Transcript

Steven Jarvis:

Hello everyone! And welcome to the next episode of the Retirement Tax Services Podcast: Financial Professionals Edition. I am your host, Steven Jarvis, CPA. And in this show, I teach financial advisors how to deliver massive value to their clients through tax planning. Really excited for my guest on the show today, not only is he prolific in the financial planning industry for a couple of different things that we’ll get into in a second, he’s also been growing his practice this year and seen a lot of success by including tax planning. So my guest, Derek Tharp is a certified financial planner and founder of his firm Conscious Capital. He’s also a lead researcher at the Nerd’s Eye View blog as part of kitces.com. And he’s an assistant professor of finance at the University of Southern Maine. Derek, that’s quite the list! Welcome to the show.

Derek Tharp:

Oh, thanks for having me. I’m a big fan of what you guys do. So, really excited to be here.

SJ:

I certainly appreciate you saying that. We definitely love hearing that, what we’re putting out both through this podcast and through The Perfect RIA podcast is having an impact on advisors. And as we were getting ready for the show that’s kind of where we started. Your firm’s been around for a few years now, but this summer you really made an emphasis on growing your firm. And so, so talk a little bit about kind of, what led to that mindset shift and then where you’ve been seeing really that positive feedback from your prospects and clients..

DT:

Sure, yeah. And for me, part of it was just life happening in terms of when I initially launched my firm and then my wife had some employment changes that led me to take on a full-time role at kitces.com initially. I had my practice, some friends and family that was there that kind of stayed through, uh, graduate school, uh, completion there, getting my PhD in financial planning, Kansas state, going on to getting my first academic role at the university of Southern Maine, where I’m the program director for their CFP program there. But, yeah, just in time actually kind of finally feeling settled, you know, finally starting to feel ready to put more time and effort into my practice and really, actually The Perfect RIA and has been really big, a big influence on me actually going all the way back to… I was doing the behind the scenes editing for the blog posts, uh, around the podcast for Matthew’s, uh, kitces.com/seven episodes.

So, that has always had an impact on me and his thoughts around guardrails and using that with clients and communication, that it’s always been something that’s kind of stuck with me and I’ve been giving thought to. And what I learned about The Perfect RIA, somehow I missed that for, for a while. But then I really dove into the content, was there, you know, it really gave me some inspiration to go out and try and grow my practice and think more strategically about what I’m doing. And for me, it’s been a lot of education just doing educational events and, uh, through senior colleges in the area, that are devoted to students over the age of 50 and really just putting good educational content out there versus mouth is a program. Their membership program has lots of good resources that may not be the final product I think that you want to present, but it gives you a nice foundation to present on lots of different topics and be a good resource. And doing those types of courses have been good for me. And tax planning has been a real strong emphasis in both kind of what I’m teaching in class, but then also moving into the actual presentation with my clients, once they are prospective clients, once they request that I put a plan together for them.

SJ:

Maybe we’ll circle back around to how you share this with your students on tax planning, but let’s start with the prospecting process. What are some specific things related to tax planning that you’re bringing up and how do you communicate that in a way that those prospects are seeing the value and saying, “yeah, Derrick, let’s, let’s do this thing.”

Communicating The Value Of Tax Planning To Prospects [4:16]

DT:

For me. There’s kind of two different things. One, Roth conversion planning, it’s easy in terms of it’s relevance to so many people who are in my kind of target clientele. So, it is relevant to many people that I’m trying to work with. And there’s often value there and kind of that having a strategic perspective, long-term, it’s something people are somewhat familiar with. Maybe they’ve heard about it, but they don’t quite know how to do it. They don’t know where, you know, what tax bracket they should be targeting long term. So I can provide some tangible value and, you know, using various software tools, even kind of quantify what that value is, which I think is important. And a big part of that, I might say the second part is just answering any, you know, helping people find answers to tax specific questions that they have.

DT:

So, you know, the, I can think of a good example earlier this year, it was somebody who reached out and they had a question about, moving back from Hong Kong and their pension plan and how that was going to be taxed. And obviously I have no idea. I’m not a CPA. I’m not a, you know, that’s not a question for me, but knowing the resources, to get them in touch with the CPA, I have that conversation and participate as the advisor, but not the ultimate source of the tax knowledge, uh, but doing what I need to do to get an answer for my client in that situation.

SJ:

Yeah. I love that example because you hit it right on the head. It’s, it’s not that you have to have the answer. You have to be willing to give them the place to ask the question and then follow through on helping them find an answer. I also wouldn’t know the answer for how the pension would work from them, moving back from Hong Kong, but it feels like so many advisors, maybe you can share some perspective working with students will feel kind of really hesitant to get into tax planning because, ‘oh, what if they ask a question I don’t know the answer to?’ But the first example you led with was one, you clearly didn’t know the answer to. And really I’d be curious. How did, I mean, how do you handle that with the client? When they say, ‘Hey, moving back from Hong Kong. I got this pension,  no idea what to do with it.’ What’s the answer on taxes? I mean, what do you say to that?

DT:

Yeah. I’m just upfront, you know, I tell my prospective clients that I’m not a tax preparer. I’m not a CPA, but I know there’s a lot of value in working with professionals to get those answers right. And so, you know, I can help them through that process, uh, get them connected with somebody who will be able to give them an answer. And that example too, they told me about some of the other advisors they met with in their interviewing process. One of them told them, ‘just not to worry about it, just don’t report it’, which sounds terrifying to me that an advisor would say that! The other ones, you know, they really just kind of shied up, ‘oh, I, I don’t know. You know, that’s too complex.’ And for me, I mean, absolutely it’s a complex issue. And I had no idea what the answer was. They’d done all the Googling they could do. And they were unclear with what the answer was, but I can get them connected with a professional who can give them the answer. And so for me, that’s the route I took. And ultimately that worked out for me in terms of giving them the solution without being the person who necessarily has the expertise.

SJ:

Yeah. And as I have guests on the show and I was, I worked with clients. I mean, I hear these types of examples over and over again. And that’s part of the reason we do this podcast is to try to get this message out there more that your clients aren’t coming to you expecting you to have all the answers right off the cuff, right? That they’re looking for a trusted partner, someone that they can come to that can do more than just hit a Google search and hope that the right answer comes back, but actually help them through to finding a good answer. Even if someone else is the one who gives that answer.

DT:

Absolutely. Yeah. For me, and  it’s liberating too, in a way to not feel like I need to have the answer and everything. And I think it actually helps build trust too. When I tell somebody, I don’t know, something, I think there is probably myself as a younger advisor would have felt more concerned about, you know, saying that. But when you say it with confidence and, you know, you assure the client that you’ll help them find the answer, I think that actually builds credibility and trust. And that you weren’t just going to try and make something up or get around the question and dodge it.

SJ:

Yeah. I, 100% agree with that regardless of the field, when I’m working with other professionals, it does kind of just lend that extra credibility almost instantly, if someone is willing to say, ‘oh, I don’t actually know, but here’s my plan for figuring it out for you.’ As long as they’re telling me, they’re committed to helping me get to an answer, I do kind of perk up and they’re like, ‘oh yeah, I don’t know. But here’s my plan.’

DS:

Absolutely.

SJ:

Because we all, I mean, your clients or prospects, they know that you can’t possibly have all the answers. And so if you try to pretend that you do that kind of, that BS meter is going up. So…

DT:

Yeah. Hehe for sure!

SJ:

Yeah. Well, I really like, in your approach, that you’ve picked something specific to the types of clients that you’re serving, because like you mentioned, the Roth conversions, that was something that really fits with the prospects and clients that you work with. So, you have a very tangible, quantifiable tax plan opportunity you can discuss with most, if not all of them. And then it sounds like you’re just kind of giving them an open forum to say, Hey, what other, what other tax questions do you have? And so for advisors listening, I mean, this is, completely something you can replicate, whether you work with, uh, a similar clientele base that, you know, and you can pick Roth conversions as well. I know other advisors who use that, or if you have a different target market, maybe you’re picking another tax planning strategy that still you can help quantify, but then also giving them that open forum to be able to just kind of have that opportunity that honestly, they probably haven’t had to this point in their lives to just ask someone in this judgment free zone of what is this thing on my tax return mean?

DT:

Yeah, absolutely. And I think just opening the door for that conversation is the most important part and then you’re, then you’re engaging in financial planning and you can certainly help them through that whole process.

SJ:

Yeah I really like that. Uh, let’s pivot for just a second ‘cause you mentioned that in your teaching, as you work with students in the CFP program that you head up, the tax planning is a, is a topic that comes up. It sounds like a focus. I mean, what are some of the elements there that you’re trying to drive home? What is it that you hope their takeaway is?

DT:

Sure. As a point of clarification, when I was mentioning the students, that’s more the students in the workshops and the kind of public courses that I’m offering around these topics. But yeah, really, you know, the, again, horse’s mouth is, their master membership resources have been useful for me. They have some really nice built out presentations that you can then customize, make your own, add your own spin to them. But I mean, really touching on sometimes not even just the Roth conversion type planning, but more of the basics of, you know, how retirement accounts work, sometimes it’s amazing to me, you know, as professionals, we all get buried in the details of our own field and lose sight of how simple, some of the questions that people really have are, and not just because they aren’t familiar with it.

And so helping somebody understand the basics of IRAs and things to look out for and what, you know, common pitfalls and planning around that and rollovers and all the different pieces, really just providing that education. But for me, I have a full course that I’ve built out that covers alll the different topics I want to cover. So, you know, Medicare, social security, long-term care planning and estate planning, tax planning, investments, and retirement income planning. And, I’m sure I’m missing one, but within that sequence I also do those as standalone workshops as well for people that just want more of that, kind of quick hit of information and go from there.

SJ:

It’s easy for those of us who spend all of our time in finance and tax and these different areas to just kind of start taking for granted that some of these topics are almost like table stakes. Of course everyone understands some of these basic things, but the number of times that I still get questions only from taxpayers, but from advisers at times of, Hey, remind me how the capital gains brackets work. If I, if I have $40,000 of income and a million dollars of capital gains is the million dollars all at 0%? And it’s like, ‘well, wait a second. Nope, Nope. How did we… how did we get there?’ But, you know, having a process for giving people a chance to ask the questions that are top of mind for them, or, you know, be able to do these workshops in the community where you’re helping with some of these pieces of tax information that are applicable to all of these people, and they really have no other avenue for even getting that basic understanding of how do the, how did the tax brackets fill up?

How do these buckets, uh, how’s the income accumulate and get taxed? That can be really powerful.

DS:

Yeah, absolutely. Yeah.

SJ:

You had mentioned as we were getting ready for the show that as you kind of go through the prospecting process, that really the tax piece in particular, since it’s quantifiable is something that your clients will really kind of almost latch onto to say, ‘oh, Hey, I really see the value there.’ To the point of even them identifying, ‘oh, wait, this, this, this is going to more than cover the fee you’re charging.’ Can you talk more about, about how you kind of frame that conversation or how do you communicate that quantifiable piece that helps them draw that connection?’

Leveraging The Power of Quantifiable Tax Pieces While Prospecting [13:03]

DT:

Sure. Yeah, so when I’m meeting with somebody for the first time, I really want to be, might have an initial phone conversation to learn more about their background and make sure that it’s a good fit at that level. But then I want to be putting together a plan for somebody because I want to actually be able to present to them, demonstrate, you know, what doing financial planning work with me is like. I can understand from a consumer perspective, it’s so hard to tell the difference between one advisor and another, and they all sound so similar. And so much of it’s so abstract that I want to give somebody something tangible and hear whether they want to work with me or not. They want to go do it themselves, whatever it is, I want them to really learn something. So I really kind of lead with the education and truly, I don’t mind if somebody just takes that and it goes and implements themselves, and they were able to get something valuable from it.

DT:

I feel really good about that. So I like to do a free plan. I know there’s controversy on, should you charge for the plan? Should you not? For me, I just often feel better. I’d say about doing a free plan because I don’t have the pressure of feeling like I need to deliver. The question is often, ‘well, what am I getting for this $2,500 plan?’ Or whatever, an advisor charges. And I don’t like the pressure of that. I just want to present a plan where I’m highlighting what I see as the most relevant to a prospective client and go from there. So I liked the less pressure around it. I also think you’re potentially devaluing long-term planning. Every time I do, in the past, when I did a paid plan, the question would always be, ‘can I just come back every year and pay you $2,500 to do a plan for me instead of managing things on an ongoing basis?’

And for me, once you put a number above zero on that, now you’ve kind of set the anchor point of what people think financial planning is worth. And so I think actually charging for that can sometimes diminish the true value, but so that’s just my kind of philosophy. I like to get that plan put together. That plan is going to walk through kind of the first looking at income, summarizing the total situation, looking at what they can spend. So I’m a big guardrails fan. As I mentioned, going back to Matthew’s episode on the Kitces Advisors’ Success Podcasts was really influential on me. I think there’s a lot of psychological value too, to guardrails that’s often underappreciated. And so walking through that retirement income planning piece, then moving into tax optimization, which is often going to be around that Roth conversion strategy because for my typical clients, those are going to be pre retirement or early in retirement that I’m usually meeting with people.

And so walking through that, you know, really quantifying, so using different software tools, I use a combination of Income Lab, Right Capital and Holistic Plan, for various components when I’m doing some of the, both the financial plan, and the Roth conversion planning. So, you know, being able to actually quantify the value of that strategy. And yeah, as we were talking about before, one of the you know, I was presenting to somebody and they happened to have a plan where it made a really big difference whether they got the Roth strategy right or not. And they responded to me and said, you know, ‘wait a minute, if we get this right, this one thing will more than pay for the entire fee of working with you over our lifetime!’ And, you know, it’s, yeah, it’s true. It helps, I think, to really drive the value of planning.

It gets people thinking about, you know, the value there and the value of that long-term strategy. And if they want to work with me, it will be, um, I do work now exclusively on an ongoing basis. So, working together on an ongoing basis, rather than just a one-time plan, but getting that strategy right. So doing the actual planning work of implementing, cause that’s really where financial planning is valuable. Then I wrap up the presentation with the discussion of portfolio recommendations, but very simple, I’m just using a buckets framework, a very high level, conceptual, you know, how do we, you know, what does research say in terms of an ideal kind of allocation in retirement? What in your situation would that mean? How many years of spending would you have in your, I like to use a ‘protection bucket’ and ‘growth bucket’. So how many years of spending would you have available in your protection bucket? And that I think just kind of gives some peace of mind to, I run into more people that might want to be more conservative in retirement than I think they ideally should be, but when they can see, ‘oh, you know, I can live off my protection bucket for 15 years in retirement.’ Yeah. They’re going to be in fine shape to weather any storms and not have to pull from their stock portfolio under most historical conditions.

SJ:

Yeah. I really liked that description. Thanks for taking the time to walk through how that process works. Uh, you know, uh, get really focused on taxes in this podcast, but I love that description of how this fits in the bigger conversation, because even though I’m all about the taxes, that’s certainly not the only important piece, but definitely like that you highlighted how that tax piece can really stand out to clients. If you take the time to quantify it for them. And, software can certainly help facilitate that. You know, you mentioned debates around whether you should charge for a financial plan; debates around what planning software you use also comes up quite often on The Perfect RIA. What I love the most about what you talked about though, is the intentionality behind it all. I’ll leave the arguments about, should you, or shouldn’t you to a, to Matt and Micah on their podcast. But I think you’re, you’re spot on with being intentional, having thought through the process and what works for you and what works for your clients. I think that’s, that’s really the most important piece of it.

And then as we get into the software side of it, your clients are coming to you because they value your input as a professional, or hopefully that’s why they’re coming to you. You know, you’ve got a great process in place. And so I’m sure that’s why your clients are coming. So we don’t, we don’t want to rely so heavily on software that is, “Hey, here’s these a hundred pages of charts and graphs you’re never going to look at, but software can still be a great tool to help with some of these, especially these detailed areas like with, with Roth conversions, that if we want to, you know, we can, we can talk high level with a client about the strategy and the philosophy and, and help them understand why it’s impactful.

But then when we get down to, okay, how much are we actually going to convert in this year or next year or five years from now, based on what we know of tax rules and where they’re headed, it can be really impactful to be able to show that visually to a client to use, you know, a holistic plan or another product where we’re actually really excited when this podcast airs will really, won’t be that far away from rolling out a tax tool for our RTS members. So definitely see the value in being able to have software to support these conversations we’re having with our clients.

Using Tools To Bring Insight, Not Confusion [19:27]

DT:

Yeah, absolutely. And I’d say in my, I agree with you a hundred percent on, you know, I’m not delivering a hundred page plan to my clients. That’s not the nobody gets value in that when I’m using different tools. I really am just trying to kind of pull out what I see as, you know, the most valuable insight from those different tools. And it may be a particular chart or something that helps illustrate a concept particularly well, for me with, with income lab, they really are, uh, they have a guard rails driven framework, so they’re, they kind of live next to right capital and in terms of my planning software, but that’s really my specialized retirement planning tool. So that helps me dig deeper there. But then also the tax center within income lab has some nice, um, allows me to quantify the value of two different tax strategies compared to one another.

So if we use the bracket management kind of terminology, if you were to target, you know, conversions to a certain bracket, where would that put you compared to another benchmark? And one thing I like with their approaches, they also, I can set the benchmark, I’m targeting to the, let’s call it the taxable/tax deferred/tax-free distribution sequence strategy, which, you know, you open up money magazine or something, and that’s usually what’s recommended. And it works well initially, or you could do a lot worse from a tax standpoint, but, you know, for that’s the most kind of intellectually fair comparison in terms of, you know, can you improve upon that with Roth conversions? In some, some cases as the plan is going to tell you, no, you can’t, but in those cases that you can, then I can actually put a dollar value to that.

And then the reason I like to use Right Capital is there’s some charts in there around showing the long term or just the long-term capital gains or brackets. So, you know, the value of potentially actually moving yourself into 0% capital gains bracket by using a Roth conversion strategy over time. You can see, you know, Medicare premiums in terms of those different thresholds and managing to that, how that can reduce where you’re at over time and just all these nice visuals. So I’m never delivering a full, you know, a a hundred page report, but I’m going to pull out these useful visuals, put them in the plan for my client. And then a holistic plan is the final one I mentioned where I really like being more precise and trying to get close to a number, but at the same time, I’m also big on working with other tax professionals. So I’m not, um, you know, I can run the numbers, I can say here, this is where it looks like, but I do want somebody to go verify with their accountant and make sure that makes sense. And I’m not missing something that certainly I could, not having the full tax background.

SJ:

I love that approach. We’re definitely definitely a huge advocate of making sure you have, some great tax professionals on your team, even if, even if that’s outside of your firm, but resources that you’ve vetted, that you’re comfortable with, that you have good communication plans in place with so that, you know, your client is ultimately the one who wins because, you know, it’s identifying the opportunities, certain a really, certainly a really important step. And unfortunately, one that gets missed quite often, but if it doesn’t get reported to the IRS correctly, it may as well not have happened. And so having that relationship with the client’s tax preparer to say, “Hey, here, here’s these things we talked about during the year. Here’s how much we think a Roth conversion makes sense for”, and then be able to communicate that to the tax preparer and getting it reported effectively without any contentious back and forth with that tax preparer about whether you should pay taxes now or not, because you’ll get a lot of tax repairs who focus on just let’s pay as little in tax right now, even if long term, there can be advantages to accelerating some of that tax bill.

DT:

So that is something I’ve run into, I’d say in terms of, you know, I have encountered tax planners or tax preparers that I think are too shortsighted, but in terms of, you know, having, having that whole process of interviewing people when your, your local market, you know, paying for their time to talk to them, to vet how they view things. And then I know whether it’s a good fit and certainly there’s, there’s people I’ve talked to in the past year, who’ve told me their views on Roth conversion planning and seems too shortsighted in my opinion for my clients. So it’s not going to be somebody that I refer them to, but you find the people that work and they do have that, um, similar sort of mentality. And then you have the confidence to send somebody to them, which I’ve found very valuable.

SJ:

Yeah. And experiences like you just described of tax preparers, who, who don’t see the value in planning opportunities like Roth conversions is a lot of the motivation behind why retirement tax services was created and why we’ve rolled out doing collaborative tax preparation and planning with advisors and their clients really excited that our RTS premier members are getting onboarded and getting their clients signed up with that because we think it’s a huge opportunity to, to improve that collaboration between financial advisors and tax preparation.

DT:

Absolutely. Yeah. And I, another note on that topic, just in terms of the resources that you guys have put out, it’s been a big help for me. And just, I’d say raising kind of my tax literacy and getting to understand some of these things and knowing that, you know, you know, QCDs, are a common error of just being overlooked, not because the tax preparer didn’t do it right, just because it’s really hard to, to know where to find that. And so, or it’s not reported on the other forms. And so just knowing those sorts of pieces of information and where to look and that’s, that’s improved my ability to be, I think, knowledgeable in front of CPAs, but also my ability to deliver value to my clients by identifying those opportunities.

SJ:

I always love to hear that we definitely put out those content because we think it can be impactful to advisors. So I appreciate you letting me know that that is that making a difference. So Derek, we always like to make sure that we can take the things we’re talking about and turn them into action and, and have, uh, action steps to wrap up our podcasts. So based on the conversation we’re having today, and, you know, the experiences you’ve had, what are some action items you can recommend to listeners to really be able to get value out of the tax planning process? Okay.

Action Items [25:21]

DT:

First I would say, you know, find a way to quantify your value that you’re providing in tax planning in some way, and maybe, you know, a software tool, it helps do that. It may be something that’s different because specific to the clientele that you’re typically working with, maybe it’s something you can do, you know, more just back of the envelope type of calculation to get to the number, but whatever it is finding a way to really quantify that because it is helpful I think particularly when working, dealing with prospects to be able to help them understand the value of financial planning beyond just this abstract sort of idea that everybody’s talking about in terms of improving their overall financial situation.

SJ:

That’s great. That quantified piece is just so impactful. And then especially, you know, if you’re going to have a long-term relationship with this client, you can look at not just what the impact would be for one year, but what if we implement the strategy over the next 10 years? And that number becomes even more powerful.

DT:

Absolutely.

SJ:

As you described your approach, I would also really strongly recommend our listeners that in your prospect and your new client process, at a minimum, you should have these two steps related to tax planning, a specific planning topic that you know is applicable to the majority of your clients, like for Derrick that that’s Roth conversions, but whatever that is, make sure you have a specific tax plan opportunity, and then make sure you’re giving clients and prospects that forum to ask you questions so that they can see that you’re going to be a resource on this topic. I think both of those will have a huge impact on the value that your prospects and clients both are seeing out of your service, Derek. Anything else to add before we wrap up?

DT:

I think I just want to say thanks again for, for what you guys are doing and a great resource for people in the industry and getting to learn more and definitely a big fan of what you’re doing.

SJ:

Thanks Derek, really appreciate that. And for everyone listening, thanks for listening in today. And until next time, remember to tip your server and not the IRS.