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Retirement Planning > Saving for Retirement

Digging Deeper

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In last month’s article (“Eureka!,” Investment Advisor October 2006 cover story)–we discussed the benefits of mining the data in clients’ 1040s in an effort to better understand them and to help you provide appropriate investment solutions. To recap what we covered last month, every line of a 1040 corresponds to a life event, each of which can represent an opportunity for you. Understanding the “why” and “what” of each line can help you gain insights into your clients’ past, present and future financial behaviors. This in turn will lead to a better understanding of clients’ investing and buying decisions, their specific issues and needs, and how they like to be serviced in order to deepen relationships.

While last month we concentrated on how to deliver wealth management solutions, we will now take a look at the other key opportunities that could help build your business success.

As advisors review their clients’ tax returns they should consider the SARI concept. SARI is the ability to:

  1. Deliver wealth management Solutions
  2. Uncover hidden Assets
  3. Gain Referral opportunities
  4. Network with centers of Influence

Uncovering Hidden Assets

When you think about the concept of “hidden assets,” keep in mind that these are currently only hidden to you, not to your clients. To uncover these assets, which are ones you are not currently managing, you will need to think like an IRS auditor. To begin, you can simply look at clients’ home addresses, incomes, and itemized deductions. Ask yourself does it all add up?

Does the client’s lifestyle seem greater than his income? Does the amount indicated make sense? If yes, how is he financing it? Is it from a trust? Gifts? An inheritance? Settlements or cash business?

Then the follow-up question to consider is: Are there underlying assets that are available for management?

Alternatively, the same information will allow you to see whether a client’s lifestyle seems to be below her income level? If yes, where is that excess going? Maybe this income level is new to her? Could there be a greater number of assets to manage in the future?

After looking at the client’s 1040, line 45, which indicates that an alternative minimum tax was due, ask yourself why this occurred? Look for the detail on Form 6251 (alternative minimum tax–individuals) to see if it was a result of an incentive stock option exercise. Why did they exercise those options? Perhaps they are getting ready to leave their jobs? Maybe they are planning on a large purchase that could have been better handled through a customized credit solution?

What about AMT?

Very importantly, does line 45 represent a life event that could free up assets? Perusing the 1040 further should provide additional information on key life events. For example, line 67, excess social security tax, usually indicates that the taxpayer has changed jobs in mid-year. If that is the case for some of your clients, could there be 401(k) assets held at their former employers? Have their benefits changed, providing an opportunity to discuss life, disability or long-term care insurance? Will their incomes be increasing because of a new position? Can you manage this potential excess?

Now take a look at Schedule B, income-producing investments. What asset base does it take to generate this type of income? For example, the average dividend yield for the S&P 500 Index is 1.9%. If your client has $10,000 in dividend income, as shown on line 9b of the 1040, are you managing the portfolio to support that?

On Schedule A (for itemized deductions) look at line 13, which represents investment interest. Are you aware of any margin loans? If not, where are those assets?

If you look at line 22 of Schedule A (miscellaneous itemized deductions), you will find investment advisor fees. Are fees from other advisors comparable to what you charge the client? If not, why not? What assets are generating that fee and are these available to you?

Then go down to line 27 of Schedule A (other miscellaneous deductions). Is there a deduction for IRD (income in respect of a decedent)? Generally, this deduction indicates an inheritance. Has your client inherited an IRA? If you were unaware of that inheritance, this would be an opportunity to make recommendations to your client on how to handle the IRA.


In addition to uncovering hidden assets to invest, think about the other services your firm offers. For example, look at Schedule A, line 10 (home mortgage interest). Could the client be a candidate for refinancing? If Schedule B (interest and dividends report) shows a lot of interest income, could it be that they are saving for a large purchase? Can you work with them on any lending opportunities?

If line 39 on the Form 1040 is checked, that means that the client is over age 65. By age 65, many people have grandchildren. Have you spoken to these clients about 529 savings plans? Furthermore, have you discussed your wealth transfer services with them?

These so-called hidden assets are all there for the finding. You don’t need to be a tax specialist to uncover these treasures. It only takes simple initiation–ask your clients for their current returns to begin the hunt.

Gain referral opportunities

Now that you know the “secrets” of the 1040 and have uncovered ideas for assisting your clients with their investments, how can you leverage it to “uncover referrals?” Again, you will need to think and act like an auditor. Use the return as a starting point to determine who your client may know. Who is in their business and social circle? Who is in their community?

For example: Find neighborhood referrals–Check the client’s home address. Are there other people you know in that neighborhood you might want to have as clients? Ask the client if he or she could refer you to those people or other neighbors who might be interested in your services.

Prospect clients’ business colleagues–Note the client’s employer. Ask if the client has business colleagues you could meet. Suggest holding a seminar at the company to address such issues as concentrated positions, saving for retirement or transitioning to retirement.

Access fellow board members–Look for contributions to charitable organizations. Ask for referrals to board members you are trying to meet. Offer your services to the organization itself–your investment advice can help it meet its fiduciary responsibilities.

As you do this exercise, keep in mind who the people are that you want to know. If your clients do not know your targets, perhaps they are less than six degrees away from that prospect and it could still result in an introduction. Potentially your clients have friends or neighbors who work for the companies or organizations you want to approach or those friends and neighbors know someone who has some connections. You’ll never know until you ask.

Leveraging the 1040 for networking

If you originally thought that talking taxes would never be an opening line for networking, you probably have a different view now. Using the 1040 can help you network with centers of influence to further your business opportunities.

Remember to look for the contact information for your clients’ tax advisors. There are two places you can look: either on the bottom of page 2 of Form 1040 (if the client uses a tax preparer, you will see that person’s name and address) or on Line 21 of Schedule A, where you can see tax preparation information.

But, think more broadly than just an accountant or lawyer. Who else is on their “payroll”? There are numerous professionals out there who do not compete for your services but complement them.

If your clients recently moved, find out who their real estate agent is. Who is their decorator? Who is their contractor? These professionals have other wealthy clients who may also need your assistance.

Making your move

So now you have a plan to get you through the 1040 to open the door to your clients’ tax past and then apply it their financial futures. But are you comfortable in asking for the return? You should ask upfront and explain the value to them. Stress the importance of the review and how it will offer you greater insight in an effort to meet their overall financial goals and objectives. Although some of your clients may be reluctant at first, over time, as you build trust with those clients, they should better understand what your review can mean to them.

If you are wondering when is a good time to approach them about this information to help develop wealth planning solutions, there is no better time than the present. As 2006 comes to a close, year-end tax planning becomes crucial–so open the conversation now to begin the planning process.

If you let it, the 1040 can be a powerful tool for enhancing client relationships and building your business. Don’t be afraid to ask.

Examining IRAs

One of the greatest vehicles to store “hidden assets” in plain view involves retirement accounts–specifically individual retirement accounts (IRAs). Is your client considering withdrawing from, adding to, opening up or rolling over an IRA? To anticipate opportunities or uncover hidden assets, think about the stages of life your various clients are in. In addition, benchmark your clients against some of these national averages:

  • Nearing retirement age–The average rollover IRA balance for individuals at retirement is $200,000. If accounts are much smaller, find out why.
  • Job Changers–The average rollover IRA balance for job changers is $60,000.
  • Past retirement age but still working–Could a non-hardship distribution be available?
  • Work for companies going through reorganization–They may have retirement plan rollovers as well as lump-sum termination packages.
  • Have not changed jobs recently–The average job tenure is about five years. If your clients have been at the same company far longer, they may be thinking about a change now. Ask them about their plans.
  • Have changed jobs in the last five years without making a rollover–One-third of all assets in 401(k) plans belong to employees who have left the company. Where have your clients kept their accounts?

Source: Cerulli Associates


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