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Helping Business Owner Clients Cope With Feelings Of Shame And Guilt Arising From Making Difficult (Or Unpopular) Financial Decisions

September 16, 2020 07:03 am 0 Comments CATEGORY: Client Trust & Communication

Business owners are faced with tough decisions every day that challenge them to run their businesses efficiently and to keep their employees happy. Yet, when it comes to decisions about asking for help, many often experience feelings of guilt and shame. And in the current pandemic environment, with recent government programs like PPP loans available to business owners who are facing financial strain, individuals who feel compelled to apply for these loans may be asking themselves, “Why couldn’t I have managed things more carefully?” or “Have I failed my family/employees because I did not manage the business better?” Accordingly, it is not surprising that financial advisors may find an increasing number of business owner clients suffering from these difficult emotions.

To understand the reason for the shame and guilt that business owner clients (and even financial advisors themselves, who have, in many cases, needed to utilize PPP loans) experience, it is first important to understand that there is a clear distinction between greed (that is often ascribed to PPP recipients) and subjective financial strain. As while the news media has been quick to name greed as a motivator for many business owners who applied for PPP loans, the reality is that greed (which is actually a pathology where an individual has a selfish desire to obtain more than what may actually be needed) is rarely the reason people apply for such support. Instead, subjective financial strain is more often the driving factor that determines when someone may reach out for financial help (including via government assistance programs). By contrast to greed, subjective financial strain is about how a business owner perceives the intensity of the threat facing their business; its subjective nature is influenced by the owner’s own confidence level in managing their business operations during stressful times (which can feel serious, even if ‘objectively’ the business is not necessarily in dire straits, or at least not yet). Nevertheless, a common reason for both shame and guilt associated with asking for financial support is because of the erroneous association with greed.

For financial advisors with business owner clients dealing with these difficult emotions, knowing that shame and guilt have distinct characteristics, and realizing the difference between them, can be key in helping clients cope through difficult times. Shame is an emotion borne out of the belief that one’s own character is somehow deeply flawed, where the individual feels that they are unworthy of acceptance, belonging, or love. When someone feels ashamed, they tend to use language that suggests they somehow feel they are failures or that their character is somehow insufficient. They may say that they aren’t deserving or worthy of merit. Guilt, on the other hand, is an emotion based on remorse; it usually results from an action or decision that is in conflict with one’s personal values. The language used by someone feeling guilt will focus more on an action (or inaction) and could hint that a particular decision was a bad choice. A person experiencing guilt generally doesn’t view themselves as being flawed; instead, they are more likely to express remorse or doubt over some action that was carried out in recognizing that it may not have been consistent with their values (or at least with the values they aspire to represent).

For advisors who want to help clients deal with these difficult emotions arising from such difficult financial decisions, it’s first important to identify the specific emotion being experienced. For clients who are suffering from feelings of shame, the advisor can help the client view the bigger picture and to find ways to reassure the individual that they are indeed worthy, looking to past business decisions or other aspects of their life to support this. For clients with feelings of guilt, advisors can support their client by finding ways to help them ‘right’ the wrong – whether that means reversing the action (e.g., returning loan proceeds taken if they turned out not to be needed, or helping a client apply for a loan if the guilt was because of not applying for a loan), or mitigating the effects of the decision (e.g., making a donation to a worthy cause to absolve their guilt for having otherwise taken the PPP dollars).

Ultimately, the key point is that feelings of guilt and shame are very common when difficult financial decisions are involved. In the case of taking PPP loans, the problem has been particularly acute, because the requirements to qualify for PPP loans were based on subjective financial strain (stipulating that ‘current economic uncertainty made the loan necessary’) and not necessarily objective financial strain (e.g., the business must have experienced a 50% decline in revenue to qualify). Given the subjective financial strain requirement – and the fact that subjectivity is, by definition, in the eye of the beholder – the media has associated greed with PPP loans and their forgiveness provision… resulting in many individuals who have taken PPP loans now experiencing guilt and shame. (And notably, recent proposals for a new round of PPP dollars would specifically shift from a subjective to more objective financial strain requirement going forward.) Accordingly, advisors can support their business owner clients who did pursue PPP dollars by helping them understand that the PPP funds were there specifically to be used to respond to subjective financial strain – they were established to help individuals maintain their business operations during these times of economic uncertainty. Moreover, advisors who express empathy and compassion, instead of sympathy and pity, can most effectively help their clients cope with their feelings, so that they may get back to business as usual as quickly as possible!

#FASuccess Ep 194: Aligning Values To Clients With Sustainable Investing And Becoming B Corp Certified, With Lisa Cooper

September 15, 2020 07:08 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 194th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Lisa Cooper. Lisa is the founder of Figure 8 Investment Strategies, an independent RIA based in Boise, Idaho that oversees nearly 90 million of assets under management for 85 affluent clients.

What's unique about Lisa, though, is that her firm operates as a B Corporation and it's focused on what Lisa calls, 'sustainability-focused equity management', a form of sustainable and responsible investing by building a thematic portfolio of 50 to 60 individual stocks that has helped Lisa to effectively differentiate herself and grow to 90 million of assets under management in just 4 years since launching.

In this episode, we talk in-depth about how Lisa crafted her unique investment approach for clients, the way the firm crafts sustainable investing themes to identify segments of the market to invest in, the screening tools they use to determine what stocks to avoid in their investment approach, how shareholder engagement through proxy voting is a key part of Lisa's investment process, and why and how Lisa's firm uses direct impact investing not to expand its equity reach, but to garner its fixed-income bond exposure instead. We also talk about Lisa's decision to become a certified B Corporation with her RIA, the five key areas of governance, customers and products, environment, team, and community that firms must improve to meet the B Corp requirements, the new processes and procedures that Lisa implemented in her firm to meet the standards, and why she thought it was worth the B Corporation cost and trouble to demonstrate how her business is acting to be a force for good and positive change.

And be certain to listen to the end where Lisa shares the unique types of clients that her firm has been able to attract with this differentiated focus, the challenges that she faced in trying to grow her team and expand her reach as her business grew rapidly, and how the mindset of doing more for more people all the time can be a great way to launch an advisory firm, but ultimately may end up limiting to its growth.

So whether you’re interested in learning about the process of B Corp certification, how Lisa created her business as a force for good, or how to integrate ESG and impact across portfolios, then we hope you enjoy this episode of the Financial Advisor Success podcast.

Creating A Six-Week Onboarding Program To Train New Advisory Firm Employees

September 14, 2020 07:04 am 2 Comments CATEGORY: Practice Management

Financial advisory firms can find themselves struggling to grow their businesses for a wide range of reasons. While some firms have difficulty developing a seamless client service experience, others may find business development strategies difficult to implement (or scale across additional new advisors) to increase their client base, and others yet may feel their executive leadership team is unable to connect with the firm as a whole. Regardless of where the difficulty lies, though, the root problem for most firms struggling with growth often lies in the lack of a well-developed training program.

For many busy firms seeking growth, investing time in establishing an effective training program is not often a top priority, and it can be difficult to even find the time to develop training protocols. However, a well-defined training program is critical not only for providing employees with a solid foundation of specific procedural requirements on how to run a firm that can grow, but also in establishing a unified firm culture that provides the vision required by employees to attract the right clients to the firm and to develop an implicit understanding of the expectations for servicing those clients. And the good news is that a good training program doesn’t have to be built all at once; instead, it can be developed iteratively, often in conjunction with fleshing out an advisory firm’s Operations Manual of processes and procedures.

Through an extensive study of employee training programs across many fast-growing financial advisory firms that were expanding their reach across the country, Herbers & Co. identified certain key characteristics that were consistent across successful training programs. From the research, they optimized an effective six-week program that can be adapted by firms to create a defined and repeatable training program for their new employees.

The weekly focus of the six-week onboarding training program for new employees is as follows:

Week 1. Understanding the company profile and its technology systems;

Week 2. Roles and responsibilities of employees across the firm and administrative procedures;

Week 3. Total client experience;

Week 4. Marketing and the prospective client process;

Week 5. Understanding the Client meeting process and client communications; and

Week 6. Compliance.

The easiest way for a firm to build a training program based on the six-week program is to develop an Operations Manual that encompasses all of the firm’s protocols and values on which training will be based. For firms that don’t already have an Operations Manual in place, it can in turn also be created one topic at a time, and over the span of several months. In fact, firms that aim to address each of the areas outlined in the weekly training topics may need up to 9 – 12 months to establish their training programs (though of course, it will still be updated over time to reflect how the firm’s processes evolve).

In today’s work environment, given our current pandemic state, it is important for remote training to be an available option for new employees. Strategies for an effective remote training program include timing the training sessions in short bursts, mixing in self-paced instructional videos, and assigning ‘homework’ exercises to be completed in between training sessions. Once the instruction and assignments have been completed, the trainer should review the assignment and offer feedback to the new employee.

Ultimately, the key point is that firms who want long-term, sustainable growth of their business need to have a well-developed training program in place. A consistent and thorough training program will ensure that all employees have a clear understanding of the firm culture and its goals, as well as being able to execute within the systems the firm uses. And while establishing a good training program can be a long-term process that may require a significant investment in time and resources, the end result will be a well-trained firm that not only knows how to operate consistently and in accordance with the firm’s culture and values to promote growth, but also is able to delegate training to more employees across the firm, which in turn frees up firm leadership from much of the training responsibilities so that their focus can be on developing and implementing growth strategies!

Weekend Reading for Financial Planners (September 12-13)

September 11, 2020 02:57 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the buzzing industry news that Merrill Lynch is barring its brokers from receiving gifts, meals, or entertainment from its wholesalers, in what some see as a shift of even large brokerage firms to begin stamping out more conflicts of interest in the new era of Regulation Best Interest, and critics suggest is simply the new path of brokerage firms to require asset managers and product companies to go through (and revenue share to) the home office instead of its brokers directly (payments which must be disclosed, but are not against the rules for broker-dealers under Regulation Best Interest).

Also in the news this week are some notable new industry studies, including one that looks at what clients actually want to talk about in advisory meetings beyond their portfolios (from protecting against identity theft to new housing decisions), the latest data on which types of consumers are actually using robo-advisors (only 10% of Millennials with <$50,000 of assets but almost 50% of those with >$500,000!), and the latest trends in how advisory firms are investing (showing the continued dominance of ETFs, an ongoing decline in the use of individual stocks, bonds, and REITs, but what is still, at best, just a small minority of advisors who are actually 'passive' as most advisors appear to be using ETFs as their own active management portfolio building blocks).

From there, we have several more interesting investment-related articles, including the launch of the new Long Term Stock Exchange by Lean Startup founder Eric Ries, the growing turmoil in prime money markets as interest rates appear to be pegged near the zero-bound for a long time to come and 'gates' implemented to prevent a 2008-style run on money markets may actually be exacerbating one this time around, growing questions about the long-term viability of the 60/40 portfolio in a persistent low-yield environment and what the future alternatives may be, and a look at how no-commission annuities may be emerging as a bond alternative for advisory accounts.

We wrap up with three interesting articles, all around the theme of being (and feeling) wealthy and what helps us get there: the first is a review of the recent Morgan Housel book "The Psychology Of Money" which explores the differences between being rich and being wealthy; the second examines what it takes to not feel 'rushed' (hint: it's all about delegation to focus on the biggest and most important tasks); and the last explores recent research finding that those who work with financial advisors don't just do better with their money... they're also happier with it, too!

Enjoy the 'light' reading!

Kitces & Carl Ep 42: Overcoming Objections By Asking More Questions To Truly Understand A Client’s Needs

September 10, 2020 07:07 am 1 Comment CATEGORY: Kitces & Carl Podcast

The roots of the financial planning industry are an eat-what-you-kill sales environment, when financial advice existed to facilitate the sale of a product, and initial survival (and eventual success) was predicated on the ability of an advisor to convince clients to buy whatever financial instrument they were selling. Which necessitated not only knowing the features and benefits of any given product, but also learning how to overcome every single objection that prospects could possibly throw at the advisor. In today’s world, though, advisors increasingly are focused on financial advice itself as the value proposition, are paid for the advice directly, and ‘just’ have the obligation to determine the best possible advice to give that helps the client achieve their goals (and keeps the advisor working with the client). Yet in practice, many advisors still think in terms of “overcoming objections” when a client doesn’t want to implement the advice they’re being given.

In our 42nd episode of Kitces and Carl, Michael Kitces and client communication expert Carl Richards discuss the key shift in mindset that advisors must go through when it comes to addressing client objections in an advice-based world, and the necessary strategies to reframe conversations by asking more questions in order to better understand a client’s needs and situation, instead of trying to overcome any resistance to taking an advisor’s advice or engaging their services.

The key to making that shift in mindset starts with understanding that a client’s (or prospect’s) objection doesn’t stem from not understanding how great the advice is that they’re getting, but rather is an indication that the advisor must be missing something important or miscommunicating somewhere along the way. After all, if the whole point of advice is to help someone achieve their goals, then a client who objects to that advice is effectively saying “that’s not going to get me to the goals that I really want to achieve… and so I’m objecting to the advice!”

Yet by taking responsibility for misunderstanding some key bit of information, the advisor can take a step backwards to start asking more questions instead, which starts back at exploring the assumptions that defined the client’s original “statement of financial purpose” (upon which all of the subsequent recommendations were based). From there, questions around what brought a client in on a particular day, or if there’s a specific thing that has changed in their lives to make them reassess their goals, can help move the conversation forward and further uncover any mid-course corrections that might need to be made. Which can even end out shifting the entire context of the conversation to figuring out if the advisor really is still the best fit for the client and their needs.

Ultimately, the key point is that the more “traditional” approach for overcoming objections was built for people that had a thing to sell (and objections to overcome to get it sold), whereas the ongoing shift towards a more collaborative advice-based client/advisor relationship means clients should naturally want to take the advice if it really gets them to their goals. Which means the starting point to overcoming an objection is digging deeper by asking more questions in order to better understand what the client’s goals – even and especially the unstated ones that may be blocking the advice process – really are in the first place.

Improving Advisor Team Efficacy By Overcoming The Many Minds Problem Of Group Conversation

September 9, 2020 07:04 am 0 Comments CATEGORY: Client Trust & Communication

Many advisory firms are building advisory teams with the hopes of sharing the workload and increasing client satisfaction. However, there are inherent challenges faced by teams, which consist of a group of "Many Minds" whose conversational mechanics are increasingly complicated by the growing number of participants, specifically when it comes to effective team communication. In fact, Harvard researchers studying how communication changed between two-person ‘dyad’ conversations and multi-person group conversations found that group communication is inherently more complex (and more problematic, as expected) because of two primary issues: 1) the ambiguity that arises regarding how and when to talk or listen, and 2) what to say (or not to say) when it is a person’s turn to speak.

When it comes to assessing how and when to talk and listen in a group conversation, there are three important considerations that will help an advisory team successfully communicate with clients: airtime (i.e., the time a person is given to speak during the meeting) is shared, typically unequally, among the meeting participants; taking turns to speak can be much more confusing in groups than between two people, as whose turn it is to speak when someone else is finished talking can often be very ambiguous; and back-channel feedback provides cues – both non-verbal (e.g., head nods, hand gestures, etc.) and verbal (e.g., saying 'yes', 'mmm-hmm', 'oh', etc.) – from listeners that let the speaker (and other participants) know they are being heard, but it is typically more limited in group conversations (as we may engage less like a participant and more like a staid audience).

Deciding what to say and how much information to offer to an advisory team can be an especially difficult process for a client, who must evaluate whether and how much to disclose personal and sensitive information… the specific type of information required during a financial planning meeting. The situation can be worse, too, if the client prefers working with a single advisor and is not yet comfortable sharing sensitive personal details with their entire advisory team.

Some tools that advisory teams can consider to optimize client communication and to develop trust include preparing agendas for all meetings that are sent to participants in advance with the aim to encourage thoughtful discussion by all who attend; setting clear expectations to facilitate a better balance between the client and advisory team members with respect to distributing conversation airtime; using active listening techniques that involve fully concentrating, understanding, and responding to what the person they’re talking to says; and organizing role-playing exercises for team members to practice communicating and focusing on the dynamics between participants.

Ultimately, while advisory teams are commonly faced with "Many Minds" issues that can make it difficult to communicate effectively with clients (and to keep them happy!), there are several tools (using meeting agendas proactively to spark engagement and develop rapport, setting clear expectations, active listening, and role-playing activities for advisory team members) that can help to overcome these challenges. Because despite the challenges that all teams face in working to communicate better, the benefits of working in a well-developed and well-trained team can far outweigh the drawbacks as, in the end, team members can work to keep clients happy while supporting each other in the process!

#FA Success Ep 193: Turning Operations Experience Into A Virtual Assistant Outsourcing Solution, with Michelle Wong

September 8, 2020 07:04 am 8 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 193rd episode of Financial Advisor Success Podcast!

My guest on today's podcast is Michelle Wong. Michelle is the founder of Nifty Advisor Support, a virtual assistant outsourcing solution serving more than two dozen independent advisory firms across the country. What's unique about Michelle, though, is the way that she's been able to capitalize on the dual trends of outsourcing and virtual teams by pivoting her own career in operations and as a client service administrator into an entrepreneurial venture.

In this episode, we talk in-depth about the rise of virtual assistant solutions for financial advisors. The kinds of advisory firms that choose to hire virtual assistants to help with everything from marketing to client servicing to paraplanning, the typical tasks that especially solo advisory firm owners can outsource to make themselves more efficient, and how Michelle's firm structures its solution to provide support across all three areas.

We also talk about the practical mechanics of how it works when taking on a virtual assistant as a financial advisor. How the typical cost of a virtual assistant is a higher hourly rate than hiring a full-time staff member but may be a fraction of the total cost when firms only have to pay for the productive hours they actually need. The benefits of using an external firm to avoid the responsibility of training staff members on key systems as a busy advisor, how virtual assistants typically work with firms through a combination of task and workflow systems within an advisor CRM and separate communication tools like Slack, and the way that cybersecurity with a virtual assistant can now be managed using third-party solutions like LastPass.

And be certain to listen to the end, where Michelle shares her frustration that so few advisory firms have a clear career track for operations team members the way they often do for their advisors. Why the flexibility and work-life balance of virtual work is just as relevant to operations team members as the rest of the advisory firm team, and the way Michelle has been able to scale her business by finding others in the industry with similar operations and client service experience who want career opportunities with greater work-life flexibility.

So whether you’re interested in learning about hiring a virtual assistant, how Michelle created a career path for operations team members, or how outsourcing can make your firm more efficient, then we hope you enjoy this episode of the Financial Advisor Success podcast.

The Latest In Financial #AdvisorTech (September 2020)

September 7, 2020 07:06 am 2 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the September 2020 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 continues with new co-author (and AdvisorTech guru) Craig Iskowitz, along with guest contributor Kyle Van Pelt, and kicks off with a look at Schwab’s announcement that all existing Schwab clients will receive free access to a MoneyGuide financial plan that they can create for themselves using the MoneyGuide One guided experience (or work with a Schwab Intelligent Advisory CFP professional for an advisory fee as little as $30/month), and highlighting how financial advisors can no longer justify their financial planning value by just inputting client data into and presenting the output from comprehensive financial planning software, and instead will increasingly be required to specialize into niches, and/or demonstrate their value in the conversations they have around the planning software.

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

Apex partners with Marstone for a tech-plus-custody all-in-one in an anticipated effort to charge fees for RIA custody (and has hired Morningstar’s Chief Product Officer Tricia Rothschild to help execute!)
Riskalyze partners with Rowboat Advisors to support ‘tax alpha’ and tax-intelligent optimization as the new portfolio value-add
LPL launches a Meeting Planner solution to optimize the surprisingly-time-intensive meeting prep process for advisors
The SEC changes the Accredited Investor definition to include financial advisors themselves, in what may be a boon to AdvisorTech crowdfunding efforts to raise capital directly from their future users?

Read the analysis about these announcements in this month's column, and a discussion of more trends in advisor technology, including Envestnet preparing its own direct indexing overlay tools as technology increasingly becomes the new value-add layer, Vanguard begins to develop its own 'robo' platform for advisors to compete for custody, XTiva raises $10M to compete for the complex process of integrating advisor compensation systems in large-scale financial services enterprises, and Timeline raises $2.3M in capital to compete in the increasingly popular realm of specialized planning tools that goes beyond what ‘generalist’ planning software can provide (in the case of Timeline, to facilitate retirement distribution planning in the decumulation phase!).

And be certain to read to the end, where we have provided an update to our popular new “Financial AdvisorTech Solutions Map” as well!

I hope you're continuing to find this column on financial advisor technology to be helpful! Please share your comments at the end and let me know what you think!

*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 (September 5-6)

September 4, 2020 03:00 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with a big expose from the Wall Street Journal on the SEC's new Form CRS, which found that amongst 8,100 firms that had filed Form CRS, 3,100 of them had a legal or disciplinary history they were required to disclose... and 40% of them failed to do so, raising serious concerns about whether the "transparency and disclosure" lynchpin of the SEC's new Regulation Best Interest rules is already coming up short.

Also in the news this week is an announcement that the state of Massachusetts will begin to enforce its own state fiduciary rule on both investment advisers and broker-dealers (in response to its view that the SEC's Regulation Best Interest came up short in regulating brokers giving advice), criticism of the Department of Labor's new fiduciary rule from both fiduciary advocates who say it doesn't go far enough and industry participants who fear it will already impose 'too much' fiduciary obligation on brokerage firms and insurance companies, and news that the SEC is finalizing changes to its Advertising and Anti-Testimonial rules with updates due to be announced next month!

From there, we have several interesting investment articles on retirement planning, including a look at how to reframe retirement as an 8,000 day period that clients can plan around (recognizing that 'play golf' may be a good start to retirement, but probably is not something you want to do for 8,000 straight days!), new research from Morningstar's David Blanchett about how to set a reasonable life expectancy estimate for retirees, a discussion of how to craft a 'Retirement Policy Statement' to complement a client's Investment Policy statement, an exploration of how retirement is really more a 'state of mind' than a state of being, and a look at the origins of FIRE as a movement around Financial Independence and not just 'extreme Early Retirement'.

We wrap up with three interesting articles, all around the theme of the new Work-From-Home era: the first explores how firms are testing out new 'hub-and-spoke' models of work environments with limited central office space and decentralized home office work environments; the second looks at the new rise of 'tiny office' spaces (e.g., 'tiny homes' custom-built as an office space!); and the last looks at how work from home may be challenging for many jobs and types of workers but especially conducive to knowledge-based workers (including financial advisors!?)!

Enjoy the 'light' reading!

Isolating IRA Basis For More Tax Efficient Roth IRA Conversions

September 2, 2020 07:02 am 23 Comments CATEGORY: Taxes

The Roth IRA was first introduced in 1997 and has since been a popular tax planning tool for financial advisors and their clients. As while Roth IRA accounts generate tax-free growth and income from retirement savings, making Roth IRA contributions is most beneficial when a client is in a relatively low marginal tax bracket. This is in contrast to deferring pre-tax dollars to a Traditional IRA, which is often most beneficial when a client’s current marginal tax bracket is high (and anticipated future tax brackets are lower). While Roth conversions are often used to transfer Traditional IRA funds into a Roth IRA account, reporting these transactions for income tax purposes can be complicated when the Traditional IRA from which the funds are being transferred include both pre- and post-tax funds.

Although contributions made to a Traditional IRA usually consist of pre-tax dollars (for which taxpayers can take an above-the-line income tax deduction on their tax returns), there are occasions when post-tax dollars are included as well. For instance, nondeductible contributions are made when a taxpayer (or their spouse) is an active participant in an employer-sponsored retirement plan, and their MAGI exceeds the applicable limit for their filing status. Rollovers originating from an employer-sponsored retirement plan can also include after-tax funds if the plan allowed for after-tax contributions.

When Traditional IRA accounts hold both pre-tax and post-tax dollars, the balance will be subject to the “Pro Rata Rule”, which stipulates that, in general, distributions from a taxpayer’s IRA maintain the same ratable proportion of pre-tax and post-tax funds as the taxpayer’s total IRA balance. Which means that distributions from accounts with a mix of pre-tax and post-tax funds cannot be made as solely pre-tax or post-tax and that transferring these distributions into a Roth IRA will need to be accounted for accordingly.

Despite the intricacies of reporting Roth conversions from Traditional IRAs with pre- and post-tax funding, converting Traditional IRA accounts can make sense, especially when a substantial percentage of after-tax dollars are in the Traditional IRA. As while the after-tax contributions themselves will be tax-free, the growth on those funds will be taxable! Therefore, paying tax on the pre-tax portion of the Traditional IRA balance can be worthwhile when considering the tax-free growth of all contributions made to a Roth IRA.

Accordingly, there are few strategies that advisors can use to make Roth conversions more compelling, which can be particularly useful when the Traditional IRA may not (initially) have a large proportion of after-tax funding. For instance, some clients may have access to an employer-sponsored plan that allows for rollovers of IRA funds into the plan. Since IRA-to-plan rollovers are restricted to pre-tax dollars, such rollovers can essentially serve to reduce the pre-tax balance of a Traditional IRA, maximizing the after-tax balance available for the Roth conversion. Importantly, rolling funds back into an IRA from an employer plan, after completing a Roth conversion, should not be done until after the calendar year in which the Roth conversion was carried out, as doing so would result in the basis of the rollover to be included in the converted amount.

Another strategy available to increase the proportion of IRA after-tax dollars is to make a Qualified Charitable Distribution (QCD), as these distributions are restricted to pre-tax dollars from the IRA. Thus, as in the case of rollovers into an employer-sponsored plan, QCDs effectively reduce the pre-tax portion of the IRA account balance, leaving a larger post-tax balance available for Roth conversions.

Ultimately, Roth conversions continue to be a powerful and versatile tool for financial advisors to help their clients mitigate the tax bite from distributions taken from their retirement accounts. By planning around current and expected marginal tax brackets, and by strategizing to isolate the basis of pre-tax dollars in Traditional IRA accounts, advisors can facilitate substantial tax savings for their clients by way of efficient Roth conversions.