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How Financial Advisors Easily Provide Tax Planning Advice with Snap Projections

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.

FP Canada Standards Council’s New Tech Rules

Did you know that there are new technology rules for Financial Planners?

 


In July 2021, the FP Canada Standards Council added two new rules to their Standards of Professional Responsibility.

 

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.