As the financial services industry continues to shift away from providing strictly investment advice to a more comprehensive and holistic approach, advisers should equip themselves with the financial planning knowledge that can help differentiate them from robo-advisers and the growing competition.
Below are six common financial planning questions that advisers will undoubtedly receive from their clients. Advisers should be well-versed and comfortable discussing these topics with their clients if they wish to remain competitive.
1. What are my options for taking Social Security benefits? I recently had a prospective couple come to my office seeking advice, bringing with them a sizable investment portfolio to manage. When I asked the couple why they were looking to change advisers, they told me, "[Our] financial adviser won't help us with basic issues, such as when we should take our Social Security benefits. That's really important to us."
Don't send your clients to a website calculator to figure out a Social Security strategy on their own. Does your doctor send you to WebMD when you go in with a bad cold? You are your clients' financial guide, and having some basic knowledge of Social Security strategies will help you navigate the baby boomers' dilemma of when to begin taking benefits.
2. How should I give money to my kids? Transferring wealth should be done with finesse and careful coordination. I've met only a handful of clients who truly understood the gift tax rules and how to tax-efficiently transfer money to their children. Did your clients give their child $28,000 in cash to pay for tuition? Guess what—they may need to file a gift tax return due to poor planning. If they had instead written the check directly to the college—or split the gift equally between the parents—the gift tax return filing could have been avoided altogether. The point here is that a good financial adviser will educate clients before these kinds of avoidable mistakes are made. You may also score some major points with your client's CPA by knowing the basic gifting rules.
(More on wealth transfers: Advisers at risk from looming $30 trillion generational shift)
3. What is a required minimum distribution? The oldest of the baby boomers (born in 1946) are about to turn 70. This means you as the adviser are responsible for assisting them in taking their RMDs before they are hit with a large penalty.
When a client asks you how much their first RMD will be, do you have an estimate to give them? You should.
Consider a client who is turning 70-1/2 this month. If his or her IRA balance was $100,000 at the end of last year, you can quickly estimate the first RMD as being approximately 4% of last year's ending balance. The exact figure would be $100,000 divided by the age factor of 27.4, which is $3,650, or roughly 3.6%. The point here is that you should be able not only to explain to your client how an RMD works, but also not look like a “deer in headlights” when the client brings the topic up.
4. Do I need an estate plan? It's a no-brainer to refer a client with $10 million in assets to a good estate planner for a comprehensive estate plan. But what about the majority of your more ordinary clients?
For starters, who is keeping track of all your clients' beneficiary designations? How embarrassed would you as an adviser be if you were to discover that the IRA account you manage for Mr. Smith mistakenly lists his ex-wife as the primary beneficiary—and not his new wife, whom he married more than 5 years ago?
Aside from a beneficiary audit, consider a basic estate plan for families with young children. Who are their children's guardians and are their accounts properly titled? How about a basic will and power of attorney documents in case of an accident or severe health issue?
(Related read: Every young adviser needs a successful mentor)
5. Should I refinance? With interest rates near historic lows, now is a good time to help clients lower their debt burden. Clients with mortgage interest rates north of 5% may want to explore refinancing options. Upfront costs should be taken into consideration, which is why advisers should have well-vetted mortgage specialists in their digital rolodex. But don't just stop at the mortgage. What about that high-interest auto loan your client was talked into a couple of years ago? Many credit unions are offering auto loan refinancing rates below 1.5%, which is well below the 4% car dealerships were selling to clients a few years ago.
If you aren't helping your clients with these easy opportunities to refinance and save money, that prospective adviser your client is talking to surely will.
6. What else should I be doing to save on taxes? The obvious answers here are: max out retirement accounts, gift appreciated assets to charity, invest tax efficiently, etc. But what about the not-so-obvious strategies? Here's an example:
If you charge an investment management fee, are you and your client taking advantage of the potential tax deduction?
Generally, fees paid for investment advice can be tax deductible if they (along with other miscellaneous itemized deductions) exceed 2% of the client's Adjusted Gross Income. The problem is, many advisers arbitrarily pull fees from retirement accounts rather than pulling them from taxable accounts or having the client pay with outside cash. This lack of planning can result in the loss of potential tax deductions.
For example, consider a client with a $1M portfolio: $900,000 in an IRA and $100,000 in a taxable account. Fees of 1% annually are pulled from each account. In this case, only the $1,000 of fees pulled from the taxable account would potentially be deductible. The $9,000 of fees from the IRA account may not be—because they were not paid with outside cash or taxable money. However, if all of the fees instead were paid from the taxable account (or with outside cash), the entire $10,000 in fees potentially could be deductible (for the amount over the 2%-of-AGI floor). Every client situation will be unique, so make sure you are looking at your client's best option.
Having great attention to detail and somewhat outside-of-the-box financial planning strategies can certainly help retain and grow your client base. After all, clients can get advice from many sources nowadays—but personalized financial planning strategies from their trusted adviser cannot be automated.
Grant Webster is senior wealth manager at AKT Wealth Advisors.
