Nerd's Eye View blog

Employee Retention Credit: Helping Clients By Assessing Rules And Eligibility In 4 Phases

November 15, 2023 07:02 am 0 Comments CATEGORY: Taxes

In the depths of the COVID-19 pandemic, many small businesses such as restaurants, entertainment venues, and retail stores experienced cratering revenues, either due to government lockdown orders that forced many non-essential businesses to temporarily shut their doors, or simply due to lack of demand since many of their customers decided to stay at home out of an abundance of caution. To stave off a wave of business closures and a subsequent surge in unemployment, the U.S. government designed a number of small business relief packages to incentivize companies to keep workers on their payrolls. One of these was the Employee Retention Credit (ERC), a tax credit that eligible small businesses could take against their employment taxes.

Although it was initially overshadowed by other relief measures such as the Paycheck Protection Program (PPP), more recently, the ERC – which technically ended after 2021, but which businesses have until as late as April 15, 2025, to claim – has attracted attention due to a pop-up industry of ERC vendors who purport to help small businesses claim the credit. The caveat is that many of these vendors encouraged businesses to apply for the ERC even when they weren't eligible, and the resulting wave of questionable ERC applications has caused the IRS to scrutinize businesses' claims of eligibility for the credit. As a result of this attention, advisors are seeing an uptick in questions from their clients – and may have questions about their own businesses – regarding whether or not the ERC is really legitimate, who can actually claim it, and whether it's worth pursuing either way.

While the ERC is indeed legitimate, determining eligibility is complex largely due to its phased implementation across 4 separate 'phases' spanning most of 2020 and all of 2021. Each phase has slightly different rules about who can claim the ERC and how the credit is calculated. Businesses need to determine their eligibility for the ERC and the amount that they can claim on a quarterly basis, adhering to the specific rules of the 'phase' in which each quarter falls since these rules can shift from one quarter to the next!

In general, businesses can apply for the ERC if they were forced to partially or fully suspend their operations due to a government order, or if they experienced a "significant decline in gross receipts" between March 13, 2020, and September 30, 2021. A business could also qualify as a "recovery startup business" (as long as the business started after February 15, 2020, had annual gross receipts of under $1 million, and didn't otherwise qualify under the other criteria), which would allow it to claim the credit for the last 2 quarters of 2021. The credit itself is calculated as a percentage of the "qualified wages" paid to employees. Notably, many of the criteria used to determine the credit – including what constitutes a "significant decline in gross receipts", what is included in "qualified wages", and what percentage of qualified wages is used to calculate the credit – vary for different time periods, as well as for different sized businesses.

The key point is that, unlike the claims of many ERC vendors, determining a business's eligibility for the ERC is by no means a simple process and generally requires the expertise of a tax professional. And yet, many ERC vendors are not tax professionals themselves, often shifting the liability of complying with the complex eligibility requirements onto the business (even while the ERC vendor collects a substantial portion of the business's ERC as fees for itself). Financial advisors, then, can help by serving as an advocate for business owner clients, helping them preliminarily determine whether they may or may not qualify for the ERC and directing them to an expert tax professional to help them make the final decision of whether or not to claim it. Which has value even if the client isn't ultimately eligible, since the headache of applying for the ERC and being later found ineligible by the IRS could be far worse than not applying for the ERC in the first place!

#FA Success Ep 359: Building A Financial Planning Assessment To Show Clients Progress And Value Over Time, With Eric Miller

November 14, 2023 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 359th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Eric Miller. Eric is the Chief Financial Advisor and Co-Owner of Econologics Financial Advisors, an independent RIA based in Largo, Florida, that generates more than $4M of revenue while working with nearly 300 client households.

What's unique about Eric, though, is how he leverages a custom-built financial planning assessment he calls their Financial Prosperity Index, which he gives to both prospective and ongoing current clients so that they can better understand their financial health, target the financial planning domains where clients need the most help, and even more importantly be able to track their progress over time and demonstrate the value of their ongoing financial planning relationship without needing to just talk about the numbers of net worth and investment performance.

In this episode, we talk in-depth about why Eric intentionally built his Financial Prosperity Index to cover 100 different questions where the client is scored across 9 different domains and then receives an aggregate weighted score and a letter grade (with identified areas of improvement to lift their grade higher), why Eric has found that even prospective clients will take the whole 100 question assessment before their first meeting because ultimately they want to see their score and get feedback on how they're doing, and why, because Eric niche-focused his practice on health care practice owners (and even more specifically with physical therapists, veterinarians, dentists, and optometrists), he has been able to develop additional even-more-refined assessments geared to their specific business needs to further demonstrate the value of their advice beyond 'just' the portfolio.

We also talk about why Eric chose to niche focus his practice because he saw firsthand from his family members who work in health care that those in the industry were being underserved and he felt that he could provide a meaningful difference in their financial lives, how Eric grew his practice by developing relationships with business consultants to medical professionals and offering the consultants a 3-day in-person financial education course they could offer to their business clients (allowing Eric to get in front of his ideal prospects while also creating a benefit for the consultants who were allowed to charge for the program that Eric delivered), and how, because Eric charges up to $6,500 for an upfront financial planning fee and a $475 monthly subscription fee to work with his clients ongoing, his firm is on track to generate over $4 million in revenue this year with barely 1/4th of his revenue coming from traditional AUM fees.

And be certain to listen to the end, where Eric shares why, even though his firm added 60 new clients last year, Eric has his sights on acquiring at least 100 new clients per year going forward so that he can grow and scale his firm even faster because he wants to help even more people, how Eric historically struggled to celebrate his wins because he was constantly focusing on the next goal but has grown to appreciate the almost-therapeutic benefits of taking a moment to appreciate the accomplishments and progress that have already been made, and why Eric believes that younger, newer advisors should focus on not just on the technical skills but on developing their communications skills and becoming more self-aware of how they communicate with clients (because good communication skills lead to better client engagement, which is what ultimately drives a more successful career as a financial advisor).

So, whether you're interested in learning about how Eric chose the 100 questions to include in his Financial Prosperity Index, how Eric now focuses on speaking at conferences geared toward practice owners (sometimes paying thousands of dollars to do so) to more directly talk with prospective clients and demonstrate his service offerings, or how Eric wrote a book specifically for practice owners that he gives away in exchange for a prospective client's card so that they can later set up a meeting to talk, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Eric Miller.

Optimizing Virtual Client Meetings To Make Them More ‘Real’ And Less Exhausting

November 13, 2023 07:04 am 0 Comments CATEGORY: Practice Management

Traditionally, financial planning meetings have been held face-to-face in an advisor's office, and over the years, a body of research has emerged showing that how the advisor's office is laid out can have a significant impact on how clients perceive the advisor, their mood during the meeting, and even their resulting financial planning decisions. However, over the last decade (and particularly since the beginning of the COVID-19 pandemic), many advisors have increasingly been holding virtual client meetings over Zoom or other videoconferencing software – and more recent evidence is showing that, just as the physical office environment matters for advisors who meet in person, the 'virtual' office environment also matters for those who meet virtually.

In this post, Kitces Senior Financial Planning Nerd Ben Henry-Moreland writes about the unique challenges created by virtual meetings and how advisors can optimize their meeting space (as well as the structure of the meetings themselves) as a virtual environment.

For many advisors, the transition to meeting virtually was a struggle on account of two major challenges. First, communicating effectively and creating the same level of personal connection over a video call is more difficult than when meeting in person; in other words, there is a decline in what researchers call 'social presence' or the feeling of being present with a real person. Second, many people (not just advisors) who have greatly increased their use of virtual meetings in the last few years have experienced the phenomenon of 'Zoom fatigue', in which a combination of factors (including excessive eye contact, the distraction of viewing one's self onscreen, limited mobility, and louder speaking) make virtual meetings far more tiring than those held in person.

However, advisors can significantly reduce these negative effects of meeting virtually by optimizing the setup of their office environment and meeting structure. For example, the way that an advisor sets up their lighting, sound, and office furniture for their virtual meeting can affect how 'immersive' and realistic it feels for the client on the other end of the call. Furthermore, setting up a meeting background (either in the form of a physical office space or a computer-generated backdrop) that's more inviting than imposing can help the client feel more relaxed and open in conversation, while introducing opportunities to go 'off-screen' during the meeting (such as using screen sharing options at various points or even just building occasional breaks into the agenda) can help both the client and advisor fight Zoom fatigue and stay focused.

The key point is that with just a small investment – both in monetary terms for lighting, sound, and camera equipment, and in time spent planning how to set up the office space and structure the meeting – advisors can meaningfully improve the virtual meeting experience for both their clients and themselves, and create an environment more conducive to talking about the client's issues and feelings around money. Ultimately, that investment can make the transition to meetings well worth it, since the ability to meet with clients virtually means that advisors can work with more types of clients, specialize in new niches, and thrive in new ways without the geographic constraints of meeting in person.

Weekend Reading For Financial Planners (November 11-12)

November 10, 2023 02:00 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the news that a Fidelity benchmarking study revealed that both small and large RIAs saw positive organic growth in 2022, helping to mitigate AUM declines resulting from weak market performance. The report also flagged that profit margins for RIAs remained relatively steady over the past several years (despite strong market performance over the period), with the trend of firms offering increasingly comprehensive service while also discounting fees cited as a potential cause.

Also in industry news this week:

How the use of model investment portfolios can potentially save advisors time and boost client trust
Why a recent IRS Private Letter Ruling could facilitate the emergence of zero-commission variable universal life policies (that RIAs can actually get paid a fee to advise on)

From there, we have several articles on housing:

How aspiring homebuyers have a range of options, from intra-family loans to "house hacking", to reduce the costs of buying a home amid elevated prices and interest rates
Why a focus on resale value has led many home improvement projects to reflect popular, rather than personal, preferences
How one potential homebuyer crunched the numbers to decide that homeownership was not the right investment for her

We also have a number of articles on practice management:

Why fine-tuning their leadership skills can help owners of mid-sized firms take their business to the next level
How rapidly growing firms can fall into cash flow traps, even if they are profitable
A recent study identified common traits of advisors with high-growth practices, including being purposeful about organizational design and being willing to delegate tasks

We wrap up with 3 final articles, all about lending in the elevated interest rate environment:

Why the spread between 10-year Treasury yields and 30-year mortgage rates has expanded in recent years, leading to higher interest costs for homebuyers
How advisors can help clients evaluate whether, and which, private credit funds might be appropriate for their portfolio
How tighter bank lending standards have contributed to a flood of private credit loans, which offer opportunities and potential perils for borrowers and investors alike

Enjoy the 'light' reading!

Helping Hesitant Clients Boost Their Retirement Spending

November 8, 2023 07:04 am 0 Comments CATEGORY: Retirement Planning

Retirement is often framed as one's "golden years", a time to enjoy the fruits of several decades of hard work. And for many retirees who have planned accordingly, this transition is not a problem as they might spend generously on travel, hobbies, or other pursuits. Nevertheless, some retirees can find it emotionally challenging to bring themselves to go beyond the basics in retirement spending (e.g., because they have a hard time switching from 'savings' mode to 'spending' mode) and can be hesitant to spend on the full range of activities that would bring them the most happiness and meaning in retirement (even though they have the resources to do so).

For instance, after a lifetime of 'maximizing' their finances (likely seeing their net worth increase steadily over time), some clients might find it difficult to see their portfolio balances decline in retirement as they draw down their assets to support their lifestyles. This could lead some to spend less than they otherwise might want to, as they prioritize maximizing their wealth (for its own sake) over enjoying their overall lifestyle. Some retired clients might feel a great deal of emotional distress when spending (and therefore could be reluctant to spend more on themselves in retirement), while still, others might be hesitant to spend due to concerns about an unpredictable future (e.g., market conditions or their own longevity).

Nevertheless, advisors have an opportunity to add value through technical and behavioral-based strategies that can help hesitant clients increase their spending and have a more enjoyable retirement. For instance, framing the results of Monte Carlo analyses as a "probability of adjustment" rather than a "probability of success" can give clients more confidence that they are on a sustainable financial path. In addition, instead of grouping client expense categories as either essential (e.g., housing and food) or discretionary (e.g., entertainment, travel), advisors can group each category to have its own portion of "core" and "adaptive" expenses with 'core' buckets including spending that would otherwise be defined as "essential" spending and an amount of "discretionary" spending a client would have a hard time living without (e.g., housing – mortgage and weekly housecleaning service), leaving the "adaptive" bucket for the spending items that are truly discretionary for the client (e.g., housing – interior art). This encourages clients to 'splurge' on spending in the 'adaptive' bucket without guilt if the advisor can show that they can be confident about covering their "core" expenses. Also, given research suggesting that individuals are more likely to spend from 'guaranteed' income sources (e.g., Social Security or a defined-benefit pension), maximizing these pieces of the retirement income puzzle could give clients more confidence to spend.

On the behavioral side, clients could 'practice' retirement (e.g., through an extended sabbatical or series of mini-retirements) to experience what it would be like to spend their assets while not receiving wages. Advisors also could work with clients to explore different types of spending that have been shown to boost happiness, from 'buying' time (e.g., by hiring someone to clean their house) to spending on experiences, to philanthropic giving while they are alive (rather than waiting until their death to do so). Finally, advisors could help their clients step back and look at the 'big picture' by creating a Financial Purpose Statement or going through the Life Planning process.

Ultimately, the key point is that while some clients have no problem finding ways to spend down their nest egg in retirement (in which case an advisor can add value by ensuring they do so in a sustainable manner), the transition from saving to spending mode in retirement can be tricky for others, who might struggle to bring themselves to spend as much as they would like (even if they could afford to). For these clients, advisors can potentially add value by framing financial planning and retirement income conversations in a way that encourages these clients to explore their goals and the spending options that might fit their unique interests!

#FA Success Ep 358: Accelerating Growth By Asking For Referrals After Celebrating Shared Success With Clients, With Veronica Karas

November 7, 2023 07:02 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 358th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Veronica Karas. Veronica is a Senior Financial Advisor at CAPTRUST and works from the RIA's Lake Success, New York, office, where she oversees $360 million in assets under management for about 200 client households.

What's unique about Veronica, though, is the unique 3-question approach she uses to generate referrals not only from clients, but also from centers of influence as well, and even uses it to get referrals from prospects… all without being too pushy or salesy.

In this episode, we talk in-depth about how Veronica developed her 3 referral questions – which first ask clients (and others) to reflect on what else she could be doing from them that would be valuable, then what are the services she and her firm provide that are the most valuable, and then whether there is anyone in their lives that could use help with those same services they just said are so valuable – and to please facilitate an introduction to those individuals in need, how Veronica built this 3-question approach because she didn't have a natural network of friends and family to give her referrals and had to figure out how to comfortably ask the existing clients of one of her mentors, and the way that Veronica follows up with the introductions she receives to turn them into new business opportunities!

We also talk about how, amidst onboarding 52 new clients in a single year (due to the success of her 3-question approach), Veronica developed a blueprint that all new clients would go through in their 1st year with the firm that leverages a more modular approach to planning and stretches out the planning work (for the client, and her own team) over the span of 12 months, how Veronica's firm structures associate advisors to work with multiple senior advisors at once to not only offer high-touch service to their client households but give those associate advisors more intentional opportunities to learn what they can by being in meetings with many different experienced advisors of the firm, and how Veronica's firm structures its advisor compensation to both empower associate advisors to take over client relationships and still have the incentive to learn to build their own book of business as well.

And be certain to listen to the end, where Veronica shares how she overcame her early-career feelings that she was too young to serve as a lead advisor, how a commitment to talking about her work with at least 5 people each day for 2 years, from strangers at Target to fellow advisors, helped Veronica to overcome her fears and generate a rising flow of prospect leads and introductions to key referral partners, and how Veronica has maintained her focus on doing the right thing to navigate ethical dilemmas that have arisen over the course of her career, even when it meant leaving a job after less than a year to start over somewhere else.

So, whether you're interested in learning about a structured approach to generating more referrals, how to create a systematized process for a client's 1st year, or how to overcome the challenges of starting out and creating your own book of business, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Veronica Karas.

The Latest In Financial #AdvisorTech (November 2023)

November 6, 2023 07:02 am 0 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the November 2023 issue of the Latest News in Financial #AdvisorTech – where we look at the big news, announcements, and underlying trends and developments that are emerging in the world of technology solutions for financial advisors!

This month's edition kicks off with the news that Practice Intel has launched a new "growth platform" centered around quantifying the quality of an advisor's client relationships with an all-in "Relationship Quality Index" (RQI) – which while potentially valuable in helping advisors understand and improve their client experience (and subsequently improve client retention and boost the lifetime value of each client), also raises questions about whether advisors will be willing to invest in tools to improve their client experience given their already-high average client retention rates, as well as what really is the 'best' metric for measuring satisfaction in the first place, since other platforms also purport to quantify customer satisfaction (some of which are notably less costly than Practice Intel's suite of practice management tools).

From there, the latest highlights also feature a number of other interesting advisor technology announcements, including:

FinanceHQ has launched as a new digital lead generation platform for financial advisors, which takes a more niche-focused approach to matching prospective clients with advisors – representing a bet that capturing prospects seeking help for specific problems (whom it can then refer to an advisor specializing in that problem) will reduce the costs of bringing on new clients and help it grow and scale among a crowded market for lead generation services
Technology-focused RIA startup Farther has announced a $31 million Series B funding round at a whopping $131 million valuation – which while reflective of its rapid growth in assets and revenue in recent years, also raises questions about whether its innovative technology offering will really create enough value to fulfill its investors' expectations, or if it will need to instead focus on simply bringing in more advisors to justify its valuation
Fidelity has stopped giving 'screen-scraping' data aggregators access to its client information, requiring them instead to go through its sanctioned direct data feed – which, while done in the name of ensuring more stable data connections and better account security, also highlights the business opportunity for data platforms and institutions that own and provide access to client data

Read the analysis about these announcements in this month's column, and a discussion of more trends in advisor technology, including:

2 new AI-driven compliance technology solutions, Avery and Hadrius, have launched – which, on the one hand could represent a significant step forward in automating and streamlining the time-consuming, repeatable processes of following compliance procedures; but on the other, raises questions about whether AI technology itself is really ready yet for the highly technical, low-margin-for-error domain of compliance
Morgan Stanley has introduced a new AI tool for its 16,000 wealth management advisors, which notably doesn't give financial advice – but does create the potential to streamline advisor processes from investment research to meeting follow-ups and even possibly generating potential planning ideas.

And be certain to read to the end, where we have provided an update to our popular "Financial AdvisorTech Solutions Map" (and also added the changes to our AdvisorTech Directory) as well!

*And for #AdvisorTech companies who want to submit their tech announcements for consideration in future issues, please submit to [email protected]!

Weekend Reading For Financial Planners (November 4-5)

November 3, 2023 02:00 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" - this week's edition kicks off with the news that the Department of Labor this week released its long-awaited "retirement security rule", its latest effort to curb conflicts of interest around retirement savings recommendations. Among other measures, the proposal would amend the current 5-part test that determines fiduciary status for retirement accounts by defining as a fiduciary act a one-time recommendation to roll funds from a company retirement plan to an Individual Retirement Account (IRA), strengthen advice standards for independent insurance professionals, apply to insurance products that are not securities, and would cover advice to plan sponsors regarding the menu of investment options to include in a company's retirement plan… though, like the similar 'fiduciary rule' proposed during the Obama administration, this latest regulatory effort is likely to face significant pushback from financial product manufacturers and distributors.

Also in industry news this week:

A recent study indicates that the RIA model has seen significant growth in the number of firms and advisors during the past decade, and these firms are expected to control 1/3 of industry AUM by 2027
Despite market headwinds leading to a contraction in advisory firm AUM in 2022, firms continued to produce strong profit margins thanks in part to organic growth

From there, we have several articles on investment planning:

Why certain private equity investments might not have the diversification benefits that many advisors and clients might expect
Why the current yield on TIPS could make them an attractive part of a retirement income strategy for clients
While small caps have experienced higher returns than their larger counterparts during the past century, recent research calls into question whether this factor will persist

We also have a number of articles on advisor marketing:

How content marketing can help advisors attract clients, even if it means giving away some of their 'secrets'
Why presenting prospects with proposed planning recommendations ultimately could reduce the chances that they become clients
How one advisor has used an extra-methodical sales process to convert prospects into clients who will be a good fit for his planning style and philosophy

We wrap up with 3 final articles, all about potential uses of Artificial Intelligence (AI) for advisors:

Why advisors are more likely to work in tandem with AI tools, rather than as competitors
How advisors can produce better 'prompts' and get the most out of ChatGPT and other large language models
Why recommendation engines could be the next big technological advance in investment management

Enjoy the 'light' reading!

Kitces & Carl Ep 124: When Clients Evolve Out Of Your Niche Specialization Should You Stay Or Go (Or Not)

November 2, 2023 07:03 am 0 Comments CATEGORY: Kitces & Carl Podcast

Many financial advisors have found that serving a client niche not only helps them run a more efficient firm (as they work with clients facing similar planning issues), but also attracts more new clients (as they are able to offer a unique value proposition for clients within the niche). Notably, though, while certain clients are likely to stay within the niche throughout their lives (e.g., retired clients tend to remain retired until their deaths), other clients might 'evolve' out of the niche (e.g., clients going through a divorce will eventually finalize the divorce, and perhaps remarry in the future). Which raises a question for these advisors of whether (and how) to continue serving clients who no longer fit their niche.

In our 124th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss the options for advisors with clients who no longer fit their niche, why choosing either to stick with their niche or to change their niche to meet the needs of their clients can be workable options for advisors, and how electing to do both can lead to inefficiencies.

Advisors who have worked with a specific client niche for several years might find that some of their clients no longer fit the niche, leaving the advisor with several options. First, the advisor could change their niche to meet the shifting needs of their client base. For instance, an advisor working with tech employees whose company is going through an IPO might find that many of these individuals switch fields or retire early, creating a different set of planning issues to address. In this case, the advisor could change their niche service and marketing focus to target early retirees in order to more efficiently serve current clients in their particular situation (of no longer needing IPO support and beginning to consider available retirement options) and also to attract new ones.

Where advisors might run into trouble, however, is in trying to work both with clients in their previous niche as well as with those in the new niche. Because doing so can come at the cost of efficiency in terms of both serving clients (as the advisor will be facing a wider range of planning issues) and marketing (as the advisor might seek to attract clients in both niches). Which suggests that while an advisor might choose either to stick with their previous niche (and perhaps move on from clients who no longer fit it) or to shift their niche (to continue serving current clients and attract clients within this new niche), trying to do both might be less effective.

Ultimately, the key point is that for advisors who have leveraged a client niche to build their client base, being intentional about how to serve these clients as their planning needs shift can allow advisors to continue reaping the efficiency benefits of niching – even if that niche changes over time!

Effective Implementation Of A Backdoor Roth Strategy: Detailed Nuances, IRS Form 8606 (And When It’s Even Worth Doing)

November 1, 2023 07:03 am 0 Comments CATEGORY: Taxes

There are many tax planning strategies that allow financial advisors to demonstrate the ongoing value they provide to clients in exchange for the fees they charge. Part of this value is understanding the detailed nuances that make a strategy effective and implementing it correctly, avoiding issues with the IRS down the line. For instance, while backdoor Roth conversions are a well-known strategy, many individuals have either missed the opportunity to use it and/or implemented it incorrectly – which, left uncorrected, can result in unnecessary headaches, taxes, and even penalties – presenting an opportunity for advisors to add significant value for their clients.

The backdoor Roth strategy can be valuable for clients whose high income levels preclude them from making regular contributions to a Roth IRA. As while income phaseouts apply to contributions made to a Roth IRA, there are no such limitations on contributions made to a traditional IRA, nor on conversions from a traditional IRA to a Roth IRA (since 2010). Thus, the strategy itself consists of a 2-step process involving 1) a contribution (either deductible or non-deductible) made to a traditional IRA, followed by 2) conversion into a Roth IRA.

While this process might seem relatively straightforward, there are many reporting requirements for non-deductible IRAs (through IRS Form 8606) and numerous IRS rules around timing and accounting that can quickly turn this seemingly simple strategy into a literal lifetime of extra paperwork filing required of the taxpayer if completed incorrectly. For instance, if the client has existing IRA dollars and/or if they plan to rollover funds from a qualified account at any point during the year, backdoor Roth conversions can be complicated significantly. This is mainly because of the IRA Aggregation Rule, stipulating that when determining the tax consequences of an IRA distribution (which includes a conversion), the value of all IRA accounts will be aggregated together for the purpose of any tax calculations (turning a 'clean' backdoor Roth into a messy partial Roth conversion!).

To avoid this situation, before recommending a backdoor Roth, advisors need to make sure they know about every IRA dollar (everywhere in all accounts), review prior tax returns for Form 8606, and confirm that there will not be any rollovers during the remainder of the current year. For clients with a tax-free basis in an IRA, options to remove the taxable gain portion (and become eligible for a 'clean' backdoor Roth) include converting the balance to a Roth (which could be done over multiple years) or rolling the pre-tax funds into a company retirement plan or Solo 401(k) (though not a SIMPLE or SEP as they are lumped in with traditional IRAs for the pro-rata rule).

Advisors also can support the backdoor Roth process by communicating with clients' tax preparers about the strategy and why they are recommending it for their mutual client. Because while advisors might recognize the long-term benefits of having money in Roth accounts, the process does not come with a current-year benefit that may be immediately apparent to the tax preparer; furthermore, it requires tax preparers to complete additional forms (which they may not appreciate if they’ve not bought into the long-term 'why' themselves).

Ultimately, the key point is that while backdoor Roth conversions can be a valuable strategy, it comes with significant rules and nuances that, if not fully understood, have the potential to cause onerous tax complications for clients in the future. Which means that advisors can add significant value by working together with clients and their tax preparers to ensure that the backdoor RIA process is completed correctly!