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Talking about new taxes with clients isn’t a one-size-fits-all proposition

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With the presidential election and fiscal cliff negotiations behind us, the reality of increased taxes is sinking in for many investors. Unfortunately, many are sitting on the sidelines, passively watching their portfolio absorb the brunt of new tax laws.

According to a recent survey of 751 mass affluent investors commissioned by Nationwide Financial, six in 10 (60 percent) survey respondents say they either won’t or are unsure if they will meet with a financial advisor to discuss how new taxes may impact their portfolio.

It’s human nature to freeze in moments of change and uncertainty. That’s where financial advisors come in. There’s a huge opportunity for advisors to proactively engage clients to have this important conversation. It’s also important to recognize that some clients may be more receptive than others.

Our survey reveals that, among various demographic groups, there are notable differences in the understanding of tax-advantaged products and varying degrees of receptiveness to their use. This data helps us see the ripest sales opportunities and identify segments that may be more resistant to change. 

Regardless of their current point of view, all segments of affluent investors need to understand the implications of new taxes. Advisors who come to the table understanding their client’s current perspective can tailor counsel for a more efficient and effective conversation that will enhance trust and credibility.

Here are few key insights from our survey:

Women are more upbeat but less confident in knowledge

Female survey respondents were less likely than men to expect a significant decrease in household income or asset value as a result of tax code changes (16 percent vs. 31 percent). They also were less likely than men to have met with a financial advisor to talk about this topic. In fact, just one in 20 women survey respondents had done so at the time of the survey (5 percent women vs. 13 percent men).

I hope female respondents are justified in their comparative optimism, but in the meantime advisors should make a point to reach out to female clients. Remind married clients that the wife is more likely to outlive her income, so it is critical for both spouses to be active in managing the portfolio.

Despite more optimism about their portfolio, women respondents expressed less confidence than men that they completely understand the tax advantages of annuities (17 percent vs. 27 percent), life insurance (23 percent vs. 34 percent) or 401(k) plans (38 percent vs. 52 percent). This may be attributed to what appears to be an underutilization of the financial advisor relationship. However, our survey data suggests that women may be more receptive than men to learning more about tax-advantaged products – so advisors can build trust by helping them address this perceived knowledge gap.

Middle-aged respondents are more receptive

Middle-aged survey respondents (ages 35-54) are less likely than those older to say they understand the tax advantages of annuities very much or completely (56 percent vs. 73 percent), but are twice as likely to consider purchasing another tax-deferred product (31 percent vs. 14 percent).

This group of respondents is more likely than those who are 55 or older to want more education on annuities (51 percent vs. 37 percent), life insurance (23 percent vs. 14 percent) or 401(k) plans (30 percent vs. 17 percent). They are less resistant to making portfolio adjustments, with only about one-third of middle-aged respondents (31 percent) saying they won’t make any portfolio adjustments as a result of new taxes, compared to nearly half (45 percent) of respondents 55 or older. 

Despite a less receptive mindset, 84 percent of those older than 55 say they are comfortable talking to their financial advisor about taxes. Advisors should take advantage of this receptiveness to reinforce their long-term relationship with these clients – even if it doesn’t result in portfolio changes. You may find that receptiveness to change increases as you help them understand the situation and their options.

Upper-middle income levels are open to education and change

More than half (52 percent) of those with $150,000-$249,000 in income believe changes can be made to prepare their portfolio for new taxes, compared to just 36 percent of all survey respondents. Half (50 percent) of respondents at this income level want more education on annuities, compared with 41 percent of the total survey population.

Survey data suggests men and women ages 34-64 with income of $150,000-$249,000 may be most receptive to the prospect of adding a tax-advantaged product to their portfolio.

Receptive or not, this is a topic of importance for all clients. While survey data can be helpful, remember that your clients are people—not numbers. You’re bound to find some who don’t match this data, and the last thing you want to do is insult their intelligence.

A good way to start is by asking clients if they understand how new tax laws will affect their portfolio, and if they feel confident in their understanding of tax-advantaged products. Answers to these questions will help you find the right starting point for your conversation.

In the end, your clients will appreciate your effort, which will go a long way in reinforcing your long-term relationship.

Eric Henderson, FSA, MAAA is senior vice president of life insurance and annuities for Nationwide Financial, Columbus, Ohio


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