Looking for a Good Way to Engage Clients and Prospects in Conversations on Planning Needs? Why Not Start with Their Tax Return?

Unless the client initiates the conversation, it is often difficult for financial professionals to know how to engage clients and prospects in financial planning discussions.  Yet many times, those same financial advisors and planners have access to the tax returns of clients or prospects.  Next time that happens, why not use the 1040 as a conversation starter?  I say this because, for those who know how to mine it, the 1040 reveals a host of potential planning needs and serves to help script your conversation. Furthermore, because the issues reveal themselves in the context of the person’s own tax return, the conversation is typically welcomed and immediately perceived as relevant to their needs.

For example, let’s examine the W-2 Wage and Tax Statement that is attached to the return. Most of us just take note of the first box, which lists Wages, Tips, and Other Compensation.  But for the astute financial advisor or financial planner, it offers much more useful information.  Just consider, for example, those letters that appear in boxes 12 and 13.  Here’s the valuable information they provide:

  • C – This represents the cost of group term life insurance for coverage beyond $50,000. Further questions about this policy and others held by the client may help reveal the need for additional life insurance coverage.
  • D through H and S – These represent elective deferrals to various retirement plans. Typically, you will see the letter D, which is associated with 401(k) plans. This information gives you added insight into how aggressively the person is saving for retirement. If you see modest or no entries, then further inquiry on how the client is planning for retirement may reveal the need for additional assistance and/or guidance. You might begin the conversation by asking, “How are you maximizing tax-advantaged opportunities to defer income and save for retirement?”
  • T – This represents benefits that the employer paid under an adoption assistance program. Its presence represents a significant life event for the client and, particularly if this is a first child, may open up a discussion regarding the client’s insurance and estate planning needs. It also creates an opportunity to discuss education planning goals your client may have.
  • V – This represents income from the exercise of a nonqualified stock option. When these options are exercised, they typically generate a taxable event. If the client sold the stock after exercise, then the client had sufficient liquidity for the stock; but where did the balance of the cash go? Further inquiry on your part may reveal liquid funds that you could assist in investing. If the client is still holding the stock, it may represent a considerable concentration in the client’s portfolio, particularly if this represents one of several stock options. If that proves true, you may want to ask the client, “What steps have you taken to reduce the risk associated with concentrating so much of your wealth in one security?” This may provide an opportunity for you to discuss various monetization strategies and hedging strategies that are commonly utilized to reduce such risk in a portfolio.
  • W – This represents an employer’s contribution to the taxpayer’s HSA. This should cause the advisor to inquire how well this plan is working versus a more traditional plan, the extent of employer-provided benefits and the potential need for disability income insurance.

All this, and we haven’t even gotten to the return itself. With the tax season upon us, financial professionals are likely to see a number of tax returns.  Make sure you are equipped to take advantage of the opportunities imbedded in them.

To learn more about income taxation or to better prepare yourself as a financial services professional check out our course Knowledge for the Real World: Income Tax.

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