The coronavirus and resulting market chaos have clearly caused clients to worry about the health of their family, themselves and their portfolio. Times like these are when advisors truly earn their keep—to be in communication and help clients stay calm when it’s too easy to panic.
Volatile markets provide the wise advisor with a chance to educate clients on why managing taxable, tax-deferred and tax-free accounts in a coordinated and optimal fashion—a concept popularly known as “householding”—is so important. And this type of environment requires taking it to the next level—or, as we call it, “smart-household portfolio management” or “smart-householding.”
Most investors have scattered retirement and brokerage accounts. But too few advisors are taking the time to ensure all of these accounts are truly in sync with each other. A good advisor might talk about the down market as a “buying opportunity.” But a great advisor can help their clients reset their portfolio for long-term financial success, even in the midst of a crisis.
The steps of smart householding
This market environment creates a meaningful chance to discuss the most important concern on a client’s mind—risk. These conversations can lead to careful rebalancing of a portfolio that might include an IRA, 401(k), a spouse’s Roth IRA and any brokerage accounts. Taking a smart-householding approach with these accounts and rebalancing in a collective manner places a client on track for long-term success based on a combination of their current financial standing and their view about the years to come. And, as the markets inevitably come back, you can help a client make back losses by creating a smart-householded portfolio.
Stormy seas for markets frequently lead to conversations about finding opportunities for tax- loss harvesting to lessen their tax bills in the years ahead. A smart-householded portfolio can help an advisor craft a long-term tax-smart strategy that enables clients to earn greater after-tax returns. Proper asset location is a matter of determining which assets belong in which types of accounts—for example, if dividend stocks or yield paying bonds might be better positioned in a tax-qualified retirement account—to ensure optimal levels of tax efficiency.
Taking the time to help clients develop a well-positioned and fully tax-advantaged portfolio across their various accounts provides significant benefits for advisors as well. Optimizing a household portfolio to reduce unnecessary taxes is like plugging a hole in a leaky bucket. If clients’ portfolios aren’t coordinated, the taxes come out of the assets you manage, resulting in reduced revenue.
The benefit to the client hinges on consolidating their accounts with one advisor to call the plays and help improve outcomes. And this leads to new AUM through account consolidation. This next-level thinking will help you earn a client’s trust, which is vitally important in this age of automated advice platforms or so-called robo advisors and almost “free” trading fees that might encourage people to buy and sell stocks on their own—not a good strategy in this environment.
What comes of going the extra mile? A happy client, and someone who is more likely to provide referrals. People will inevitably talk about finances when the stock market is making headlines like “biggest decline since the Great Recession.” A client who can tell a friend or family member how you rebalanced all their accounts while increasing tax efficiencies is a prime candidate to lead to new business.
Some clients may not be comfortable in putting all of their investment accounts under a single advisor’s management. Some might forget to roll a 401(k) into an IRA. Others might prefer to independently manage an account or two. But demonstrating the impact of household-level rebalancing that includes long-term tax considerations could encourage a client to entrust all of their assets to your advice and management.
There may be difficult times and dark skies right now, but history has shown such difficulties don’t last forever. Offering a client advice and service that go well beyond navigating the short-term climate can help you not just maintain but also grow your business once our lives—and the markets—return to normal.
Steve Zuschin is an executive vice president at LifeYield. Follow the firm here @LifeYield
