When TurboTax and other do-it-yourself tax preparation software programs were introduced in the mid-1980s, many pundits predicted the demise of the human income tax preparation industry. Yet, in the intervening years, tax-preparing accountants have not only survived—they continue to thrive. For instance, according to the National Society of Accountants: "The average [fee] for a professional income tax preparer to handle a 'typical' 2014 tax return was $273…a 4.6% increase over the average fee last year, which was $261; and an 11% increase from two years ago."
And according to an article written last year by CFP Mark Cussen on the future of the tax preparation industry, "In 2012 there were about 160 million households that filed tax returns in America. About 60% of filers went to a Certified Public Accountant (CPA) or a tax preparation franchise such as H&R Block or Jackson Hewitt to have their taxes prepared, [while] 30% of filers used computer programs such as TurboTax."
We believe the 30-year experience of tax accountants faced with the digital automation of their services provides an important lesson for today's financial advisors confronting the challenge of online investment platforms (the so-called robo-advisors).
In the case of Turbo Tax, et al (Quicken, TaxSlayer, TaxACT, H&R Block at Home, etc.), their 30% market share has come largely from people who were already preparing their own tax returns manually, and found the computer programs (and now, online platforms) to be way easier.
Even more encouraging, many of the taxpayers who switched from professional help to doing it themselves digitally were overwhelmed by the complexities of tax law, and quickly went back to their old tax preparers—with an increased sense of the value of professional tax help.
In our view, financial planning will turn out to be the wooden stake in the heart of robo platforms.
Historically, financial planning has been the "loss leader" for marketing investment management services. In the 40+-year history of the "financial planning" industry, very few planners have actually turned a profit on their planning services, with the majority of firm revenues coming first from the sale of tax shelters, annuities, mutual funds, and most recently, AUM fees. And those firms who live by planning fees alone tend to be very small businesses.
