Transcript

Steven Jarvis:

Hello everyone! And welcome to the next episode of the Retirement Tax Services Podcast: Financial Professionals Edition. I’m your host, Steven Jarvis, CPA. And in this show, I teach financial advisors how to deliver massive value to their clients through retirement tax planning. Really excited to have back on the show with me today, Taylor Schulty as my guest to help answer a question on this Tax Q&A Friday edition, if you missed the last time that Taylor was on the show, definitely go back and give it a listen. Taylor actually hosts a couple of great podcasts, the Stay Wealthy Podcast and the Experiments in Advisor Marketing. Or did I get, did I get the name right? Taylor?

Taylor Schulte:

Yep. Yeah. You got it right, Experiments in Advisor Marketing, a bunch of nerdy marketing stuff for financial advisors.

Taylor Answers A Question He Was Asked On LinkedIn [1:22]

SJ:

Oh, I love the marketing stuff. I’m learning so much about marketing these days. It’s been great. So, Taylor, welcome back! It’s great to have ya. The question that we want to talk about today actually came as a result of a post you’d put on LinkedIn about the show. And so it was really, it was specifically directed at you. And the question was, ‘I would like to know if Taylor’s ever recommended a Roth conversion, but then had a client decide not to do it because their tax preparer didn’t recommend it. How do you handle that situation?’

TS:

Yeah. I love this question. And as I mentioned to you, we had this situation late last year. The caveat is the client ended up actually moving forward with the Roth conversion, even though the CPA did not agree with us. So, a little bit different of a situation, but we can still talk through some of this stuff. And I actually found, I went back and I dug through my emails and I found the email from the CPA. Just thought that I’d read it because this CPA was very much in disagreement. He led off the email in response to our email to him reaching out, which I’ll explain our process for dealing with CPAs, but he wrote, ‘I am in absolute disagreement with your tax planning proposal. And this seems to have been a trend in your industry for the past few years, Tom (Tom’s our client, he’s one of our larger clients) Tom was in one of the lowest tax brackets he could be in for 2019, and you are wanting him to pay 22%. Why? In addition, you’re ignoring California’s tax rates of 9.3% on the same income. I can see maxing out the lowest tax brackets, but to blow past that is ridiculous.’

So just for some context, um, at age 72, this client is projected to have gross income, of right around $200,000. So after deductions he’s to be at the very top of the 22% tax bracket already. So, you know, just like a very very common situation, a great candidate for Roth conversions. Client is even charitably inclined. So even, you know, pairing some donor advised fund contributions, in addition to the Roth conversion is a great situation for him. So that was the email that we received in response to our tax proposal.

SJ:

Yeah. Let me pull a couple of things out of there because part of the question is, okay, how do you handle the CPA? And so maybe just for context for the listeners, what’s the timing and what does that initial communication look like? Are you reaching out in March as they’re trying to do tax preparation and saying, ‘Hey, don’t forget this’? Or was this earlier in the year, as you’re talking to Tom about it? What are you sending to the CPA to even make them aware of this?

TS:

Yeah. So, here’s our exact process – we meet with our clients during the month of May and October. So May is just after tax season. And then October is just before the holidays. So we have your stereotypical surge meetings in May and October. In our May meeting, we collect client tax returns, we do our tax analysis. And then we use that meeting to just start to introduce some of the tax planning opportunities for that given year. So we don’t really put numbers to anything we say, ‘Hey, it looks like, you know, a potential Roth conversion, you know, something we’ll recommend this year. Here’s what a Roth conversion is just as a reminder.’ So just kind of high level, here’s some things that we might be doing later in the year. And then in October, when we have a much clearer picture of their tax situation, that’s when we put actual numbers together and formalize our tax planning recommendations or proposal for the client.

TS:

And after talking through that with the client, as they’re kind of nodding their head and say, ‘yes, this sounds great.’ We say, ‘okay, from here, we’re going to go to your CPA. We’re going to help validate this recommendation, make sure that we aren’t missing anything and make sure he, or she is on the same page. If they’re on the same page, we’ll come back to you, we’ll finalize and then we’ll implement this thing.’ So in this situation, it was just after our October meeting and we sent the proposal to the CPA and that was the email that we got back. So, in this situation, now sometimes CPAs aren’t on board and we have to, you know, have a hard conversation.

SJ:

So, the email you sent to the CPA, is the client included on that? And like what level of detail are you sending to the CPA? Because you made it sound like to the client that you want to get the CPA’s input and kind of their approval. So, are you giving them some room to give input and that’s how strong of a reaction he gave? Or maybe help me understand that a little bit better.

TS:

Yeah, our goal is to be in the driver’s seat. We’re not really going to the CPA to like get their opinion on it, but you know, the CPA is signing off on the tax return, right? They’re filing the tax return. So we want to make sure everybody’s on the same page here. And we also want to make sure that we aren’t missing anything, especially with new clients too, right? You know, there might be something out there that we just don’t know about yet. We’re not really going to the CPA, asking for permission or asking for their input. We’re more saying, ‘Hey, we uncovered this opportunity. Here’s what we’re seeing. Is there anything that we’re missing?’ You know, and maybe we say something along the lines of like, is there anything that you want to add to this? Now this situation is a little bit unique because the client kind of took it upon themselves to go straight to the CPA and say, ‘Hey, here’s what these guys are recommending’. And then that’s when we got this email back directly from the CPA. So we hadn’t really had a chance to formalize and send our proposal to the CPA yet for whatever reason, the client kind of jumped the gun there. So once we received that email, then we were able to go back to the CPA and kind of lay out in more detail what our proposal was still, you know, what it really was. Now that didn’t help the situation, which I’m happy to expand on as well.

What Led Up To This Awkward Situation With The CPA [6:20]

SJ:

Okay, so, in this situation, you meet with the client in October, they’re super excited about the idea. And so before you even have a chance to reach out to the CPA, they’ve gone and said, oh great news, ‘Mr. CPA, Taylor, my great financial advisor over here has got this all figured out for me.’ And then… was this a CPA you’d worked with before, or is this the first communication you’ve ever had with this person? And they’re right out of the gate; I absolutely disagree with everything you’re doing.

TS:

Yeah. We had not had a chance to work with the CPA yet. This was a relatively new client that was finally a candidate for tax planning. And it was just one of the CPAs that we’ve had a hard time getting in touch with, and kind of building that relationship with. So this is like the first time where we had an actual, you know, impactful tax planning situation, reaching out to them to try to partner on this thing and work together as a team. And that’s the response that we got. And I think, you know, and maybe you can chime in here. Like I think sometimes CPAs do get caught off guard. Like maybe this should have been their job to bring this up. And they didn’t for whatever reason, and now all of a sudden, the new financial planners in the picture and they uncovered the opportunity. So, I think sometimes they, they immediately go on the defense, especially when we haven’t had a chance to like build the relationship and build the rapport first. They don’t know who we are. We don’t really know who they are. So it kind of, everyone just kind of goes into defensive mode immediately

SJ:

Yeah. Yeah, I think it is tough when, and it sounds like you have a great process in place that just unfortunately got circumvented this time. But when that idea is sprung on the CPA and I mean, you weren’t there, you don’t know exactly how the client presented it. They probably had the best of intentions about how they were relaying this strategy, but maybe key pieces of it didn’t get relayed correctly or weren’t interpreted right by the CPA. And I can almost guarantee you that at some point, that CPA has had a bad experience with a recommendation a financial advisor has made. I say that really confidently because I talked to advisors who will in the same sentence, tell me they don’t do any tax planning – and then specific to our conversation today – they don’t do tax planning, but they’ll do Roth conversions with clients. And if you don’t think a Roth conversion is tax planning, there’s a good chance that you’re not doing it right.

TS:

Yeah. Yeah, and because of this situation, it’s now actually part of our workflow… when we have a new client, there’s a new CPA in the picture. My lead planner will make an effort to reach out to that CPA and have a conversation with them. And just talk to them about how we approach financial planning, how maybe we’re a little bit different, how we approach tax planning, the types of tax planning that we do, the timing of all that stuff. So that when, and if a Roth conversion comes up or a QCD or a donor advised fund or whatever it might be, it doesn’t totally catch them off guard. And it’s great when we connect with that CPA and they’re on the same page and take a similar approach to tax planning, and now we formed that relationship, and now we avoid this situation altogether. So, you know, I will take some ownership here for sure. Like we probably could have done a better job earlier on in the year, communicating with that CPA, this just happened to be one of the CPAs, you know, it was hard to get a hold of.

SJ:

I mean, good for you for taking that extreme ownership standpoint of what could I have done different? It sounds like you’ve got some, some things in your process now to make sure that you’re doing everything you can going forward, but specific to this situation with Tom and his tax preparer. So, you get this email that in no uncertain terms is telling you that you’re basically you’re wrong and you don’t know what you’re doing. What’s your next step in that situation?

How Did Taylor Handle This Combative COI [9:25]

TS:

Yeah, honestly, you know, it’s one of the situations where you get this email back from a CPA that you don’t know, and it’s a relatively new client. This client has been working with the CPA for, uh, at least 10 years, if not longer, right? So, we’re the new person here at the table. And so, the first thought is, ‘oh, no! Like what’s our client going to think here?’ Like that the CPA is essentially saying, we don’t know what we’re doing. You know, what’s going through the client’s head right now. And so what we did before responding to the CPA is we reached out to our client. We actually had him come into the office. So we could just sit and just have a conversation, kind of regroup on this thing and shared more about, you know, our rationale behind it. Try to get a feeling for him.

TS:

We said something along the lines, like, ‘look, you know, we’re not here to step on your CPA’s toes. We know you’ve had a good relationship with them for a long time. This is our approach. And not everybody agrees with our philosophy and that’s totally okay.’ So, kind of regroup with the client, got on the same page. He gave us permission to respond to the CPA with our train of thought as to why exactly, you know, we’re proposing things this exact way. So we went ahead and did that. So, we replied to that email, you know, a really long in-depth email that, you know, I have a copy of it here in front of me. That still didn’t change the CPA’s mind, he called the client, you know, said, we’re crazy, we don’t know what we’re doing. In the end, we were high-fiving in our office because our client in the end said, ‘you know what? I’m going to side with you guys on this one. I’d like to go ahead and move forward with the Roth conversion. I’ll talk to Steve, the CPA, come tax time. I won’t even let them know right now, just process it and I’ll deal with him come tax time and let them know what we did.’ So, it felt really good just to, I don’t know, like, win over the client, I guess. The client seemed to put a little bit more faith and trust in us, in that situation, even with some of the strong words coming from the CPA. So, I just felt like, you know, we did our job communicating and handling the client, and probably a client forever after all this.

SJ:

So, from your perspective… I mean, if they didn’t work with the CPA for 10 years – just in the little bit you’ve told me – I can make some guesses at why they might have sided with you or the CPA, but what do you think made the difference, that they ultimately went with your recommendation?

TS:

I think it was just explaining the rationale behind everything, right? Like he’s an extremely smart, guy’s an engineer that worked for Qualcomm for over about 30 years of his career, really, really smart guy and understands these things. So, rather than attacking the CPA to say the CPA doesn’t know what he’s doing, this is crazy. Just providing rationale and actual numbers behind our proposal and giving him the information that he needed to make a decision there. The CPA was more combative, right, and didn’t really share any specifics as to why it was a bad idea. It didn’t really put any numbers to anything just basically said, ‘you don’t have a crystal ball. You don’t know what the future is. What are you doing putting Tom in a higher bracket?’ So, yeah, I think there’s just maybe the way we approached it, not as defensive, very, very confident in our recommendation and just, I think the way we handled it.

SJ:

Yeah, it can be really hard not to get defensive. And I mean, you know, really good job on your part of when, when someone else initiates that, that you don’t also take that same response, because it can be really easy when somebody sends you this really strongly worded email – that your client also sees – telling you how wrong you are, to just skip right to ‘no, I’m smarter than you’. And use that same type of approach, but laying out the details so that the client is the one that ultimately feels empowered to make the decision, because really that’s what great advisors should be doing is empowering their clients to make decisions.

TS:

Yeah, and one thing I want to say here is that in this situation, and we told the client this that a Roth conversion is not going to make or break their situation like this. This client has way more money than he’ll ever spend. So it’s not like he needs this money. It’s not like he needs this money to go into a Roth IRA. He doesn’t even have heirs so it’s not like an inheritance thing or a legacy planning thing. So, you know, we looked him in the eyes at Tom, like, you don’t need to do this, this isn’t going to make or break your situation. We’re just showing you an opportunity here to optimize your retirement plan and maybe pay the IRS less money over, over your lifetime here. So, do with it what you want but like, here’s the opportunity. Here’s all the information now, you know, make an informed decision. And that’s kind of the, the position we like to be in, which is we want to show you what’s possible, right? In your situation, and then let you make a decision because I always say, there’s the textbook answer, and then there’s your answer. And as long as their answer, isn’t putting their retirement plan in jeopardy, I’m okay supporting that.

SJ:

You know, you made the comment that the CPA comes back and says, ‘well, you don’t have a crystal ball. How can you make this recommendation or something to that effect?’ And I would imagine that part of the reason Tom is siding with you is because you had probably already acknowledged to him that, ‘Hey, we don’t have a crystal ball. We can’t guarantee what’s going to happen in the future.’ but, and whatever your, your logic was of, you know, based on where rates have been in the past or your income currently, or what you’re expecting the future. There’s, there’s a lot of things you can look at to say, ‘while we can’t guarantee the future, we feel confident that right now you are in a lower tax bracket than you most likely will be in the future.’

TS:

Yup. Yup, and as you know, and this situation especially, even if the client will be in the same tax bracket, right. We have a growing tax liability that we’re dealing with, you know, Tom, would you rather pay, you know, 22% on a million dollars today? Or 22% on $2 million later on? And so, this idea of a growing tax liability as well, even if tax rates aren’t going to change is something that we’ll talk about with clients.

SJ:

Yeah. Yeah. There’s so much emotion tied to money in general, but especially to taxes that making sure the client knows they have options. If tax rates stay the same, you know, the, yes, the total amount that they pay taxes on is going to grow, which means they’re going to pay more taxes, but as we get into the time value of money and lose ourselves in those calculations… sure, they end up in the same place, but you’re giving them an opportunity to take control over what they’re doing and to decide what’s most impactful for them, because some people very much would rather pay what they can now and not have to worry about and have that risk of what the IRS is going to do later. And you’re going to have clients who are going to say, ‘Nope, I don’t even care if I pay more later, I’m still going to wait as long as I can to write any kind of check to the IRS.’ Getting really clear on that. That’s definitely important.

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How Financial Advisors Can Avoid Conflict With Their Clients’ COIs [15:52]

SJ:

Taylor, any other, kind of takeaways from this experience as far as how you work with CPAs when maybe not everyone’s on the same page?

TS:

No, I just think it’s really important to just kind of reiterate kind of our process going forward to have that conversation with the CPA earlier, kind of form that relationship first. So you don’t catch CPAs off guard and just really think about your client being in the middle of you and a CPA, you know, two professionals in their life. You know, we want to make this a good experience for our clients. So just really thinking through this and being thoughtful, I think sometimes as financial planners, as good financial planners and tax planners we uncover these opportunities, and we get really excited about them. We present them and we want to implement them, but we don’t really think about all the different, you know, people involved in the different pieces. And so, just be really thoughtful and intentional about it so that we do keep these relationships. The last thing that we want is this, Steve, the CPA to not like us, right? Or, you know, have animosity towards us. We want to be on the same team here because we care about our client. So, even though there might be some differences in philosophy, I still think forming that relationship, having good communication, setting expectations with the client goes a really long way in these situations. And again, there’s a lesson learned in there for us, for sure, and something that we we’ve made a change going forward.

SJ:

Yeah, that’s great. I mean, I will say from a CPA perspective that a lot of people go into accounting because at least to some degree they enjoy the problem solving aspects of money and accounting and tax laws and things like that. And so, I love your approach there of building that relationship before it’s a specific client’s situation, because tax preparers are very compliance focused, and they, just like advisers, they care a lot about taking care of their clients. So, I bring all this up to say that if, if you can more generally start a relationship and bring up some of these concepts when it’s not specific to a client and just get their wheels turning on, ‘Hey, here’s the kinds of things we like to think about.’ When it’s not specific to a client, they’re way more likely to be open-minded about it and really think about, okay, what are all the different possible alternatives, as opposed to when it comes to a specific person that they’ve had a relationship with for 10 years and you’re coming out of – for them it feels like – nowhere to say, ‘Hey, here’s the strategy that okay, Mr. CPA, you don’t ever do, but we do all the time. You should just trust us on it.’ Which that’s not how you word it, but that’s how they’re going to hear it.

TS:

Yeah, and one thing that’s hit me too, and actually this is an improvement we could make, you know, when a new client joins us and there’s a new CPA in the picture, you know, how about this, Steven? What if we called the CPA? And we set a meeting with them, and instead of telling them how we approach things, what if we just said, ‘Hey, we want to learn a little bit more about you and your practice and how you operate. Do you mind if I ask you some questions? Great! What do you think of Roth conversions? What’s your process for recommending or implementing Roth conversions, charitable giving? What kind of strategies do you typically recommend to your clients? Right? QCDs, is that something that you like dislike? How do you…?’ Whatever, and just ask questions and gather information, and now we have all the information from the CPA and we have a little bit, you know, a better idea of how to approach things going forward. So that might be a better way than saying, like, ‘here’s how we do it, you know, get used to it.’

SJ:

Yeah, and when you have a new client is a perfect time for that. I definitely recommend to advisors that they’re reaching out proactively and talking to CPAs, that they’re looking through there, hopefully they’re recording that in their CRM of who their clients’ CPAs are. But when you onboard a new client, is a perfect opportunity for that to say, ‘Hey, Mrs. CPA, Tom’s a new client of ours, I see that Tom has worked with you for a long time. We’d love to sit down and learn from you, the types of things that we can do to make your job easier, because there are a lot of tax impacts of financial planning.’

TS:

Yep. I love it. Yeah.

SJ:

That’s great. Well, perfect. Let’s transition to the action items then, so we can give everyone something they can walk away with, because I think that right there, is a perfect starting point for action items. Anytime you have a new client, that should be part of your onboarding process with the client to understand who their tax preparer is, and then have a process for building that relationship before you’re trying to implement any tax planning strategies.

TS:

Yeah, and another action item I would suggest kind of on top of that is we have, what’s called a third-party authorization. So when a new client joins our firm, we get the name of their professionals, including their CPA. And we have them sign this form, giving us the authority to talk to their CPA on their behalf. So, now we can share actual numbers and talk about their actual financial plan. So, if you are doing a lot of tax planning and collaborating with CPAs, put together that third party authorization form and have your client actually sign it. Now you have that two way street where you can actually communicate with the CPA.

SJ:

Yeah, the more you can have based on systems and processes, the more consistently you’re going to apply these things and the more effective they’re going to be. So, I love that, that’s great. From this experience, Taylor, any other action items to recommend to the listeners?

TS:

Yeah, I would just say, you know, maybe lastly, just think about your process for recommending Roth conversions. Set those expectations with your clients. In fact, there’s another situation we dealt with last year as well and we kind of just failed to let the client know what our process was. ‘Hey, first, we’re going to introduce the concept then we’re going to make our recommendation, and then we’re going to take it to the CPA to validate it. And then we’ll come back here and implement it.’ And we didn’t really lay all that out. So, set those expectations with your clients so they know what this process is and what the next step is to avoid any confusion or any situations like this. And just get ahead with the CPA as well.

SJ:

That’s awesome. I love that. Well, let’s wrap up right there, Taylor. I really appreciate all of your insight and you being willing to share this experience that you had. There’s a ton to learn from that.

TS:

Thanks so much, Steven.

SJ:

Really love having you here. Taylor, we’ll have to do it again sometime. Thanks for listening everybody. Good luck out there, and until next time, remember to tip your server, not the IRS!