As the fiscal cliff looms on the horizon this election season, financial advisors are figuring out strategies to help spooked clients take action if Washington lawmakers fail to deal with the expiration of the Bush tax cuts, which are scheduled to go into effect in Jan. 1, 2013.
For advisors who have a fiduciary responsibility to their client, but perhaps little expertise or capabilities in tax planning, the uncertainty leaves them trying to figure out what guidance to provide, says Kathy Stewart, vice president of fiduciary research at fi360, the education and training company that acts as a watchdog for the fiduciary standard.
“We are inundated with information on the looming fiscal cliff daily,” says Stewart (right). “When sifting through all the articles and studies, it is important to not forget the basics.”
Here, then, are the fiscal cliff basics for advisors – fi360’s top five tips for financial advisors who are navigating investors through the shoals of tax positions, portfolio evaluations, estate planning and budgeting.
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(Read Fiscal Cliff Is Higher Than You Think: BofA-Merrill at AdvisorOne.)
1. Know Your Client. Remember to brush up on your client’s overall goals and objectives as you begin fiscal cliff preparations, including a review of your client’s budget/cash flow, investments, retirement plan and estate plans, says fi360’s Stewart, who contributes to the organization’s professional training programs on legal, regulatory and financial subjects.
Keep in Mind: In an overall client review, good communication is essential, whether face to face, over the phone or in an email or letter. According to Susan Weiner, an investment writing consultant and CFA charterholder, the principle of “What’s in it for me?,” or WIIFM, should guide you: “When someone looks at their email inbox, they’re going to judge things by WIIFM,” she says.
2. Tax Positions. Investment advisors are expected to know the implications when they advise either the purchase or sale of assets in client portfolios, according to fi360’s Stewart.
“With changes forthcoming to income tax rates on ordinary income, qualifying dividends, capital gains rates or the impact of the AMT, what is true today might not be true once Congress either takes action or fails to do so, as the case may be,” she says.
Keep in Mind: While generally not tax experts, prudent investment advisors will involve outside experts such as the client’s accountant to look at any effects of forthcoming changes. Richard Niles, senior editor for Summit Business Media’s Tax Facts Online, suggests that advisors should help clients avoid getting blinded by the 2013 sunset and consider moving income items into 2012, when rates may well be lower, and at least some certainty prevails.
3. Portfolio Evaluations. For advisors who claim to provide comprehensive advice over a client’s financial picture, now is the time to investigate the tax ramifications as part of your year-end advice, according to fi360’s Stewart.