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It turns out there are scientific reasons that so many people have misguided notions about taxes and Steven is joined this week by a Financial Psychologist to explore what those reasons are. Meghaan Lurtz is a writer, researcher and educator focused on the overlap of psychology and financial planning and shared her insight on how Financial Advisors can more successfully navigate conversations around complex and emotional topics, like taxes. Much to Steven’s delight Meghaan confirmed some of his beliefs on WHY taxpayers feel the way they do and make some of the choices that they do, now he has science and experience backing him up. This episode is a must listen for anyone who talks to their clients about taxes.
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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 I have a Certified Financial Planner. No surprise there. Jonathan Byrd, who is the CEO of Farham Financial and is joining the show to talk about something we actually haven’t covered yet. So with that little bit of a teaser, Jonathan, welcome. Why don’t you give us a little bit of your background and then we’ll dive into some fun things.
Yeah, appreciate it, man. My background, I previously worked for Schwab for six years. Started with their build a broker program, ended up working for their own like internal RIA called Schwab Private Client. I had 205 clients and $250 million that I managed, and I had 20 hours a week of like part-time help. So that was as busy as I ever wanted to be. And so I started my own firm saying I’m not gonna take on 200 clients again. I’m gonna keep it more manageable but kind of keep the same specialty of working with retirees or near retirees. And it’s been a blast ever since.
Well, that’s fantastic. Before we dive into, cause there’s a couple of things in your experience I really wanna highlight, but I mean, this is a tax focused podcast. So with the clients you serve currently, the retiree before retiree group, I mean, what are some of the things that you are incorporating just in kinda your day to day working with clients that is tax focused?
Yeah, so like, given that I’m working with retirees, I would say like probably two of the more important tax principles I’m using are just this idea of asset location and spending withdrawal order. So, asset location, just, you know, optimizing for where we’re holding different assets, like specifically keeping bonds inside of a traditional IRA, keeping things like index ETFs inside of a brokerage account or, you know, individual stock compounders inside of a Roth IRA, super overlooked, but can definitely save money on taxes every year. And then spending withdrawal order, just kind of optimizing for whatever their withdrawal rate is. You know, just figuring out where we can pull from to minimize their lifelong taxes.
So Jonathan, I get a lot of questions from listeners, but how does this stuff work in practice, like asset location? I think you’re right that it’s overlooked in how it’s executed, but I mean, Google will tell you the asset location is important. So how do you mechanically get that done? I mean, a new client comes on and what you’re getting, you’re getting all their statements. I mean, what does that, do you have a checklist you go through? What does that look like to actually make sure that either they’re in good shape or that you need to help them make some changes?
Yeah, I mean, I would say yes, I do have a process that I go through. I mean, I think for most advisors it always starts with discovery, right? Just like understanding what specific goals they have so that we’re aligning their portfolio and all of their planning actions with those goals. And then after we go through that discovery, just really looking at their particular holdings and looking at what makes the most sense. So, like I said, like finding opportunities for selling things in an IRA and then, you know, potentially buying them back in a brokerage account and, you know, making whatever moves are needed.
All right. I appreciate you sharing that detail. Okay, let’s dive into the meat of why we got together here today. There’s a couple of things that you have firsthand experience with that I wanna be able to chat with for our audience. One of them is buying another practice. I get questions about this all the time. There’s a lot of advisors who are inter fascinating this as an idea, but just don’t know where to start or how to think about that. And then the other one is getting paid leads, which this is something we’ve actually started piloting for Retirement Tax Services that we’re starting to provide some of our Premiere members with leads. And we’re really excited about being able to connect taxpayers to advisors who are gonna help them, but with love. Let’s start with the practice acquisition side. Talk a little bit about, why you went down that road, what that kinda looked like for you. Maybe some things you learned, some things that went well. Let’s hear how this process worked for you.
My story might be different than a lot of others. So I think for a lot of advisors, they might go on platforms like FP transitions or you name it, and you can find firms that are for sale. And I think that you do that you’ll find that there are probably 30 to 50 buyers for every one advisor who’s selling. So you just completely recognize like, this is insanely competitive. So I never did that. Like I have never tried to find a practice for sale that way. So I did buy a practice last year, but, the way it came about was unusual in that I started a separate business that was running kind of concurrently to my advisory firm. I started a firm called RIA Clients with my good friend Robinson Crawford. And it was really just this idea that we were gonna try to help RIAs who had individual clients were no longer a good fit.
We’re gonna help them find a different RIA that would be a better match for them and then help them get some kind of compensation for making that transition. Turns out we found out that much like the acquisition space, there were lots of potential buyers and not a lot of potential sellers, so that didn’t work out. But in the process of doing that, we called literally every RIA in Arizona that had less than a hundred million and just asked the question. And so I called this advisor in Sedona and Greg Preble and almost before I could even explain why I was calling, he saying, I’ve been trying to sell my practice and I can’t find anybody. And it’s like, okay, well yeah, you know, happy to talk. That’s how I ended up acquiring that firm. But it was 10 clients, all of ’em were retirees and yeah, the transition went super well. We went 10 for 10 on the transition.
That’s awesome. That’s really interesting. There’s a couple things that stand out to me there. One, and I don’t want to gloss over this. I mean, there it with just about anything that you want to try to do, especially when it’s something different, you gotta be willing to put in the work. Like, I mean, what’s one of the things that stood out to me, what you just said is that you just started calling every RIA in Arizona with less than a hundred million. So you got really specific on, and here’s who we want to try and target. And even though that particular piece of the business or that particular piece of the plan didn’t go as intended, you’re still putting in the hard work and that’s usually where the results come from.
Yeah. True. I would say like anytime you’re really like, you know, making connections or grinding like that, like even if like in my case you didn’t get the result you wanted something good is likely to happen to you. My dad always kind of preached that growing up and turns out he was right.
As we’re recording this right after Father’s Day, that is a very apt reference. Okay. So, Jonathan, we’ll come back to this a minute cuz we’ll compare the two. Talk about your experience with getting paid leads.
When I first started my practice, I was looking for clients anyway I could get them. And so one of the avenues I started first was using Zoe Financial, like in brief, their compensation structure is like it’s revenue sharing. You share 25% of your revenue for 10 years and then after those 10 years you can buy out that client in essence like pay like a two and a half times multiple on the amount that you’ve been sharing with them. So very pricey, but they, at least in my experience, do a good job of getting qualified leads and so it’s, you know, easy to take on clients that way. And then if you do flat fee financial planning, then you still give up a quarter of your revenue, but it’s only for five years, not 10.
So I did that for a while thinking, hey, like, you know, I need to get some clients here, but when I comparing the revenue sharing model with just pay upfront, it was just night and day. Like, I immediately fired Zoe after taking on I think five clients. And then I’ve been using Smart Asset ever since. So if you like, I can talk about using them.
So yeah, please talk about using Smart Asset. And then I would also love to just kind of hear some insight on kinda what the close or conversion rate was between the two models because I don’t know as much about the Zoe Financial, but usually on the Smart Asset side of things or really not just Smart Asset, there’s other platforms out there when you’re paying upfront for the lead, it tends to be more of a volume game that you’re gonna pay for a lot of leads, you’re never actually going to turn into clients.
Yep. I would say that’s exactly right. I pivoted to Smart Asset where I started paying. So my target clientele is retirees with over a million in assets and Smart Asset has different tiers for self-reported investible assets. They don’t verify it, but I think right now it’s $250 roughly per $1 million lead. And I would say like, so first I’ll explain my experience before I talk about conversion. My experience has been awesome. I’ve used John Baron for coaching for the last, like ever since I started three and a half years ago. And he really made it easy in terms of having a repeatable process that you could go through with every prospective client. And having that in place made using paid leads with smart asset just like fireworks, like it could not have gone better because, and the reason I’m mentioning that is I’ve heard a lot of other advisors say like, Hey, I’ve bought a few leads off Smart Asset and like they don’t return the phone call and it’s like, okay, there’s a few more things going on here and one of them is having like a repeatable process cause you’re doing high volume.
Yeah. Jonathan, if I can pause you for just a second because I mean, you casually mentioned John in there, which I’ve worked with John in the past, that’s how you and I got connected and he is great for having that repeatable process you’re talking about, but part of the reason I wanna pause here is that again, I wanna highlight the hard work that goes into to driving success. That this isn’t just whether you’re going a revenue share model or a pay upfront model, or whether we’re talking about lead generation or your own marketing efforts, your own tax plan efforts, whatever area of your business, these are key elements of success that you have that you’re being intentional, that you have a repeatable process. That it’s not just, well, let’s hope something works out.
Because like you said, I’ve talked to advisors as well and it’s like, ah, I stopped paying for those leads because nobody was converting, nobody was returning my calls or whatever it might have been. And the same thing comes up with tax money in general. Ah, you know what, I stopped asking for tax returns because, you know, only half my clients gave them to me and then I wasn’t sure what to do with ’em. It’s okay. What was your system or process for ensuring success? And people get this really out of and that they want the results before they put the systems in place. And that’s fantastic that you work with John to have such good results on that end.
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Yeah. If you’re an advisor struggling to like get the result you want, call John Baron. So anyway, I’ll finish my line of thought on Smart Asset, if you don’t mind.
Yeah, of course.
So, you know, I sort of like dipped my toe in the water, spent 10 grand after I did that, I found that I was getting roughly 10 grand worth of recurring revenue back from the clients I signed up, so I said, wait a second, this is a phenomenal roi. I’m gonna step this up. So kicked it up to another 30 grand and I think I’m roughly a quarter mill in now, and for what I’ve put in, for every dollar I’ve put in, I’m getting 83 cents back in recurring revenue. So I’ve lost interest in buying stocks, I’m just buying leads now. So yeah, I’m definitely doing high volume and I’m focusing all in Arizona which is where I’m based. So, I’m just pedal to the metal on that.
Yeah, that’s really interesting. So, Jonathan, as we were preparing for this episode, and one of the things that you highlighted from a business owner standpoint, as you look at how you run and manage your business, you talked about that there was a distinction for you between going out and buying leads versus, you know, even though this practice you bought came through a little bit unique circumstances, it sounds like you haven’t tried to pursue that again. So talk a little bit about some of those other just kind of business considerations around what avenue you go for growing your business.
Yeah, for every dollar I put in and the smart asset leads, that dollar is deductible on my tax return in terms of like an advertising expense, which turns out is a big deal. Because when I compare that to buying a practice, so I’m just gonna get specific about the practice I bought. So advisors can kind of see the math here. The practice I bought had a valuation of 420 grand and certainly like different deals have different structures, but like for sure the most common one is what I have, which is you put 40% down. So for me that was like 168 or like, call it 170 grand and then you pay the rest out, like basically using a seller note. And for me that was over 60 years at 5% interest. So I put 170 down and then I have this $50,000 payment that I make for six more years.
There’s like two important factors when it comes to how the tax side of an acquisition works. One is how much gets a portion to the consulting fee and then how much gets apportioned to like, in essence the goodwill that you’re buying or in essence like the client list. So through just basically pure luck, the advisor who I was working with here said, you know, I kind of attribute the consulting arrangement here to be more important than usual. So I’m gonna say that that’s worth $55,000, which was something like 13% of the deal price, that’s unusually high. And, here’s why that benefited me is whatever the consulting fee is, that amount is deductible right away. So when I paid 170 grand down, I got a $55,000 deduction. Most times a consulting fee is like single digits, like single high digits, maybe eight, seven, 8%.
So I gotta break there. The rest of the deal is pretty much, I mean, minus like a small restrictive covenants thing, like for 8,000, the rest of it is all this goodwill. Here’s the need to know on goodwill. It gets amortized over 15 years. Now you might wonder, okay, why is that the case? I think that’s an IRS rule that gets applied to really any business that’s trying to amortize goodwill because probably most advisors know, like the average life on a client is something like six years. So will you even have these clients 15 years from now? Maybe not. But anyway, I’m paying 50 grand a year for this seller note, but my deduction is 25 grand a year, so I’m having this $25,000 after tax expense that I have to cover every year. And that kind of sucks.
Yeah, you’re definitely touching on some of the, you know, well I’ll loosely use the word fun. That’s the wrong effort, but that’s what we’ll stick with on the podcast areas of the tax code where, you know, that kind of ties into just general accounting principles of, you know, I guess the logic behind this is, okay, you’re paying for something that’s gonna benefit you over a period of time. So just like we would depreciate a building, we’re saying, Hey, you bought this client list, is essentially what it’s saying. You bought these client relationships and the idea would be that this is gonna benefit you over a certain period of time, so we wanna spread the expense over a certain period of time. Whether you agree with that logic or not, that’s what the IRS has decided and we get to go along with it.
But as you’re looking at the potential cost and benefit of taking these different routes, those are important considerations cuz like you pointed out, especially if you’re paying upfront for the lead, you are getting the tax benefit at the same time that the cash flow is going out. And that’s not the case when you have a business acquisition. So certainly something to consider. I mean, I know advisors who have been successful doing each, and so it’s not to say that that principle on its own should 100% sway your decision one way or the other. But it’s definitely going to be more painful if you don’t go in with your eyes open to the fact that that’s the way it’s going to work. I definitely see this happen with taxpayers quite often when they don’t realize the really common example is with like rental properties the first time somebody gets into a rental property and doesn’t realize that not all of the losses will be deductible the first year. Those kinds of things that again, it might not have changed the ultimate decision, but you need to go in with your eyes wide open so that you’re making smart business decisions.
Yeah, I agree. So like in the end, like having now done a healthy amount of both paid lead buying and acquisition, like I would sum it up by saying like, acquisitions are great for really fast growth, but the ROI including tax benefits is super favors paid leads or just organic growth.
Well, Jonathan, I certainly appreciate how willing you are to share the details of that. These are topics that I feel like often get talked about in generalities and that a lot of people aren’t willing to just be as transparent as you’ve been. So I know that’s really valuable for people to be able to hear no, here’s exactly how it works and what my experience has been. So, people have a reference point and it’s not quite so vague.
I got one more tidbit that I would wanna know if I were an advisor listening. Something that I learned through experience rather than foresight. So in the quick context here is I’ve been reinvesting every dollar that I make in profit into more leads just so I can grow as quick as I can. So I’m trying to create like a compounder here. Here’s what I learned and I think any advisor should know in the future. Let’s say like in year one you have negative $50,000 in Schedule C income and in year two you have positive $50,000 of Schedule C income. My intuition was that, okay, I have a net of zero and therefore I don’t have any tax to pay, that’s not the case.
So you still owe full you know, 15% FICA tax on year two 50 grand of income. So that was kind of a surprise to me that my CPA had never told me about in our tax laying meetings, but is another thing that you should know you know, in terms of eyes wide open.
Yeah, that’s a great point that especially in the early stages of a company understanding how that tax bill is going to change year over year and that, you know, on paper, like you said, it can feel as simple, oh, well I lost $50,000 this year, let’s roll that forward and offset $50,000 of income next year. But it, like with anything in taxes, it’s rarely that simple. We wanna make sure that we really understand what those implications are and when we can deduct losses in the current year versus when they do have to get carried forward. Again, it might not change the ultimate decision or the ultimate outcome, but it’s gonna prevent a lot of painful surprises along the way. And especially if you’re younger or newer in your business development, I mean an unexpected additional five or $10,000, $15,000 of taxes, I mean, unexpected cashflow is rough for new businesses in particular.
So it’s good to to know that going in. Jonathan, let’s circle back for just a minute. You talked about that one of the things that you think has really made an impact on your success with converting leads is the work that you’ve done around, you know, having a repeatable system with Coach John Baron. Just I mean, we don’t want you to try to condense his process into the next couple of minutes, but what are some highlights for you? What are some key things that stand out to you in that process that you might had you not worked with someone else to say, okay, these are things I’ve gotta make sure I’ve got in my process?
Do you mean like specifically for prospects or like just working with ongoing clients?
Well, specifically for prospects, let’s stick to converting people to new clients. And that might be specific services you highlight or specific touch points in the communication. I mean, what stands out to you of, hey, if I took these one or two or three steps outta the process, I think it would completely devalue what I’m doing.
That’s a fair question. I would say there’s like three things that I’m trying to touch on with everyone who goes through my process. One is making sure, making certain that they are feeling heard. And I do that both by having like an initial phone conversation where I’m asking questions about their situation, but also having them fill out at least a brief questionnaire where I can understand both what’s important for them and what kind of concerns they have. So making them feel heard is the first one. Giving them something valuable that they can use, whether or not we end up working together, I would say is also been useful. Because even if that client or that prospect doesn’t sign up, it kind of gives them this like, positive feel about having interacted with me and now they’re more open to, hey, if their friend asks about, do you know anyone?
Actually, you know, I talked to Jonathan, he gave me some good insight even though I did not working with him, you know, go ahead and talk to him. So yeah, just showing something useful was the second one. And then just, being like explaining how I would help with what’s important to them without going through some giant discovery process is super helpful. So I know your brother Matthew Jarvis has talked about like creating the one page financial plan and just explaining, Hey, you know, here’s what I can do for you. I think that’s super valuable in terms of helping a client understand what they’re gonna get by working with you.
Yeah, I love that. So what I heard from you there is that in your process, you wanna make sure that those prospects are feeling heard, that you’re delivering something valuable regardless of they keep working with you, which I love that approach just to life in general. And then being able to simply articulate what the journey together is gonna look like. And you’re absolutely right. That one page financial plan is a great way to do that. Of course, I’m very biased that value, that those one page financial plans include tax planning to some level because we all pay taxes like we’ve talked about today. I mean, there are definitely nuances and complexities that a lot of people just don’t understand. So it can be a huge area for opportunity.
A hundred percent.
Well, Jonathan, I really appreciate you taking the time to share all of this. We always like to make sure that we’re taking the information we share and turning it into value for our audience, which of course is by taking action. Appreciate that you already shared. Here are some things that people can be incorporating into their processing process. The other thing that stood out to me from our conversation today, kind of a theme throughout this is that whether we’re talking about converting prospects or just lead generation in general, doing your own taxes, whatever it is, having a system for what it is you’re trying to accomplish, to me that’s gotta be step number one. That this isn’t haphazard or sporadic. Here’s our clearly defined system for how we’re gonna make this work. And then you touched on it a couple of different ways, putting in the hard work this isn’t about, and no podcast is going to give you some kind of magic trick that’s gonna take all of the work out of these things that you can certainly learn from other people. If you can learn from Jonathan’s experience, you can shortcut some of the process by learning from other people, but you’ve gotta know that there’s still hard work that’s going to be included.
And I think it’s probably worth like, at least briefly defining what you and I are defining as a system. It would just be set of actions that lead to a desired outcome. But in the John Baron universe, there’s five things. There’s a trigger for something that starts it. There’s a process like steps that you’re following to make it happen. There’s reporting on it. So you’re like getting some kind of feedback on how well is this working or not. You take some time to inspect that reporting to actually make some judgment calls on it. And the last one is that you do some follow up to make sure that it keeps improving over time.
Yeah, that’s a great description of how John works. And if you don’t currently work with a coach, John Baron is a great coach to work with. We will get his contact information in the show notes. There’s so much value in working with other people in these different areas.
You would, I’d be getting paid for recommending John here. I’m not for St. John’s name.
No. John’s a great guy. I totally get where you’re coming from. And, I mean, this speaks to providing value to people that when you provide a valuable service, people are gonna talk about it, whether they get compensated for it or not. And totally, John is certainly in that camp. The other thing I’ll throw out there is that if you’re looking for more great information around tax planning, more great tips on how you can be doing this with your clients go out to retirementtaxservices.com, get signed up for our weekly newsletter so that you’re getting these insights and tips and tricks in your inbox every week so that you can keep leveling up what you’re doing around taxes. Jonathan, thanks so much for being here. I really do appreciate your time and this has been a great conversation around some things we don’t normally touch on. So thanks for being here.
Pleasure. Thanks for having me.
To everyone listening, thanks for being here this week and until next time, remember to tip your server and not the IRS.
The information on this site is for education only and should not be considered tax advice. Retirement Tax Services is not affiliated with Shilanski & Associates, Jarvis Financial Services or any other financial services firms.
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