Read The Transcript Below:

Steven (00:52):

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 with me today on the show I have Patrick Lonergan, a financial advisor who has built pretty much his entire practice around taxes and an advisor. I’ve had a chance to spend time in person, which is also always a bonus to me. So Patrick, welcome to the show and it’s great to see you again.

 

Patrick (01:14):

Yeah, Steven, thanks for having me. I appreciate it.

 

Steven (01:17):

We had the chance to meet at FinCon in New Orleans this year. I think next year it’s going to be in Atlanta. For anybody listening who does content creation of any kind, it’s a great conference. There’s a pretty consistent group of financial advisors that come, so we have a lot of fun when we’re there, but it’s also lots of great content. Patrick, I mean, what were some of your takeaways from the conference before we dive into the tax side?

 

Patrick (01:38):

Yeah, I think there’s a few. First, it’s just the network meeting people like you and connecting and hearing what’s working and what’s not in the industry is always a lot of fun and just how you’re running your practice and business in general is great. And then just getting insight from people that are out there doing it, having success in specific areas, whether it’s YouTube, blogging, podcasting, there’s just lots of really good information you can take away. It was a good time. I’m looking forward to next year. I’m already, signed up.

 

Steven (02:07):

Well, I certainly appreciate it. That’s what you focused on. I promise I didn’t see the question, but it fits right into why I was so excited to have you on the podcast, which is that I also love learning from people who are doing things in practice and I love being able to share that message with my audience so that it’s not just theory because even though I work with clients, I’m still not a financial advisor. There’s a difference between what I do and what most of my audience does. But as we got talking at FinCon I learned more about what you do, and you mentioned it before we even hit record today, that it might not have been your original intention. You didn’t just grow up thinking Someday I’m going to be a financial advisor that leads with tax planning, but this is how your practice evolved. So tell us a little bit about what your practice currently looks like and then how this progression happened for you.

 

Patrick (02:50):

So currently our practice is focused on entrepreneurs that have a net income of a million dollars and up. And really they don’t feel like anybody in the marketplace is doing tax planning. They feel like a lot of their advisors, the team they work with is really good at collecting the data and doing the compliance. But nobody’s saying, Hey, it’s July. Let’s look at the trajectory you’re on and figure out where you’re going to be from a tax perspective and then let’s match your cashflow up with that and then figure out how to fund strategies that will reduce your tax bill. And it took a minute for us to figure this out. I’ve always been an entrepreneur, dropped out of law school, bought some real estate, and then I had financial advisors coming to talk to me to show me some cool strategies with the mutual fund. And just always my main concerns were how do I grow my business and how do I manage liquidity? And so when I got into financial advisory after the real estate market melted down, it just really was our focus to serve the entrepreneur and figure out what needs they had and show up and add value there.

 

Steven (04:00):

I liked how you described your approach to that where it’s okay and tell me if I’m interpreting this wrong, but it’s really, let’s start with low-hanging fruit that’s necessary for every business. So I mean, any entrepreneur who’s making a million dollars in net income has to pay taxes, and geez, unless they’ve got this really dialed-in subscription model, they probably have variable cash flow. And so we’re starting with a real necessity that they’re most likely not getting from their tax preparer. Their tax preparer is probably doing the bare minimum of helping with the compliance. Maybe they sent them vouchers for estimated payments that probably did or didn’t make most likely probably didn’t make sense for the next year. And so you’re coming in as the starting point, Hey, let’s pick the low-hanging fruit, take care of something, and immediately demonstrate that we can add value. But you tagged on the end there, that might be where you start, but then you’re using that cashflow plan that you’ve set up to say then what are strategies we can fund that I would assume, with the goal of minimizing their tax liability. So talk more about how that transition happens and what kind of things you’re looking for.

 

Patrick (04:58):

Yeah, absolutely. So we’re a huge proponent of not just lowering the tax bill but also building wealth. So I can go buy a bunch of stuff and get a tax deduction, but if I buy a depreciating asset, my favorite is like, oh, go buy a G class. You get a tax deduction and it’s like $200,000 on a depreciating asset doesn’t make a lot of sense to me. And our strategy never really revolves around that. So we’re really looking at how can we take free cash flow. And that’s something we spend a lot of time looking at. Clients will sometimes be like, I want to get my tax bill to zero. And it’s like, well, that sounds great, but we’re always going to have to pay tax on what our lifestyle expenses are, that if we’re spending $300,000 a year, 30 grand a month, we’re going to pay tax on that much money.

 

(05:44):

The rest of it we can work on reducing, but really we’re looking at, okay, here’s our free cash flow and there are some strategies where it doesn’t take a lot of investment If we make right entity selection, there’s some tax benefits there on payroll tax, that type of thing. But then we start looking at, okay, where can we put our dollars where we can start building wealth? And that could be in retirement strategies, cash balance plans, that type of thing that really help us minimize the tax bill without screwing up the global cashflow because then we have this thing called the cashflow calendar and we put on there everything from the home remodel to business investments to tax strategies to make sure that we are always living in this margin of safety if we, let’s call that band somewhere between 500 and a million dollars of cash.

 

(06:34):

And it just depends on the entrepreneur on where that margin of safety needs to be, but anything above a million dollars in that example would be inefficient. We need to get those dollars to work. Anything below that threshold is a danger zone, and so we just don’t want to run somebody out of business because they ran out of cash. So we’re projecting forward the tax strategy and everything else they have going on in their lives to make sure it fits in that threshold. And it just gives the client a ton of peace of mind like, okay, cool. I know I can execute this strategy without running out of money.

 

Steven (07:03):

Patrick, I like that every time I ask you a question about taxes, you’re tying it back to cash flow. Because I’m a tax guy, I talk about tax all the time, but I’m constantly trying to reinforce that we need to make good life decisions and then figure out the most tax-efficient way to do them. People like saying, don’t let the investment or the tax tail, the investment dog or however you want to say it, but it’s so natural for you that underlying this is, yes, we can minimize taxes over the long term, but that’s no one’s primary goal. Or if it is, we probably need to help ’em readjust that because sure, we could do some things that get taxes to zero this year, but is it worth it? Are we really building wealth? I like how you talked about tax savings and wealth building together because tying our tax strategies back into a cashflow calendar, I love that that concept to me is both a great way to explain to a client and something that we can keep coming back to and build from because there are going to be years where, hey, maybe there’s not anything exciting from a tax standpoint that we can do this year.

We still have this cash flow calendar that we’re working on together to have that foundation.

 

Patrick (08:02):

Yeah, and one thing you said that I think is critical is it can always be super exciting to talk about the financial aspect and all the different strategies available to us, but really our planning all starts with what’s most important to you? What are your goals? What are you trying to accomplish? Because at the end of the day, I can come up with a fantastic tax strategy or financial strategy or debt reduction strategy, but if it doesn’t align with your goals and help lead you to we’ll call it a more fulfilled life, then what’s the whole point? Right? Let’s do this for a purpose, not just to have a bank account with a hundred million dollars in it. At the end of the day, I would rather see the account balance be zero and we live a full life over here with great relationships, experiences, growth, contribution, health, that type of thing, versus nobody likes us and we got a bunch of money. So I think you made a critical point that we always start with that and then we build strategy around it. 

 

Steven (08:59):

Having a bigger goal than let’s stick it to anti-IRS is really important for long-term tax savings. So, Patrick, you talked from a general sense of, hey, we start with this cashflow planning that we move into strategies that might be relevant. Now there’s been a few different things that have come up recently online on podcasts about value versus volume. And so I would love for you to speak to, because I’m sure you have a whole laundry list of things you could do with each of your clients, and as you look across your entire book of clients, there probably is a whole spectrum of things you have done, but as you look at a specific client, what’s that approach look like? Okay, great. We’ve established our baseline cash flow calendar. How do you decide the order you’re presenting them in? How many are you presenting at a time? Is this something you take care of in the first 12 months you work with them? Or this is a 10-year project? I mean, what does that approach look like?

 

Patrick (09:47):

Yeah, that’s a great question. Really, every client starts off on the same trajectory, and we meet with all of our clients monthly. We charge fairly healthy monthly fees. Most of our new clients are somewhere between 5,000 and $6,000 a month in fees. They’re paying us now. Sometimes we’ll offset that with the AUM, but the reason they’re paying us so much is every client starts off with the same six meetings. So we have data meeting where we’re collecting all the data, and then there’s a few meetings around data really. We get to the data confirmation meeting where it’s like, here’s your cash flow and your balance sheet, everything correct there. Yep, that all starts looking good. Then we have key observations, so here’s everything we see going on in your world. Then we have a solutions meeting. So the key observation is really all of the problems.

 

(10:32):

We don’t want to call it the problems meeting, but here are all the problems we see in the five areas of planning that we look at, and the five areas are tax, legal, investments, insurance and cashflow. So we’ve got observations in all of those areas and really we’re leaning on some planning partners in all of those. We’ve got some CPA partners, some legal partners, some real niche tax strategy people that we’ll go and talk to and just see what opportunities they see. I feel like we’re very wide but not very deep. We know enough to be dangerous, so we lean on experts in different areas. And then once we get through the solutions meeting, we’re really looking at a scope and a schedule that aligns back to the client’s goals. So here’s what the next 12 months are going to look like. Here’s all of the work we have to do, and that could be everything from we’re going to help get the estate plan lined up if that’s a key priority.

 

(11:21):

And then obviously every July looks the same for every client. We’re estimating where they’re going to be for income and what the tax liability is going to be and then start looking at tax planning there. But it’s really hard from our perspective to uncouple tax strategy with those other four areas of planning, legal investments, insurance, and cash flow. So we see all these things working together to create an integrated and coordinated plan. So that’s really how we work on it, and it’s going to be dictated by the calendar and when deadlines are due. And then what the client’s goals are is really how we’re structuring our scope and our schedule for our clients.

 

Steven (12:00):

Patrick, you mentioned the fees you charge, and I remember you talking about that when we were together in person. So since you opened the door on that one, especially since I’m not an advisor, I’m always curious about this because, in the CPA world, most people charge an hourly rate. No one really talks about what the hourly rate is, and no one complains that the biggest firms are charging a multiple of the smallest firms. It just kind of happens. And so it’s been fascinating to me in the financial planning space, how much fighting there is about how people charge and what an acceptable fee is. Again, not an advisor myself, but the conventional wisdom would say, wow, Patrick, you’re charging so much more than the average advisor, which for me, honestly, I love to hear when it goes along with such a clearly articulated value proposition because we can take the cliched statements of price is only an issue in the absence of value, and as you describe, Hey, here’s the things I’m doing for someone on a monthly basis and here’s what the calendar looks like to me, it totally makes sense why you didn’t just say, okay, well here’s the average free and I’m going to charge that because you’re doing something significantly above average.

 

(13:02):

What I’m curious about, as I say all that is how has that evolved over time is you rolled back five years or 10 years, how long has your fee looked like that? What was that process for you? Where was the point where you said, you know what? I need to be charging a lot more because of all these things I’m doing?

 

Patrick (13:16):

Thank you. So I think the biggest opportunity for us, the reason we can charge those fees is we went back and did the math over the last two years and figured out what we saved our clients on average. And we’re at $280,000 a year of income tax savings, not deductions but savings. And so when somebody pays us $72,000 and they save two 80, it’s probably the best investment they made every year. And typically when we work together, that’s an annuity. Like every year they’re saving those same dollars and we’re just helping continue to execute on that. And it’s interesting, it’s hard to save clients who are making 250 to $500,000 a year. They’re not making enough money to charge enough, but we’re still doing the same amount of work. So we found there’s sort of a little bit of rare air the higher the net income gets, the more we can save them and the more valuable we are.

 

(14:10):

So that’s I think really the key driver in the value side of things. And then just a quick point on monthly fee versus hourly fee. I don’t like the hourly fee because it disincentivizes the client to call us a hundred percent, like, please use us for every single thing you’re doing. You’re buying a washing machine. I’m exaggerating, but call us, figure out if you should finance it or pay cash the answers to pay cash. But we like that model because it just encourages a ton of engagement. We used to do planning on a one-off fee basis like, oh, we think this will be about $15,000 of work. But really I think this comes from, I’ll say the world you live in regards to the flat fee planning type of thing. I think there’s some real value in that. I believe I listened to your brother on Michael Kitces’ podcast and it really shaped the way I thought about planning.

 

(15:05):

And I’m like, I sort of love this idea. It takes all the conflict of interest out of the equation. Let’s just have a flat fee for the value we provide and work really hard to provide more and more value to a unique client. And so that’s really how we arrived there. We were charging 5, 10, $15,000 planning fees, and then we were trying to, after the fee was over, have AUM investment in maybe some insurance products, that type of thing. I grew up, I started in the insurance world, so we like to make sure that that box is checked too, but that’s really how we started and how we evolved to where we’re at today.

 

Steven (15:44):

Well, I appreciate you sharing your perspective. It’s always helpful to see how people think about this, and I totally agree with you on the hourly versus monthly. That’s why in our firm, we don’t charge hourly fees. Basically, we have an annual relationship that we’ll bill monthly at times, but we want that same engagement of I don’t want somebody to feel like every time they pick up the phone or send me an email they’re going to get an extra bill. We structure our fee in a way that 99% of what we come across is going to be covered every now and then and for us the only exceptions when we have a client who comes to us who needs help amending a tax return that we didn’t help them originally on. So there’s been a handful, literally a handful of times that we’ve said, you know what?

 

(16:20):

This is outside of the scope of what we normally do. We are going to charge you for this, but 99% of the time our fee covers everything, and then we have that higher engagement. So I love that that’s your approach. I do want to circle back and especially since this is a tax-focused podcast, I don’t want to let you off the hook too easily. You said that your average annual savings and you described as an annuity, so this is every year average annual savings, tax savings, $280,000. Talk a little bit about more of just maybe top three areas that you’re seeing and help us with the math of how are you getting to $280,000 of savings on an ongoing basis?

 

Patrick (16:55):

That’s a great question. So I think the lowest-hanging fruit that we see is the QBI deduction right now. And part of the problem with some of the CPAs that we work with is they’re not looking at net income and wage before the year end, and you can’t do anything about it after January 1st. And so right now we’ve got a client who’s going to make about two and a half million dollars this year. He’s got three employees wages were going to be about $150,000 in the business. He was hardly paying himself anything. And I’m like, we’re leaving a ton of money on the table here. We have to raise your wage to the way the QBI deduction works. We can get that number to be the same, and it’s like, let’s not leave those dollars on the table. So that’s a huge one, and that doesn’t take any investment.

 

(17:42):

It’s just good administration and bookkeeping. So that’s one that we really go after. And then second, we find a lot of times we have business owners and then they own a bunch of real estate and their spouse might be a real estate professional. It’s shocking how often the depreciation, there’s no cost segregation studies done, that type of thing that can help accelerate a bunch of those losses, especially with the tax cuts and Job Act. You could take a hundred percent bonus depreciation and then it was 80% this year, it’s 60% next year, but it’s still a lot of money that we can use to offset income. And then there are really strategies, I mentioned this earlier, but cash balance plans. If a client has a lot of free cash flow and they don’t need it to grow their business, we think those are a great solution. Again, that can work nicely with the QBI deduction.

 

(18:29):

If we have to increase their wages, depending on how old they are, they can get four or $500,000 into a retirement plan, and then 37% tax savings. There’s a few hundred thousand right there that we saved that they were maybe just parking in a brokerage account. And the cool thing about the difference between those two is the IRS is going to fund about a third of that retirement plan because we get the tax savings that can go over there. So if I had to look at low-hanging fruit that we regularly are getting, it’s some of the depreciation QBI deduction and then cash balance plan, those are the strategies we really like to lean on to create some margin for our clients.

 

Steven (19:04):

I appreciate you sharing that. This really reinforces the value of focusing on who you serve, because for people listening who primarily work with the industry tagline of pre-retirees and retirees, people with a million dollars or more of festival assets, those people need to be served. And that’s great if that’s your niche. But if that number, and that’s part of the reason I dug at it a little bit, that number of how could you possibly save someone $280,000 a year in taxes? Well, when you work with entrepreneurs have more than a million dollars of net income, and you understand how some of these things can play off of each other. The numbers become real in a hurry. That when you understand that the qualified business income deduction isn’t just about did I have net income that especially for entrepreneurs, for the owner of a business, this isn’t just how much was my net income.

 

(19:50):

We’ve got to look at what are those factors that bolster how much of the QBI deduction that I actually get. And so now the math starts to feel a little bit more real because if all you say is, Hey, I saved my clients an average of $280,000 in taxes a year, that can feel a little clickbaity like, no, no. That’s like the people saying their whole life is the answer to everything. But that’s why we take the time to drill into these things. These numbers become very real when we can apply them to specific situations.

 

Patrick (20:17):

It really is once somebody makes over a couple of million dollars a year, and they have, oftentimes we find our clients spending caps out at about 30 grand a month. So when you think about that, they have a million dollars that they can spend on tax strategy because there’s maybe five or 600 going to the IRS, and then there’s another million dollars that they can allocate somewhere. And so that’s where the margin happens. And we have some clients that are making 15 million a year and we’re saving them a million and a half dollars in tax. That helps the number a little bit, where when we have somebody on the lower end that might be saving 60 or $70,000 a year, so there’s a little bit of offset. Not everybody falls into that 280,000 range, but it’d be great if they did. That’s how we’re doing it, and it really was almost a shocking number to go back and look at. And our clients find this, we provide a ton of value outside of just the tax savings side of things going to enforce. We get them organized. Their CPAs and legal team love us because they can connect with us and we get ’em exactly what they need and it helps.

 

Steven (21:24):

I’m glad you mentioned that at the end because that was the point I wanted to bring back as you talk about the fee that you charge, that’s for everything that you do. And I’m just bombarding you with questions about just this one sliver, which happens to be the sliver that is the easiest to quantify of, Hey, I charged you this and this is your tax savings every year, which is a multiple of what I charge you. And oh, by the way, we’re doing all these other things. And so I love being able to explore those dynamics because that’s when everyone’s winning. That’s when you’re excited to have them as a client. They’re excited to have you as a professional. This isn’t a game where it washes and everyone comes out. Even everyone’s coming out ahead.

 

Patrick (22:01):

And one thing I’d like to just acknowledge, I feel like I’m not as good as the traditional financial advisor in the context of I don’t know how to sell financial advisory without this tax carrot over here. Like, Hey, look at this cool tax thing I can do. If I just have to go, Hey, this is going to make your life better and it’ll give you some peace of mind. I’m just not that good at selling that. So I’m like, okay, I can quantify this piece over here. We’re just going to do a ton of this. We’re really going to lean into the tax side of things and show up and provide value, and we’ll do all these other things. I’m just not good at selling those other things. So I hear the traditional financial advisor go, yeah, hey, we, we’ll take your retirement account and make life really easy for you, and it’ll be 1% of your assets. I’m not good at that. So I commend the financial advisor that can do that. It’s just not in my skillset. So that’s probably a little bit why I’ve leaned into the tax side of things. 

 

Steven (22:52):

I mean, good for you for identifying what’s value to your clients and what works for you personally. In the world of podcasts and social media and online content, it’s easy to gloss over things and generalize and say, oh, this is how everyone should do it. But there’s general concepts we can all pull from. But at the end of the day, the people who do the best work for their clients, who deliver the most value, who find the most opportunity are the ones who take those general ideas and then customize the heck out of ’em to their situation, to their strengths and to their clients. So I mean, good for you for being committed to the process and continually improving.

 

Patrick (23:26):

Yeah. Thank you.

 

Steven (23:27):

Patrick, we always like to make sure we’re taking this information and turning into value, which means helping people take action. So as you think about the progression of your firm and getting to the point where you’re at or maybe even where you plan on heading next, what are actions you recommend to advisors who are interested in leveling up what they do around taxes?

 

Patrick (23:43):

Yeah, so I think one of the best things you can do is invest in yourself. And I think about the education. I’m always looking for new opportunities to go learn and develop, and I look at what you are doing. I love your tax reference guide. I love the backdoor roth. All of the pieces you have are just great tools in our tool belt. I really don’t know. I feel like if you really want to separate yourself and you just keep stacking up those skill sets and it allows you to solve a more and more complex problem, at the end of the day, if we’re concerned about a robo-advisor replacing us, there’s a problem there because we’re not adding much value. We’re not connecting with the client. And so the way I see all that coming together is just stacking all these skills on top of themselves, going out and finding what the marketplace is looking for, finding a problem that’s not being solved, and we sort of see that on the tax side, but I’m sure there’s a million other problems out there that advisors can add value to their client’s lives and go, okay, I can get really good in this arena serving this market, and we can really move the needle for people.

 

(24:51):

So I think that’s the main drivers, really just get educated. And again, this is not a paid promotion, but you do such a great job educating people. Thank you, I appreciate it. Love the newsletter, love the resources you put out. It’s great stuff. So thank you. 

 

Steven (25:05):

I certainly appreciate that. We did just release an 8606 masterclass. I think you’re referencing the guide that we put out, but to really expand on that, we recorded a whole masterclass on it. If you haven’t had a chance to check it out, go out to retirementtaxservices.com. That’s available. This episode is releasing on New Year’s. Happy New Year’s, everyone. I want to throw out this caveat, maybe not caveat, reminder as Patrick’s talking about the importance of education. I also want to make sure that on your list of action items is that tax planning becomes a year-round conversation because it sounds like you’ve already done that, Patrick, and I’m sure that’s part of where the value’s coming from for your clients. You specifically talked about July, but don’t let the tax deadline, don’t let April 15th be the only guiding star for when you talk about taxes. In fact, all of the people I know who are delivering massive value around taxes are advisors who can make this a year-round conversation so that we’re having proactive and intentional conversations outside of the tax filing itself. So whether it’s taking the master class on Backdoor Roth contributions around 8606, getting education, incorporating this into your client meetings, making sure you’re getting every client’s tax return every single year, these are things that go on your calendar throughout the year, not just once a year.

 

Patrick (26:16):

Absolutely. And to just piggyback on that, you’re right, there’s April, there’s July for us, there’s September, October, December 31st. It’s like we’ve got all these tax deadlines that we have to be constantly doing work for our clients, and they appreciate it brings a lot of value.

 

Steven (26:33):

Well, and since you mentioned it earlier, just again, a reminder, the RTS desktop tax reference guide is something I always have printed, and laminated on my desk. It is 2024. Now make sure you go out and get the 2024 version downloaded. We have this fun couple of months where we have to still care about the 2023 rates as we get the filing done, but then onto planning, we want to be focused on planning. So Patrick, again, it was so fun seeing you in New Orleans. Thanks for taking the time to come on the show. Really appreciate you being here.

 

Patrick (26:57):

Yeah, Steven, thank you so much again. I appreciate you having me, and I appreciate all the good work you do for the industry.

 

Steven (27:02):

Thank you to everyone listening. Until next time, good luck out there. And remember to tip your server, not the IRS!