Helping Your Clients Understand Uncle Sam

Mitch Anthony

Spring, when a financial advisor's thoughts turn to – taxes.  The biggest day in April for most of our clients (and us) is April 15, the day tax returns are due to be filed with the IRS.  As your client's financial life planner, you want to be sure your clients are shielded from having to pay more than their fair share to Uncle Sam.  Unfortunately, clients don't always understand the tax consequences of their decisions.  As their financial advisor, one of your responsibilities is to educate your clients on why it's so critical to look at the tax ramifications of each investment they make.  One of the ways to introduce your clients to the issues surrounding asset protection, specifically taxes, is to use stories.  As I've illustrated in many of my books, stories are a great way to engage clients and translate difficult concepts into understandable terms.  In this month's column, I'm going to share a few of my favorite stories from my book The Financial Professional's StoryBook (coauthored with Scott West and Dave Saylor).  I'd love to hear back from you after you've had a chance to use these stories with your own clients, or if you have a story of your own you'd like to.

Cheap Sneakers 

"Would you run a marathon in cheap running shoes?  Of course not.  You want shoes that will help you maximize efficiency so that you can run your best race.  Over the long journey, good shoes are going to make a difference.

It's a little like investing.  If you invest in cheap and taxable securities, they're going to make you work harder each year because of the taxes each April.  Over the long run, those taxes are going to hurt your performance more and more.  My advice is to take your investing as seriously as you take your running – and invest with the best vehicle you can."

The Fox and the Henhouse 

"The long-term goal of investing is to multiply the eggs I our baskets.  Most people are focused on producing more eggs (getting higher returns) but pay little attention to the fox that perpetually robs the henhouse.  If you ignore the fox, there eventually will be nobody left to produce more eggs.

That fox is taxation.  The annuity I'm about to show you builds a high fence around the henhouse to keep the foxes out – which allows your eggs to multiply."

Duty-Free Store

"Annuities are a little like duty-free shops at the airport.  Here's why.  First, everything in the shop is exempt from taxes.  Second, there's usually a wide selection of products available.  Third, you have to be going on a long journey to shop there.

The "AnnuiTree" 

"Let's imagine that your back yard is like your portfolio.  You haven't planted anything yet.  Many years down the road you're going to retire, and one of the things you want for your retirement is a hammock in the back yard – along with a gentle breeze, lots of shade, and plenty of lemonade.  So you prepare for this by planting trees in your back yard.

The problem is, as the tree grows, the IRS man shows up every April and trims back the growth by as much as four percent.  N the end, you may not have enough shade for your hammock.  That's why you should plant the 'AnnuiTree' – a tree that the IRS cannot touch.  In fact, this tree has step-up plans and compounding features that assure growth."

Leaks 

"Investment portfolios are a little like scuba tanks – leads can have serious consequences.  If you're diving and your tank is leading air, your dive is going to get cut short.

The same is true of investing.  If your portfolio has a tax leak, your retirement could get cut short – and you might have to go back to work.

I can show you how to seal the tax leak with investment planning, and so you'll keep as much of your gains as possible.

Aerodynamic Tax Returns 

"Cars are a little like investments – the higher the performance, the greater the resistance.  With cars, the wind resistance increases in proportion to your speed.  With investments, the tax burden increases in proportion to your gains.  But, there are solutions.

With cars, it's aerodynamics – engineered to help slice through the wind.  With investments, it's tax-exempt investments – designed to slice your tax burden."

Racing Performance 

"My father retired.  No, he's not spending time on golf courses, cruises, or in the garden – he's racing Ferraris.  I asked him his strategy for winning.

He said that the number one fact is the efficiency of the care – the calibration of the spoiler; the right tires, and the proper fuel mixture.  He cleans, waxes, and polishes every square inch of the car.  He also fills in the dents and dings – eliminating any drag on the aerodynamics – because these races are won or lost by hundredths of a second.  He ekes ever bit of efficiency out of the car.

How does this relate to your investments?  I'd like to make your portfolio as efficient as possible by reducing the drag of taxes on your performance.  It could help put you in the winner's circle.

Adapted from The Financial Professional's StoryBook by Scott West, David Saylor and Mitch Anthony (©2006 by Mitch Anthony. Published by Advisor Insights Press.)

Mitch Anthony is the founder and president of Advisor Insights Inc. and The Financial Life Planning Institute, training companies serving advisors and the financial services industry. He is a contributing editor for Research magazine and his column “Financial Life Planning” appears in Financial Advisor magazine. Anthony has been named one of the financial service industry’s top “2006 Movers & Shakers” by Financial Planning magazine. His radio feature, The Daily Dose , is heard every day on 200 radio stations nationwide. Anthony is the author of several books for advisors, including StorySelling for Financial Advisors , The New Retirementality, Your Clients for Life , Selling with Emotional Intelligence , Making the Client Connection , The Financial Professional’s StoryBook, and Your Client’s Story. Contact him at mitch@mitchanthony.com