has not only lost the tax return income and the accounting revenue, but also a client. If the firm had been more proactive in the relationship, it could have been more involved and maybe managed the owners’ assets after the sale. Partners should meet with business owner clients who are within five to ten years of retirement to discuss their succession plans in full detail. A simple report, such as Exhibit 5, can help the firm be proactive know which business clients it should be talking with.

Exhibit 5

Data Aggregation Directed at Business Owner Analysis

Preparer; Business ID; Total Sales; Gross Profits; Employee Benefits; Pension and Profit Sharing/plans Fred; 14-4351; $1,457,287; $297,730; $426,624; $484,207 Fred; 14-4352; $3,130,198; $429,692; $410,424; $412,307 Bill; 14-4353; $1,770,886; $374,408; $368,763; $299.,238 John; 14-4354; $2,392,592; $273,214; $351,175; $238,534 John; 14-4355; $2,618,688; $394,406; $342,020; $317,938 Bill; 14-4356; $358,222; $329,762; $332,704; $327,979 Bill; 14-4357; $1,002,300; $274,413; $307,229; $436,951 Fred; 14-4358; $1,523,160; $412,484; $292,141; $342,754 Fred; 14-4359; $1,293,396; $428,564; $273,939; $450,566 Barry; 14-4360; $2,217,642; $208,555; $239,259; $398,229

Many closely held business owners should consider the need for a buy-sell agreement. These agreements can help protect the business, any surviving owners, and the deceased owner’s family, not to mention employees and their families. A common concern is that, upon the death of a business owner, the surviving owner may find it difficult to fund a purchase price. Surviving owners may have access to the business’s general assets, they may borrow the funds, or they may purchase life insurance. Planning ahead can make the process easier, and CPAs should be proactive in ascertaining which clients will need buy-sell agreements and providing useful advice on how to structure the arrangements and suggestions on the most efficient funding. Closely held business owners might also benefit from advice on setting up an employee-sponsored retirement plan, and advisors can help ensure the plan design is the right none for the entity and the owners.

Case Study

By analyzing its client data, a Seattle-area CPA firm working with data analytics firm WealthStar Alliance discovered it had a significant number of clients with AGIs that exceeded $250,000. The data analytics also identified married couples between the ages of 40 and 45 with dependents under age 3. One client, age 43 and in good health, had a young child. The first planning opportunity for the client was life insurance protection for at least 20 years, covering the child through college. The proposal estimated a death benefit of $1.5 million, which would increase to $1.8 million in year 20 to offset inflation.

The second planning opportunity was supplemental retirement income. Considering the client’s high AGI, he did not qualify for the full Roth contribution, but was comfortable budgeting $20,000 per year for a Roth alternative contribution over the next 10 years.

One solution recommended by the CPA and advisor in this case was as follows:

  • Two policies were suggested—term life insurance for a 20-year $1 million death benefit, with a cost of $1,054 per year, and permanent insurance in an index universal life policy, with a death benefit starting at $464,181 and increasing to $849,632 at age 62.
  • At retirement, the client would receive a distribution with tax-free income payments from the permanent policy of $73,692, from age 70 through age 85 (16 years). This totals approximately $1,179,072 of tax-free income.
  • At a life expectancy at age 86, there will still be approximately $108,223 remaining from the permanent policy, which may go to heirs or charity.

Finding Opportunities

The use of data analytics can reveal business opportunities within a firm’s client base that would otherwise go unnoticed.

Through incorporating client data into a common structure, CPA firms can build intelligence that allows them to succeed in appropriate financial and client service transformation initiatives. The examples discussed above can help CPA firms can identify which type of opportunity to bring to market, and when.

Ernie Guerriero, CLU, ChFC, CEBS, CPCU, CPC, CMS AIF, RICP, CPFA is vice president of marketing for Security Mutual Life Insurance Company of NY, Binghamton, N.Y.
Richard L. Engebretson, CPA (inactive) is a partner at WealthStar Alliance, Minneapolis, Minn.
Cary W. Parker is a partner at WealthStar Alliance.