The new tax rates require new tax planning, but advisors find it's like feeding a big pill to a small dog
Brooke’s Note: Here is a clear example of why former schooltteachers and former vacuum salesmen sometimes make better financial advisors than people with doctorates in finance. No solution is much good unless the patient can be convinced to take the pill. Eric Henderson seems to have a good grip on that dilemma and lays out some thoughts here about getting clients to think about the one thing we all seem to hide from — change.
Now that new taxes are official, you would think that investors would be rushing to their financial advisor to discuss their portfolio. Surprisingly, many are not. Why? It depends on which investor you ask. See: Advisors need to deliver a reality check to clients about 2013 tax changes barreling down the pike.
According to a recent survey of mass-affluent investors commissioned by Nationwide Financial Services Inc., there are significant differences in the way investors from different generations are reacting to new taxes. While middle-aged survey respondents appear to be receptive to advice and education about tax advantaged solutions, they are generally passive when it comes to doing something about it. Baby boomer survey respondents, on the other hand, voiced less interest in education and more resistance to making a change.
There is at least one common denominator between the two groups: Our survey tells us that investors of all stripes are not very likely to engage an advisor to talk about new taxes. In fact, 6 in 10 respondents either said they won’t do so or are unsure if they will.
Savvy advisors who understand the potential cost of failing to prepare for new taxes are proactively reaching out to their clients. They’re likely to find that the most productive discussions happen when they tailor their approach to meet clients where they are.
Ears wide open
Let’s start with the good news from our survey: Middle-aged survey respondents (ages 35-54) appear to be more receptive to making portfolio adjustments for new taxes. They are twice as likely to consider purchasing another tax-deferred product as those 55 or older (31% vs. 14%). See: The ABCs of doing due diligence on fixed income annuities.
This group also voiced a greater receptiveness to learning more about tax-advantaged solutions. They were more likely than those 55 or older to want more education on annuities (51% vs. 37%), life insurance (23% vs. 14%) and 401(k) plans (30% vs. 17%). They also acknowledged a lower level of understanding of the tax benefits of annuities, with nearly half (44%) saying they don’t understand them very much or at all, compared with 27% of those 55 or older. See: Why my financial advisor came to mind (seriously) as my airplane was plummeting toward the ocean.
Backing into the tax talk
Members of Generation X acknowledge a desire for more education and are relatively receptive to changing their investment strategy. Unfortunately, just like their baby boomer elders, they’re unlikely to engage their advisor to talk about this topic.
Why are they so passive? Consider the primary concerns of a middle-aged investor. They are likely to be in the prime of their career with their children still living at home. In other words, these people are busy, and may be focused on other things. Their priorities likely include saving for retirement, paying for college and ensuring that an unexpected event doesn’t derail the family’s finances.
Instead of simply focusing on taxes, invite them in to talk about topics that may be higher on their priority list, such as their retirement plan, college-savings products and life insurance. It will be easy to add taxes as a discussion topic — and based on our data, they’re likely to be interested.
Conversely, respondents older than 55 voiced more resistance to change, with nearly half (45%) saying they won’t make any portfolio adjustments as a result of new taxes, compared with about 31% of middle-aged respondents. Nearly a third (30%) of this group does not believe it’s even possible to make changes that will prepare their portfolio for new taxes.
About half (47%) of those 55 or older said they are not interested in additional education on life insurance, annuity or 401(k) products. They voiced significantly more confidence than younger respondents that they understand the tax advantages of annuities (73% vs. 56%).
How do you counsel clients who feel that they know it all? On some level, they accept that they don’t, otherwise they wouldn’t have come to you in the first place.
In fact, older investors have more confidence in their advisors than you may think. Despite a less receptive mindset, 84% of this group say they are comfortable talking to their financial advisor about taxes, and they are actually more confident than younger respondents in their financial advisor’s ability to help them prepare their portfolio for changes in the tax code (96% vs. 86%).
This may seem like a contradiction. Actually, it’s an acknowledgement that they do trust their advisors. It’s also an opportunity.
Advisors should take advantage of the receptiveness of baby boomers to at least have a conversation. Before engaging them, take a moment to walk a mile in their shoes.
Baby boomers are more likely to be empty-nesters. They are close to or in retirement and probably worry about things such as outliving their income or the costs of long-term care and health care in retirement. See: How IRS rule changes may bring an obscure retirement plan into prominence.
Build your invitation for this conversation around these topics. Both annuities and life insurance can provide solutions for these challenges — not to mention enhance a portfolio’s tax position. This will provide a natural transition to the tax topic. See: How Glenn Neasham lost his house, was forced to go on food stamps and faces jail time after selling a senior an indexed annuity.
Pick up the phone!
The most important thing is not to wait for clients to call you. Many clients have no intention of initiating a discussion about taxes. Advisors should set up a meeting.
You may find that openness to change increases as you help them understand the situation and their options. If not, the effort will serve as a reminder that their advisor is looking out for their best interests. Either outcome will provide a positive long-term return on the investment of your time in the form of enhanced trust and credibility.
Methodology: The tax study was conducted online by Harris Interactive between Sept. 28 and Oct. 5. The respondents comprised 751 adults ages 18+ having $250,000 or more in annual household income or investible assets. Figures for age, sex, race/ethnicity, education, region and household income were weighted where necessary to bring them into line with their actual proportions in the population. Propensity score weighting was also used to adjust for respondents’ propensity to be online. Since this information was collected before the presidential election, respondents were asked to respond to questions assuming both potential election outcomes. The data represented here focused on responses where respondents assumed the president would be re-elected.
Neither Nationwide nor its representatives give legal or tax advice. Please consult your attorney or tax advisor for answers to specific tax questions.
Eric Henderson, FSA, MAAA is senior vice president of life insurance and annuities for Nationwide Financial.