As you help your clients work through the many stages and phases of retirement income planning, financial planning, and creating long-term projections, the importance of tax planning undoubtedly remains a top priority and focus throughout these discussions. Whether you’re a Financial Planner, Advisor, or an Investment or Wealth Manager, chances are that your clients are coming to you for financial and retirement planning advice.
At its core, a solid tax planning strategy will have invaluable long-term benefits for your clients. It will ensure that there are no unnecessary taxes being paid during the asset decumlation phase, help to keep investments efficient, provide ample opportunities and insights for charitable donations, maximize both your clients after-tax spending and estate value … I could go on, but I think you get the picture so I’ll stop there.
Likely, you already know all of this – the real issue here is how to facilitate, implement, and execute these tax planning conversations without creating additional work in your already jam-packed schedule. The good news is that this is the very objective of this blog post — to help you provide tax planning through your financial advisory process in an efficient and streamlined way.
I’m going to focus on how you can do these things within Snap Projections, a leading Canadian financial and retirement income planning software for Financial Advisors, Planners, and Investment Managers. We’re designed specifically to help small to medium Advisory teams and Independent Financial Advisors serve their clients effectively and efficiently.
So, let’s start with asset decumulation.
Asset decumulation is a major component of retirement income planning and it rarely gets the attention it deserves. Everyone talks about saving and investing but no one ever talks about the best way to spend during retirement.
As a financial planning tool, Snap’s primary objective is to maximize the longevity of your client’s portfolio by minimizing or deferring tax liability, thus providing them with the highest possible amount of after-tax spending throughout their retirement.
Snap’s default logic to maximize your client’s cash-flow during retirement is to first drain the non-registered accounts, followed by the TFSAs, and then the registered accounts, outside of any RIF or LIF minimums. This will keep marginal tax rates as low as possible during the early years of retirement.
In some cases, this strategy won’t align with your clients’ objectives so it’s simple to create your own decumulation strategy by setting your own default (we call this the cash flow management logic). Additionally, you can make manual overrides to the default withdrawals.
But you may still be wondering, what is the best way to decumulate the assets in a projection?
This is a simple question on the surface, but the answer isn’t always obvious. We would need to define the client’s goals first.
For instance, are we optimizing for the
- Highest retirement income?
- Highest estate value?
- Lowest estate taxes?
- Short-term liquidity?
- Long-term growth?
We suggest using this Financial Planning Questionnaire with your clients to ensure you fully understand their needs, goals, dreams, and desires. This knowledge is what will put you in the position to truly help them. Plus, it makes your data entry much easier. You do not need to be an existing Snap user to take advantage of our questionnaire.
Between the default CFM logic, and the pension income splitting, Snap Projections does perform initial optimizations on the order of withdrawals, and for 90% of cases, the defaults work very well.
However, you can modify the default algorithm (to essentially create your own default logic) and achieve even more desirable results. You can use the CFM Order column to change the order around and see if that results in either a higher cash flow or higher estate value, depending on the goals of the client. As well you can change the conversion age for RRSPs and LIRAs, and see whether drawing the minimums sooner or deferring them until later creates a better outcome.
In most cases, the defaults work great for quick planning. However, if you want to invest some time optimizing for a specific goal, you can create copies of the base scenario and see if changing the default settings yields a more favourable outcome for your client.
What about charitable donations?
Planning for charitable donations is an essential part of both tax and estate planning — modelling the impact of any potential decisions for your clients not only provides them with a massive value with respect to tax planning, but will help ensure their legacy dreams become reality.
In Snap Projections, you can easily plan for assets, insurance, and cash donations and have the associated tax credits applied to your projections. You can see the guide on that here.
What about tax credits, deductions, & taxable benefits?
In Snap, entering these critical pieces of the tax planning pie are simple. You can see the step-by-step guide here in our help section that will help you set those things up to ensure each plan is totally customized for your client.
What about maximizing RRSP & TFSA contributions?
Unused RRSP and TFSA contribution room is tracked and shown easily in Snap to ensure your clients are leveraging those opportunities. You can see the breakdown of how those calculations are done here and what assumptions the software starts with.
If extra funds are being invested or saved during the decumulation phase, Snap’s default logic will be to maximize for tax efficiency, automatically maximizing first the RRSP and then the TFSA. The software does the calculations for you, and you can easily modify the default logic and create your own decumulation and contribution strategy as well.
What about spousal situations?
When you’re dealing with spousal scenarios, Snap is going to do all the heavy lifting for you. You have all the advanced options you need to optimize the situation with easy access to elements like pension income splitting and even basing the minimum RRIF withdrawals on the age of the younger spouse.
You can easily set up a spousal RRSP or model a surviving spouse scenario (that includes asset rollover) by simply modifying the projection length for one person. It really is that simple to show your clients what their financial situation could look like if one spouse passes away earlier than expected.
You can watch a live event recording here where we work through a case study, showing how to model a surviving spouse scenario in Snap.
What about transparency & compliance?
We spend a lot of time talking with our users, as our product truly is a user-led design. Our product team works continuously to improve, iterate, and build the new features our current users are requesting.
One thing we know first hand is that lack of transparency and hidden calculations is an absolute deal-breaker for Financial Advisors, especially when it comes to tax planning. If your client pushes back or asks a question, you need to be confident with what you’re presenting and you need to know you’ll be able to not only answer their questions but explain how the numbers were generated. If you’re a CFP or a QAFP, your designation requires that you understand how the software you’re using for financial planning works. You can read more on those rules here.
This is exactly why you will find tax charts to show you what is under the hood and behind those high-level numbers on the main planning page. You can see what those look like and how the calculations are generated right here. And, we make it easy for you to export these tax tables and entire spreadsheets into Excel, should you need to pull the information out of the software for your own verification purposes.
With respect to compliance, we provide multiple resources to help cover you. Our Financial Planning Questionnaire can help you satisfy your KYC requirements, and our reports provide a full summary of key values for the plan (including our Life Needs Analysis tool) to share with your clients. All assumptions are included within the report for complete transparency and documentation purposes.
What about updating last year’s plans?
Updating old plans can be cumbersome, but it doesn’t have to be. With Snap, you’ll be able to rebase and update your plans with the click of a button. Upon accessing an outdated plan in the New Year, you’ll be prompted to rebase your scenario. You click the button, and that’s it — you’re done. The rebasing will cover all annual updates for income amounts, asset values and costs, RESP grants, debt balances, government benefits, contribution rooms, tax settings, charitable donations, and more. You’ll just want to confirm and validate that all the projected new year values are accurate before proceeding with your plan.
What are the key elements of the plans to compare for opportunities to make improvements?
One of the biggest challenges Advisors bring to us is that they can’t create multiple what-if scenarios for their clients in real time. In Snap, it’s, well, … a snap. You can see how quick and easy it is to create multiple what-if scenarios here.
Once you’ve built out multiple what-if scenarios to compare various strategies and potential outcomes, there are some specific areas where you will want to look for tax information and any potential opportunities for improvement.
To compare the scenarios here are a few areas to look at:
- An Estate Summary is available for any year of the plan by clicking the Estate Before Tax value on the Planning page and for the final year of the projection in the report.
- The Marginal and Effective tax rate columns on the Planning page, or on the Cash Flow Summary page of the report.
- The Total Tax paid during the projections, not including estate tax (click the blue icon at the top of the Total Tax column).
- The Estate after Tax column in the Net Worth Projections page of the report for each year for all scenarios.
What about tax planning for clients with corporations?
Snap integrates both personal and corporate financial planning seamlessly with an optional corporate planning model (available in our Advisor Business plan) that can be layered onto your personal projections. You can get a brief overview of the module in this video here, it’s about 8 minutes long.
You can review the basic corporate assumptions we use here, and learn more about how we handle and track the refundable dividend tax on hand and how to customize your fixed income and equity return allocations here.
Snap understands the importance of having those tax planning conversations with your clients. This aspect of financial planning is extremely important to your clients’ overall financial success and health, especially during those retirement and decumulation years. Our goal is to make it as simple as possible for Advisors to model and demonstrate these scenarios effectively in order to help their clients reach their financial goals.
Did you know that there are new technology rules for Financial Planners?
Certified financial planners (CFPs) & qualified associate financial planners (QAFPs) have some new expectations and requirements pertaining to the technology they use as part of their financial planning process. We’re going to break these two new rules down for you and demonstrate how Snap Projections helps to satisfy these requirements. We enable planners to easily comply and meet these requirements, so if you’re a Snap user, we’ve got you covered for these changes.
Let’s start with Rule 28, which you will find on page 16 of the updated set of standards.
It states that:
(28) When relying on or using technology in the financial planning process, a Certificant:
a) Must take reasonable proactive steps to gain a general understanding of the methodologies underlying the technology that have a direct impact on financial planning projections and recommendations;
b) Must have an understanding of the financial assumptions underlying the technology that have a direct impact on financial planning projections and recommendations;
c) Must validate that the inputs and assumptions used are reasonable and appropriate based on the client’s circumstances; and
d) Must validate that the outputs generated are reasonable and appropriate for the client before relying on them, or presenting the final recommendations or strategies to the client.
In laymen’s terms, this new rule simply means that Financial Planners need to understand what data goes into a financial planning software, and whether or not the numbers that go both in and come out, are reasonable. It means that you need to understand how things are calculated, and be able to validate that the assumptions and outputs are reasonable. The other layer here is that all of this pertains to what is reasonable and appropriate for your individual client, which means you really need to “know your customer”. If you use financial planning software that you don’t understand because it isn’t transparent, or don’t invest the proper time in client discovery and awareness, you may find yourself in breach of these new rules.
How does Snap Projections help with this new expectation?
Snap Projections takes great care to document and share the methodologies and assumptions that underlie the software. We believe a thorough understanding of these inputs is important to ensure the outputs of the software are as intended for your needs. We use current government-provided inputs where available (e.g., tax rates, CPP benefits) and use reasonable and customizable assumptions where required (e.g., inflation, portfolio holdings). Where possible, we use industry-recommended inputs (e.g., the FP Canada Projection Assumption Guidelines (PAG) for the rate of return assumptions). Additionally, our data entry flow encourages the review and validation of many of these assumptions as the plan is initially being created. In addition to the resources you’ll find below, it’s worth mentioning that we have a stellar Customer Support team that is available to answer any questions you have. If you’re wondering where a number is coming from, or how something was calculated, all you need to do is ask. You won’t be left in the dark and we will ensure you have the information you need to be confident in the numbers and plans you present to your clients. Articles outlining our methodologies and assumptions can be found throughout our Help section of the website. Some of the most relevant articles are included below:
Once we cover the data and numbers, we also need to consider the human element here, which is the responsibility to know your customer, and to know what is reasonable and appropriate for each individual. We provide you with a Financial Planning Questionnaire to obtain the relevant information that you need to not only serve your clients but remain compliant.
Next, let’s cover Rule 29, which you will find on page 17 of the updated set of standards.
It states that:
(29) In all cases, irrespective of the data used, the material assumptions used as well as the rationale must be documented, and clearly communicated to clients.
This one is a bit simpler to digest, and is essentially stating that you must be able to both demonstrate and document your assumptions and reasonings, and also show you’ve shared this information with your clients in a manner they can understand.
How does Snap Projections support managing this requirement?
Snap Projections includes a dedicated page in the Report section for assumptions used in the projection. In addition to these values, advisors can add their own comments in this section for any other material details not captured in the default tables. If assumptions are more appropriate in reference to specific figures (e.g., tables, charts) you can add comments to any section of the Report. Assumptions currently included are listed below:
- Start year
- End year
- Inflation rate
- Province for tax purposes
- Rate of return on capital assets
- Appreciation rate on real assets
- Retirement age
- CPP start age
- OAS start age
- CPP % of maximum
- OAS % of maximum
Other assumptions may be included depending on additional functionality added to the projection (e.g., education goal, insurance). There is also the option to export the plan as an Excel file, which documents 100+ different assumptions/parameters used in the plan. Our reports are simple and easy to understand for clients. For sharing the plan and communicating with your client, you have several options. You can present the plan and charts in real-time, either in-person or through screen-sharing, and then download a PDF of the report to email or print and provide it to your clients.
At the end of the day, even though this may be a lot to digest, these changes are good. These new rules, which are timely and relevant to the changing environment, are designed to protect not only the clients but the Advisors as well. And in the spirit of complete transparency, these resources and features in Snap are not new and were not built to accommodate these new rules. For us, this is business as usual because we fundamentally believe in having a tool that advisors/planners and clients alike can understand. We believe in transparency, and ensuring everyone involved understands the assumptions and methodology.
Over the last few weeks, I decided to take a deep dive into the practices of our top clients in order to distill their approach into a simple framework for what makes them referable.
I always take meticulous notes when I see something that works, so I went over my notes from several hundred conversations with advisors from the past three years to see if I could discover something useful. It turns out that some of the best advisors consistently focus on 4 key areas of their business that determine everything else and significantly impact referrals.
You have likely heard that 20% of activities generate 80% of results. This is called the Pareto Principle. Pareto noticed that 20% of the pea plants in his garden generated 80% of the pea pods and later showed that approximately 80% of the land in Italy was owned by 20% of the population. When you really start to look, you can see other examples of this principle almost everywhere. The 4 areas I’m going to share with you today make up the 20% of the work that generates an overwhelming 80% of results in your businesses. We started referring to these key principles as the Referability Quadrant.
Some advisors think a referral strategy consists simply of a tagline in their email signature like the one below.
That’s insufficient at best and dangerous at worst. It won’t actually drive sufficient volume of referrals and it is dangerous to make your business growth dependable on a single tactic that simply doesn’t work.
The Referability Quadrant is a systematic approach to structuring your business so you become more referable.
It all starts with elevating your game and ends with evaluating your systems. Here’s how it works.
Elevate Your Game
Great advisors constantly improve their business. Period. They improve their systems and processes by designing useful workflows. They ruthlessly prioritize and apply technology to eliminate waste anywhere in the process. This instantly leads to more efficiency and time savings not only for the advisor, but also for their team and, most importantly, for their clients.
Here are two quick wins you can implement today to elevate your game.
First, schedule meetings online. Jason Pereira, an award-winning financial planner and senior financial consultant and partner at Woodgate Financial, Inc., recently shared an anecdote with me that perfectly exemplifies how this can have a huge impact on your practice. One of his staff members was spending nearly 70% of her time booking, rebooking, and confirming meeting times with clients over the phone. When they moved to an online solution to automate the process, they saved his staff and his clients a lot of time. In fact, he estimates they got that time spent booking appointments down to 20% of his staff member’s day. Suddenly, she had half of her day back that she could now spend on more productive tasks, significantly improving the firm’s efficiency. Similarly, his clients can now easily choose a time that works for them without having to play phone tag with anyone.
Another way to elevate your game is to use face-to-screen technology to meet with prospects and clients. Face-to-screen technology has been said to be one of the most disruptive forces sweeping through the financial advisory space for several reasons. You’ll be surprised that not only do your out-of-town clients want to meet online, but that even some who live in town prefer it because it saves them time, too. After all, who wants to be stuck sitting in traffic?
Clients appreciate advisors who value their time. As an advisor, if you’re easy to work with, you become way more referable.
Engage Your Prospects
Top advisors optimize for client engagement rather than for customer experience in their financial planning process. According to Paulo Sironi, one of the most prominent minds in FinTech, customer experience can be copied or purchased and therefore quickly commoditized, so it isn’t a sustainable competitive advantage. Instead, you need to provide something of value. Show prospects what you can do for them in a way that clearly shows them the value you provide.
Financial planning is a tremendous way to engage clients. In fact, in the quickly changing landscape of financial services, with at least one major shift underway (which we wrote about here), it is one of the few areas where you can predictably add value to each of your clients.
Advice has to come before products. Financial plans should be the core of your client relationship. Do you understand the biggest financial worries of your clients? Are they thinking about a new roof or saving for their children’s education? What are their biggest questions about retirement?
If you don’t know the answers to the above questions, you’re missing a great opportunity ‒ and your clients are missing out on a lot of value. Ask good questions and listen. There is really no magic about it. It’s just listening empathetically and trying to help your clients make better financial decisions. If you focus on their life, what matters to them, and their financial goals and challenges, you become an important and even integral part of their life and build a long-lasting relationship. This naturally leads to referrals.
Educate Your Clients
The recent research by Credo Consulting shows that “the likelihood a client will provide a referral to his or her advisor gradually grows with that client’s increasing levels of financial literacy.”
The key takeaway here is that investing in educating your clients pays off. Education is key not only when it comes to serving your clients and retaining them, but also in growing your practice.
Don’t even think about a textbook approach to financial planning or 50-page financial plans, though. Rather, be practical. Educate clients about the specific impacts of their financial decisions and answer their biggest questions about their finances. What happens if they stay the course vs. following your advice? How long will their money last? How much can they spend without running out of money in retirement? When should they take their government benefits? Which of their assets should they spend first?
Quick and meaningful what-if scenarios increase the level of understanding, which builds trust that then helps drive referrals. When clients understand what is going on in their financial plan, they’re actually excited to tell other people about what they know. This is how you generate referrals.
Evaluate Your Systems
In order to continue elevating your game, you need to create a feedback loop so you can see what is and isn’t working. Peter Drucker famously said “What gets measured gets improved.” See how that brings you back to elevating your game? Measuring results and identifying areas for improvement should be a regular activity, and collecting feedback from clients is a big part of that.
However, that’s only half of the story. What you might not realize is that by creating a client feedback system, you receive referrals. Yes, the referrals can be a byproduct of your feedback gathering process if you implement it correctly.
We have interviewed a multitude of experts on the topic of referrals ‒ here’s a short list of some links you can check out to learn more about great processes that can help you gather referrals almost automatically:
Grant Hicks recommends building an advisory board that includes your top clients so you learn directly from your best clients, and suggests having six centres of influence completely integrated with your business.
Julia Chung and Sandi Martin show how they integrate working with other professionals and how referring out to the professional they think is best for each individual is a cornerstone of their business.
John Page has a process that gathers referrals without the advisor ever having to ask. Seriously! He stresses that this process “needs to be systematic.”
It starts with laying out the ground work during the first meeting, creating an advisor evaluation form, reviewing the evaluation with the client, and creating a system to reach out (if you want to listen to him lay this process out in detail, you can listen from 13:00 to 22:00 of this podcast episode).
By building feedback and referrals right into your evaluation process, you capture a big opportunity that many advisors miss.
Focusing on these 4 areas will help you organize your advisory practice to maximize referrals and ultimately help more people achieve their financial goals. And I think this is what we all are here for ‒ to help Canadians make better financial decisions.
If you’d like to learn more about how we approach addressing the 6 most common financial planning questions, here’s a quick video ‒ or you can always request a 1-1 demo with us here.