Tax Planning as an Essential Client Service

Editor’s note: In this edition of What’s Working Now, an AdvisorRADIO feature in which Horsesmouth members tell us about recent success they have had running and growing their businesses, we hear from advisor Hank Mulvihill, who sees tax planning as an essential way for advisors to maintain an edge.

The following article includes edited excerpts of Hank telling his story. Or you can listen to the full interview by clicking the audio file below.

I started as a retail broker at Merrill Lynch in 1987. Six weeks after I started, the market went down 37% in the famous crash of 1987. I thought, “What have I done with my career?!” But I survived, and I survived because I realized that I had to get a lot smarter. I became a serious advocate of financial planning, and that led me to be tax-focused throughout my career, even though I’m not a CPA. I ended up going independent and running my own firm for 21 years until a larger firm came along and made me a cooperative offer I couldn’t refuse. It’s been an absolute bonanza for both of us.

Tax planning for 50 years

I’m going to try my best to add something to the advisor community today by talking about what we think we do very well here and that others can also do. There’s an enormous market, and we find that focusing on tax and tax planning has been very, very useful for Smith Anglin Financial, my firm, for more than 50 years. That’s a hell of a track record.

We were recently recognized by the Financial Times in large part because of the breadth and depth of the firm. We focus on more than just the investment management piece, with four CPAs on the staff. As an aside, it’s a personal pet peeve of mine that advisors are supposed to pretend that we don’t give tax advice. Really? Finally, I’m affiliated with a CPA firm, so I can give all the tax advice I want as long as the CPAs bless it.

Tax planning is how our firm got started. The father of one of our current partners started a CPA firm 52 years ago, and it grew. Then his son came into that firm, double-degree master’s CPA. Instead of going, at the time, Big Six, he came to his father’s local regional Dallas firm.

After a couple years, he walked into Dad’s office and said, “I want to do investments.” We’re talking 25 years ago now. Dad said, “No. CPAs don’t do investments. We focus on taxes and planning.” OK. But about a year later, the son came back and said, “I’m going to do investments.” And thus the current firm was born.

There are four founding partners on the investment side, and the CPA side has never stopped, it continued on and is flourishing to this day. That is a remarkable, I think, statement about continuity and focus on shared values. It’s fun to be part of this group. Clients have access to leadership and ownership. That’s a special situation.

Tax planning as a centerpiece

We’re specialists in understanding the tax impact that you need to start planning for around age 62, and how you need to work through your retirement decision and post-retirement income calculations. We nail that as well as anybody. We’re able to foresee and address issues, and do things that a lot of folks never even discuss with potential prospects.

We talk about taxes all along, but it really comes into focus around age 62. It’s wonderful and so simple to use taxes as a centerpiece for the transition phase from accumulation and investing to spending and retirement. You can lay it all out in front of people. Then we use Horsesmouth Social Security illustrations to show clients what they can expect. People often want to claim Social Security at 62, and most of the time that’s a disastrous idea. We attempt to disable that thinking.

The power of 3

We focus on three things: comprehensive planning, a conservative approach, and aligned values.

• Comprehensive planning. We lead with comprehensive planning. For us, that’s a financial plan based on the client’s inputs. Then we sit down and listen. What are they really trying to solve for? That’s what it’s all about. The investment piece is an engine that powers growth, but it’s not the life planning situation that people really need. That’s a tremendous maturity that the industry ought to get to if they’re not there already.
• Conservative approach. The second part of our three-prong approach is a conservative approach. We’re not going to promise to beat the S&P or knock the socks off of anything. We are going to promise to protect you and to give you everything we know and can see in the markets. That’s what we do. Our approach is disciplined and based on risk-mitigating strategies. We’ve got expertise in converting once-in-a-lifetime large liquidity events into long-term income, and we specialize in retirement planning.
• Aligned values. Thirdly, we align values. Everything here is to the fiduciary standard, with integrity and accountability. We don’t care about DOL or SEC because we’ve been there for a long, long time.

The first meetings and free financial plan

As a way to bring people in, we give away the initial financial plan. We’ll give it away to someone who’s not even our client yet. This initial plan is a rough outline, we don’t think it’s nearly deep enough, but it’s a start. That takes time, but we have a staff for that. People are grateful to receive it, and it’s a totally complimentary, no-obligation deal. We use state-of-the-art software, Money Guide Pro.

So people come in for their first meeting, and we offer the free financial plan. In the first meeting we explain here’s how we work, here’s who we are, here’s what we do. And we offer the free financial plan. When do we introduce the free financial plan conversation? When we know it’s a qualified person, basically someone who’s willing to give us a rough outline of their holdings and needs.

We are willing to do the free plan because, it’s interesting how people tend to weed themselves out. People are not going to walk into a high-powered CPA investment management firm unless they are thinking they need solutions. So, if they agree to share their information, we spend quite a bit of time gathering data and working on a plan, which we complete and present at a second meeting.

Then at the second meeting we make it clear what we can, will, and would like to do, if we feel that the client is a good fit for us. We’re very culture-oriented here. There have been situations or clients we didn’t want to work with, and we’ll say, “We appreciate this, let us know how we can help you.” Most of the time it moves smoothly into, “There are needs here, can we fulfill them for you?” We also sell life and health insurance. We don’t stress it, but long-term care comes up. It’s part of the comprehensive planning. At the end of the second meeting, if everybody is feeling good, they become clients and we start the detailed planning process.

The free prep of tax return

People with $750,000 under management have “premier client status.” That gives them complimentary preparation of their primary tax return. We send out our data gathering form very, very early, starting in late December. The clients put all their information together and send it back to us, where it goes to the accounting department.

As an advisor, I can go right over there and see what’s going on. It’s very valuable information, it really is. Some circumstances change, and there are tax consequences for option exercises and things like that. I see what the accountants are looking at, and I talk to the client. It’s advisor-centric here. If the client wants to focus on a serious tax issue, I get a CPA on the phone or we have a meeting together. It’s great to go down the hall and have that kind of deep bench.

Always there to help

We give away the first financial plan for free, but the more detailed one involves a ton of tax work, and we don’t just give that away. But we do bundle it in for our medium- to high-net-worth clients, and it’s available for a fee to any client. We charge primarily through assets under management at this point. We do flat rate sometimes, and we will do hourly billing for consultations. The range of fees depends on how many assets you have—a $30 million client, of course, is going to pay less than a $250,000 client. Pretty much the top rate is 1.25%, but it can get down into the single digits.

We can’t do a free financial plan for somebody with $5,000. It doesn’t make sense, it’s as simple as that. On the other hand, my personal stance is that if somebody asks me for help, I’ll find a way to help them. That has served me well for a long time. I had a small IRA deal for a woman who referred me last year to a $2.5 million client. So you never know. I will never turn away somebody who needs my help, ever.

Extremely pro-Roth

I am extremely pro-Roth, sometimes even ahead of what my firm wants me to do. I think anybody who has any opportunity at any age ought to put money into one. Yes, if you model it out, after 15 or 20 years the tax bite might be the same. But the Roth is an entirely separate asset class that will never be taxed and has the ultimate power of estate planning and generational bequeathment. I am so pro-Roth that I really become obnoxious about it.

We’ll do pre-planning with Roth, and try to get clients to convert their large IRAs. We have a lot of big IRAs, and you know the client will get hit with RMDs and then Medicare surcharges. We understand that, but clients see the total net worth and income calculation, and it’s a huge pain. They get upset if nobody tells them about it. So we try to get clients to pay the taxes upfront. Particularly with our current low rates, I’d rather take some pain now and push this deep into the future.

Then we have some unique tactics. Let’s say somebody retires, and they have no real income for a couple of years. Oh my goodness, that’s fertile ground for us to do capital gains sales. We can do all kinds of things at that point.

Clients recognize the good deal they’re getting in having a firm so insistent on tax planning, and they’re really shocked about it. We rarely lose in competitive situations.

More on aligning values

Our third key point, “aligned values,” starts with the fiduciary standard, and we take it incredibly seriously. It’s absolutely doctrine around here. We have full disclosure—anything we can think of to tell the client, we do, and we do it way before any engagement or anything happens. We’ll tell them. In the rollover situation, we put it in writing that clients will pay us more than with their alternative choices. We have no problem with that. Just disclose it. Then live up to it, of course.

Then aligned values. What do clients want? They want to know that the people looking after their funds have integrity and accountability, and we stress that. We also emphasize that we want to foresee and address issues, perhaps even before the clients think of them. Then we want to be proactive, and make sound and timely recommendations. These are just us doing our business. All of it leads to the clients getting a broader view of their own life path. When they know that we are aligned with that, versus making some fees off of AUM, that’s a huge contrast.

We understand that money’s a tool, and that taxes are a part of it, and the planning is a huge part of it, but at the end of the day, clients want to have a better life. When we’re discussing what’s really bothering them, we’re listening. That’s where the conversation is. We do what we can. It’s always interesting, you really become a counselor in this business.

Divorcing clients

There are times where we have to recognize where our jurisdiction is being overreached. It happens. Clients bring very personal and intimate subjects into the meetings, and we do what we can, but there are some things we’re just not set up to work on. Sad to say, not all of our married couples stay together. Counseling for divorce is part of the business. We urge clients to try to work it out, but if they’ve absolutely made the decision, we advise them to have an amicable meeting, and we act as the dual advisor until a point comes where we can’t.

There’s a point at which you recognize that you can’t do something, and then you must recuse yourself, and everybody needs to find their own advisor. We try to make the time together last as long as possible. It saves both sides a ton of money, and usually they can work things out before they lawyer up and launch the missiles. There’s also an aspect that everybody’s ignoring, and that’s who gets head-of-household status. That’s very impactful on the tax side. You can claim an extra $6,000 or so in the standard deduction, plus $2,000 for each kid.

Prospecting with presentations

Our growth is primarily referral-based. We are grateful to have a large base of happy clients, who bring us friends and family. But we do also generate new clients through presentations. And I’m a very outgoing guy, and I like doing presentations. Now, I’m focusing on the whole process from age 60 and up. I love the Horsesmouth materials and intend to use them heavily in 2019. It really resonates.

Social Security and Medicare are going to be a major component of my presentations. Everybody wants to know what’s going on in the markets, and I’ve got that down. I can do that all day long and people pay me to do it. But people can go online and find information about investments. They can’t easily answer Roth conversion issues, stock exercise issues, how to avoid as much AMT as possible. Those are difficult things to answer, so I’m putting illustrations for those things into my presentations now.

We do some presentations right here in the office and some for community groups. All of us here are active in different organizations, so we’ll ask permission to invite people, and look for groups whose members might want to listen to us. There are endless numbers of chambers of commerce, women’s groups, and so forth who are looking for quality presenters. Every time I put myself out there, I get overwhelmed with people who want to make an appointment. It’s a nice position to be in.

At the end of the presentation, I have a fairly simple call to action. “Tax laws have changed dramatically. There will be decisions to be made. We have been in the CPA business for 52 years. We’re an investment management firm. So many things to discuss. If you’d like to continue this further, please give us a call.”

My advice

For other advisors who are looking to get into more tax planning, I would say find some good illustration tools (like Horsesmouth) and get a relationship with a CPA firm. I think it’s essential. I really don’t know how the stand-alone, investment-only shops are going to survive.