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This article is the second in a series of the seven most common tax planning mistakes financial advisors make with clients
One of the best parts of working exclusively with financial advisors is that I get to meet a lot of interesting and smart people, especially when it comes to taxes. However even the most tax-smart advisors, ones who know the tax code as well as the IRS, struggle with how to communicate tax strategies to clients and leverage their tax-planning knowledge to differentiate themselves from other advisors when meeting with prospects.
While my last article focused on getting tax returns from clients, in this article I’m going to focus more specifically on getting tax information from prospects and demonstrating to them how working with you will prevent them from overpaying the IRS.
Getting the 1040
When included on a list of what to bring to your first meeting, most prospects will provide their tax documents along with investment statements, estate documents and any other documents you request. For those prospects who push back, the best advisors respond with, “I understand your hesitation. Finances, especially taxes are very personal. However, in order to do my best work, and I insist on only doing my best work, I will need to review your taxes. In retirement, taxes will likely be your single biggest expense.”
If this doesn’t work, the last line of defense before canceling the meeting is to suggest they “bring your tax documents to the meeting, but please only share them if you feel comfortable doing so.”
Creating tax-planning awareness
Having the prospect’s tax information doesn’t count for much if they aren’t aware of the importance of tax planning. During your initial meeting, as you review their tax return together with them, draw their attention to tax planning with open-ended statements and questions such as, “Please tell me your strategy for not overpaying the IRS in retirement,” or, “When you claim Social Security, how much do you plan to withhold for taxes?” or, “If we can find legal and ethical opportunities to pay less in taxes, would you like me to show you?” (Okay, that last one isn’t open ended, but it is a critical question to ask.)
Warning
Many of my fellow tax-nerds are screaming out in anguish: “But wait! This sounds like sales and not tax planning!”
They are wrong.
If you know every tax strategy in the world, but you can’t communicate it to prospects and clients in a way that prompts action, it doesn’t count! Without communication skills, your tax knowledge is a waste.
Let’s look at a specific example: Roth conversions. When meeting with a prospect with $1 million in retirement accounts, we first need to draw their attention to the deferred tax liability (a phrase I would never use with clients), by explaining “Ms. Client, congratulations on having saved $1 million in retirement accounts. This is a major accomplishment. I hate to be the bearer of bad news, but the IRS is waiting to take somewhere between $0 and $800,000 of your nest egg in taxes. If it’s ok with you, I want to get that number closer to zero.” (0% if they managed to QCD the entire thing to charity, 80% if they die, the kids miss the RMD with a 50% penalty plus taxes.)
Now that the prospect is aware of this potential tax liability, we can begin outlining, at a high level, the strategy for reducing this bill: “Ms. Client, someday you are going to need money from your nest egg, either as monthly income, a lump sum to do something fun, like travel the world in an RV, or maybe something not fun, like long-term care expenses. Whatever the need, if each year we pay taxes on a small amount, across your retirement it could result in hundreds of thousands in tax savings. Is this ok with you?”
Logistically this looks like doing strategic Roth conversions each year to use up the remainder of their marginal tax bracketing and/or converting an amount relative to their future RMD. Keep an eye on shadow taxes, like Medicare premiums, or work with a CPA who actively collaborates with you to watch out for this.
Taking this example a step further, if the prospect was meeting with multiple advisors, including the big-name robos, ask, “What did ABC firm recommend you do about that giant potential tax bill on your retirement account?” or, “When they looked at your tax return, what strategies did they recommend for not overpaying the IRS?” or, “When you retire, who will be helping you create a tax-reduction strategy?”
Before you run out and proclaim your great tax knowledge to clients and prospects, make sure you can not only talk the talk, but also that you have systems in place to prevent mistake #5 – Making a client’s life harder.
This information only has value if you take action, so here is what I recommend:
1. Make providing tax documents a non-negotiable requirement for prospect meetings. If they won’t provide tax information, you can’t meet with them as it would be like telling your doctor not to take your blood pressure.
2. Create a reminder or trigger, such as wearing your watch on the ‘wrong’ hand to remind you to create awareness with prospects on tax planning. Something visual you will see during calls and meetings to prompt you to bring up the topic
3. Whatever your client niche, explain, in crayons, how your most valuable tax strategies work.
Come back next week for part three in this seven-week series. Until next time, happy tax planning!
Steven A. Jarvis, CPA, MBA, is CEO and head CPA of Retirement Tax Services. "Want more on the most common mistakes advisors make on tax planning? Join Steven for an online session on April 27th and use code "AdvisorPerspectives" at checkout for an exclusive discount"
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
