8 Wealth Management Issue #1: Investment Management

The 1040 Can Help You Identify Investment Opportunities for Your Client.

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In the April issue of Tax Insider e-newsletter, we introduced the 8 Wealth Management Issues^SM, which we believe will help enhance your role as your clients’ tax adviser. Starting with this issue and in each issue until November 2009, we will show you how each of the 8 Wealth Management Issues - Investment Management, Cash Flow & Debt Management, Family Risk Management, Retirement Planning, Education Planning, Legacy Planning, Business Planning and Special Situations Planning - are interrelated. With these 8 Wealth Management Issues, you can help your clients identify the issues they have already adequately covered and those issues that need more attention. You can also help your clients create an action plan that addresses these issues as they see fit. This month’s issue will focus on Investment Management.

In today’s investment environment, it is easy for your clients to be overwhelmed by the amount of information available. It seems that the media and the so-called “experts” are always telling them what to do with their investments, even though they do not have any knowledge of their specific financial situation. Without professional advice, taking action could be detrimental to your clients’ investment goals.

You can help your clients by working with them to create an investment strategy that is designed just for them with their unique goals and needs in mind. As their Advisor, you can build an investment plan that considers your clients’ investment goals, comfort level, expectations, and the effect of taxes on their portfolio. This plan will manage their risk for every dollar of their return. And, because investment management is something that should be adjusted as goals evolve and portfolios change, you can work with your clients on an ongoing basis to monitor their portfolio and rebalance it as needed.

Although an exhaustive review of a client’s 1040 can reveal numerous investment opportunities, we will conduct a simple review of Schedule B and Lines 8a and 9.

Schedule B lists the taxable interest and dividends received by the client. This is an excellent place to begin looking for ways to enhance clients’ after-tax income. The key areas you should analyze include the following:

• Is your client properly diversified?
• Is your client in a high tax bracket?
• Does your client have investments with another Advisor?

Diversification is more crucial than ever to weathering business and market cycles. If the client has dividends from a few individual stocks or interest from a few individual bonds, they are not adequately diversified. You might want to show the client that by diversifying their individual holdings, there is the potential for reducing overall volatility while increasing return on investment.

By reviewing Lines 8a and 9, you may see that your clients are in a high tax bracket. If they are not investing in tax-exempt or tax deferred holdings, this is an opportunity for you to recommend they consider alternatives. Qualified retirement plans (including IRAs) also offer tax deferral; however, there are limitations on the amounts one can contribute.

Although clients may not tell you about assets held with another Advisor, you may find these assets by examining your client’s interest and dividend amount. This review gives you the opportunity to find out where those assets are held and whether or not the client is happy with that Advisor. In many cases, clients will have a “do-it-yourself” stock account somewhere, and they may be tired of doing it themselves.

Using the Form 1040 to examine financial planning opportunities may be new to some individuals. However, understanding a client’s tax return and the information contained in it is critical to the overall financial planning. The tax return can shed light on financial mysteries and uncover financial obstacles that keep clients from reaching their goals. Most clients want someone to tell them what to do. Taxes and investments are confusing. Your clients will respect you for helping them identify a need and working to solve it.

Next month’s feature will address Cash Flow and Debt Management. Cash flow is the cornerstone of your clients’ wealth management plan. You can help your clients identify where their cash is going each month and evaluate potential opportunities to improve their cash flow through tax strategies and proper debt management.

The current economic and market environment reinforces the importance of using a comprehensive and repeatable process to address the wealth management challenges your tax clients face, not only for their retirement plans, but their entire portfolios. Whether their wealth is valued at $10,000 or $10,000,000, it is critical in times like these that a client has an Advisor who is knowledgeable about their complete financial picture, including their tax situation, so they can be given appropriate advice and recommendations. Our 8 Wealth Management Issues strategy can help you help your clients.