For any sports fans out there, unless you have a one-sided blowout, you already know that the fourth quarter is big. It can change the course of the prior three quarters when a team can make up ground for their lousy performance for 75 percent of the game.
As a financial advisor, it seems as if the fourth quarter of the calendar year is always the busiest time of year when it comes to new clients. I think it may be that clients begin taking a retrospective look at what they’ve done this year and, fortunately for us, it frequently includes a constructive evaluation of their professional relationships and if they are being well-served. The good news for us: They haven’t been well-served. The bad news for you: If your clients are underserved, you will eventually lose them.
I encourage everyone reading this to approach the fourth quarter as if it were a Super Bowl game and you only have this quarter left to win it all. Except the game in this scenario is your client relationship. I believe that you can change the entire demeanor of your client relationship by taking an aggressive posture here in the fourth quarter of the year. Of course, this also means that this may be one of the busiest times of your year.
If you’re a CPA who thinks the fourth quarter is your chance to recharge before another tax season floods you with work, then keep on recharging. But if you are a CPA financial planner who realizes the significance of financial planning in a CPA firm and wonders whether your tax business may get eaten alive by blockchain technology and other technological efficiency gains, read on. The fourth quarter is your chance to make this a great year simply by exceeding your clients’ expectations.
Start with tax
To make this easy for CPA types, I think that the first topic for a fourth-quarter meeting will be tax planning. You may feel that your clients are well-prepared for the upcoming close of the tax year, but they probably wouldn’t know that unless you told them. Your clients are pounded daily by marketers telling them about tax reform and how this year may be different. Whether the marketers pick the state and local tax deduction, 199A, or other very broad changes in the Tax Code, they’re getting your clients’ attention.
To divert their attention back to where it should be, in your firm, you may have to be more proactive. Start this by reaching out to your clients for a year-end tax review. In that meeting, you may want to show them how this year’s tax return may vary from those in the past, focusing on the major distinctions between the two tax years. Even beyond tax reform, the savvy planner will choose to expand the tax conversation to several other pertinent areas with respect to your clients’ financial planning options.
I’d start with a base understanding of exactly where on the tax bracket scale they will be for 2018. Until you have that, you can’t intelligently have a conversation about accelerating, deferring or reducing taxable income for this year. You may expand this into a look at itemized deductions versus the newly expanded standard deduction to determine if they should consider bunching certain deductions this year or next to maximize the delicate balance between itemized deductions and the standard deduction.
I know that when we acquire a new high-net-worth client whose CPA has led them into a low tax bracket that this wasn’t discussed. This can happen when someone retires and isn’t collecting Social Security or living on after-tax savings and investments. For many of these clients, this is merely a temporary situation until they are hit with required minimum distributions. Maybe a better idea would be to utilize those low-bracket opportunities by creating income. You can create income by altering investments, creating short-term capital gains, or taking distributions from retirement accounts. Perhaps better than an IRA distribution, consider a Roth conversion to use up the low-bracket taxable income.
For clients already subject to RMDs, ensure that they’ve taken those distributions to avoid the onerous tax penalty for under-withdrawal. This conversation may also lead to revealing forgotten retirement accounts that may cause a withdrawal to be less than it should be. On the other hand, if a client is taking RMDs and doesn’t need the money, perhaps they’re a candidate to donate the RMD to a charity.
Examine your client’s gifting strategies. Of course you always have the RMD idea and the option of gifting appreciated securities. But look at their charitable strategies in light of the new standard deduction. Your client may consider bunching their contributions so that they will clearly exceed the standard deduction and provide them the maximum tax benefit. This contribution can also be made to a charitable gift trust account so that you get the deduction when you write the check but can control the actual distribution from the gift trust to the charities so that the gift goes at the pace your client wants.
Look through your client’s investment statements. Are there opportunities for loss harvesting or a need to create capital gains? Most clients have a knee-jerk reaction where they don’t do anything in fear of running up their tax bill and thereby leave some of these basic planning concepts on the table year after year. It really blows me away when I meet a client who is still carrying forward capital losses from the last market meltdown — now almost 10 years ago!
Similarly, if you have a client with net operating losses carrying forward, you may have opportunities right in front of you to utilize those NOLs this year. The most obvious choice may be Roth conversions, which could end up completely tax-free if the NOL is substantial enough.
Your bigger clients are all excited about the 199A deduction for qualified business income. They know that it may be good for them, but they may not know whether they qualify or will benefit from it. Due to the complex moving parts here, a detailed forecast is essential. The good news is that they still may have enough time in 2018 to re-engineer the profit and W-2 wages to maximize this new provision. I haven’t yet seen any disqualified taxpayers willing to convert to a C corporation for the lower rates. Most cite the sunset provision and the inherent double taxation of C corps as the most significant impediments.
While this may sound like a lot of work, the most successful practitioners know that for your best clients, this type of proactive service is simply the table stakes. Neglecting to do this for them will probably result in you not having many raving fans.
Going deeper
Now I’d like to take you to other fourth-quarter services that you can engage in order to have your clients know how much you care about them. This is where you can make up for three quarters, or even years, of under-servicing beyond the tax and investment plan. Use this fourth-quarter opportunity to circle back to all of the reviews and services that any reasonable person may believe should be includable in a personal financial planning engagement. These may include a review of cash flow, risk management, investment planning, retirement planning, estate planning, family governance, education planning, or any other planning issue that needs to be kept fresh and updated. Of course, one meeting where you are trying to make up for poor services in the past is not likely to change their feelings immediately, but it is the start where you’ll identify issues that need attention and begin to collect the data and integrate with other professionals so that you can feel good about your comprehensive review.
When it comes to cash flow, every financial life is driven by income and expenses. This alone can make or break any financial plan. I believe it’s negligent to work with assumptions when you start a planning engagement that are never updated. Part of keeping a plan current and meaningful should include a review of your original assumptions about income and expenses followed by some basic assessments to ensure these assumptions are still true and on track. If not, your client’s whole financial plan may fail, and whose problem is that?
When it comes to the risk management part, just like cash flow, is it still working for them? Start this review with the advice you originally provided and ensure that it’s still relevant and that the client actually implemented the advice. For instance, if you advised a title change to their life insurance policy to get it out of the estate, and it was never done, who is responsible? A good attorney will cause your insurance company to settle this as the regulators and courts are likely to rule against you.
For investment planning, in the original plan you likely defined their risk tolerance and investment needs, and presented them with a recommended allocation. Do you know how that portfolio is assembled today? Were your recommendations used? Are they still suitable today given all of the relevant factors to consider? This is significant whether your firm manages, oversees, or simply doles out advice for them to implement elsewhere.
Make sure that your clients’ estate plans are current and relevant. Relevance is based on facts and circumstances in your client’s life as well as changes to laws and taxes. You may never be held accountable by a court of law for failing to recommend updates to estate plans that are in obvious need of updating. But that’s a place where I’d never want to be and it’s more risky than you think. You see, if the client thinks that you are their financial planner, it is reasonable for them to assume that you’re responsible for keeping them current and relevant. You’ll be found negligent if you helped lay the plan out without ever seeing that it was properly executed and updated as needed. An aggressive counselor may find negligence in your planning services if you failed to follow up to see that all of your recommendations were implemented. A simple area where this frequently occurs would be in recommended title changes pursuant to the estate plan or the advice to place a risky rental property into an LLC for some possible asset protection.
I could go on forever about all of the things that a reasonable person may think should be a part of a comprehensive financial planning relationship. But that’s not why we started this article. We started this with my firsthand observation that many firms, including many CPA financial planning firms, do not do a comprehensive enough job starting a plan or keeping it current.
Use the fourth quarter to prove how valuable you can be by offering service that’s inherent in helping to get their entire financial house in order, and keeping it that way forever.
