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The growing market for do-it-yourself products such as TurboTax, along with a geometric increase in low-priced providers, is commoditizing tax preparation services.
During this period, your clients have doubtless become confused and frightened by market booms and busts, and have lost confidence in the financial industry in general because of numerous scandals, including Bernie Madoff’s long-lived Ponzi scheme.
In a limited sense, your clients probably already regard you as their primary financial advisor. After all, when they receive a financial letter they can’t decipher, when they change jobs or when a parent or spouse dies, they call you — because they trust you.
To this extent, you’ve given financial planning advice for years; you just haven’t put that label on it. Nor have you been getting paid for it. Amid the current atmosphere of distrust, you can leverage your clients’ trust in you to become their advisor in a real sense. Yet, to join them as a partner in their quest for financial independence and retirement security, you need to reframe these relationships.
So how do you change the conversation? Simply by using a tool that I’ve successfully employed in my practice for years: preparing a personal balance sheet. Once clients have and understand their balance sheets, they become aware of myriad financial planning needs and your ability to meet them.
You can get information for the balance sheet during the tax return interview, where planning and wealth management opportunities that may not surface in tax returns can be discovered. These may include dormant IRAs (including Roth IRAs) and 401(k) plans, unused home equity, 529 college savings plans, private equity, brokerage account details and personal debt positions.
As clients talk about their assets and liabilities during the interview, you will get a feel for how they deal with their money and, above all, their attitudes toward financial planning issues. Of course, you shouldn’t discount the need for technical expertise. Yet technical expertise is for naught if you don’t have a natural, practical way to spark this critical transition.
The chain of information required for the balance sheet begins with tax documents that serve as springboards to fruitful digressions. Your comments during these digressions can alert the client to your potential value as a financial advisor.
These documents include the following IRS forms:
• W-2, box 12: This can lead to a general discussion of the client’s 401(k) plan, including whether he or she is contributing enough and the amount currently in the account. Often, clients won’t know this amount or what investments they’ve chosen for their 401(k) plans, so they might then realize that they need advice on managing their plan assets. If the client has a 1099-R, he or she needs to know that the tax impact might have been avoidable. Also, do they have dormant retirement accounts? What are the balances?
• 1099 INT: How much is in the account? What interest rate is the client getting? What are the goals for this money? Is this account the best way to achieve them? Are they aware that they can save in their children’s names with less tax impact? If the money in the account is for their kids’ education, do they have a 529 plan?
• 1099-B: This can easily lead to a conversation about the client’s strategy for his or her brokerage account and, of course, from whom he’s getting investment advice. If this client has advisors, their effect at this point may yield clues to his or her attitude toward them and, hence, to these advisors’ competitive vulnerabilities regarding service and fees.
• 1098: When discussing this, it’s only natural to ask what interest rate they’re paying. The answer can lead to a conversation about the size of the mortgage, the home’s current value, the amount of equity and whether the mortgage should be refinanced. Do they own any rental property? If so, the same discussion can ensue.
Discussions about mortgages can easily segue into conversations about other debts, starting with car loans. What is the outstanding balance and the interest rate? What is the make, model, year and mileage (indicating current value)? Does the client have a company car? Do they lease a car for their business? If not, point out the tax and personal financial advantages.
While on the subject of monthly payments, credit card debt—that albatross of financial security—may arise. At this point, the client might lament that it will take forever to pay off the cards. Have they considered refinancing their mortgage to pay off this debt?
Now you can go back to the W-2 to see whether the client’s company is providing more than $50,000 in life insurance, and make sure they’re aware that they are paying taxes on this overage. This can spur a general discussion about life insurance, touching on the issues of how much coverage they need and the importance of covering both spouses.
Among 42 percent of married couples, only one spouse has a life policy. And, according to a recent life insurance industry study, 41 percent of adults have no life insurance at all.
Upon concluding the interview, you can then offer to prepare and deliver the personal balance sheet along with the return. The client may express interest in a financial-planning relationship on the spot, without being prompted.
Regardless, it’s not enough just to prepare the balance sheet. You must also ensure that the client fully understands it and its implications for their total financial picture and how that picture can be adjusted for their ultimate benefit.
Thus, you can plant the seeds of interest in a financial planning/wealth management relationship while engendering confidence in your ability to deliver these new services skillfully.
Chris Basom, a tax accountant and financial planner with Your Money Matters Inc. in Orange County, Calif., is founder of Your Business Matters Inc., a new online subscription service that provides business growth tools to tax professionals making the transition to offering financial planning services.