Raises, Refunds, and Windfalls: How To Make The Most Of Positive Financial Changes

The world of financial planning is so incredibly diverse. And so it is with financial professionals, as well. The challenge that most people have is that by not being familiar with the various types of advisors; styles, approaches, licenses, abilities, qualifications, etc., it makes it hard to know what questions to ask in order to formulate an opinion as to whom to work with. People tend to go with their “gut feelings” about someone. And while that certainly can be an indicator as to what kind of working relationship one might have with a particular financial professional, it is equally, if not more, important to have objective information at hand for that decision-making time, as well.

There are a few questions that advisors rarely get asked, but should be asked. Sometimes these questions get avoided because the person asking might not even realize these questions are important. Past experiences drive many of the questions people ask. But if the goal is to be as informed as possible, it’s important not to forget to ask these three questions:

Question #1: Are you a fiduciary? And how do you get paid?

Not all financial professionals are fiduciaries. There are various types of securities registrations a financial professional can acquire; some are simply registrations to sell certain products, some are registrations to give advice (as opposed to just suitable recommendations for product sales). In other words, some financial professionals are “Registered Representatives (RR)” who are affiliated with a broker/dealer, with some securities registrations that allow them to sell products. While some financial professionals are “Investment Advisor Representatives (IAR)” who are affiliated with a Registered Investment Advisory firm, who have a few more/different registrations that allow them to be fiduciaries within the advisory services they offer their clients. Some professionals are both a Registered Representative and an Investment Advisor Representative. Others are not. Many consumers don’t know the differences. Below is a very basic breakdown.

Responsibilities to Client:

IARs – Fiduciaries. Are legally bound to do what is in the best interest of their clients…above all else.

RRs – Are responsible for making sure the products they sell to their clients are suitable.

Primary Responsibility/Function:

IARs – Primary responsibility is as an advisor to their clients

RRs – Sell securities and handle sales transactions for their clients

Compensation:

IARs – Generally charge a flat % fee for advice surrounding assets under management (AUM)

RRs – Tend to be commission based. They get paid commissions for products they sell.

Compliance and Regulations:

IARs – Are associated with Registered Investment Advisory (RIA) firms that are regulated by the SEC and/or state regulatory agencies.

RRs – Are regulated by FINRA (Financial Industry Regulatory Authority), along with the SEC and other state regulatory agencies.

Question #2: What is your particular expertise?

Not all financial professionals have niche markets….or only specific types of clients that they work with. But it’s important to know if they do. Understanding what kind of experience and typical clients the advisor has is important to understanding what to expect from them in regards to knowledge and experience that is relatable. Knowing what kind of team they have, and what kind of experience the team as a whole has is important. What do they specialize in? What resources do they have access to?

Here are some examples:

Tax efficiency with investments

Protection Planning – Estate planning collaboration

Small business owners

Multi-generational planning

Etc.

Question #3: What is your ongoing service model?

Taking the initial steps to get things organized and onboard with a financial advisor can be activity-filled and very important. But equally important is the clear communication about expectations for moving forward. Understanding what to expect between the advisor and client is critical to insuring that communication and expectations are being managed positively for the relationship, from both sides.

How often does the advisor reach out to clients?

Is there a team to support clients? Or just one individual?

What can be expected in regards to calls? Meetings? Paperwork? Statements?

What method of communication is used? Phone calls, meetings, email, video conferencing, etc.?

How accessible is the advisor if the client has a question?

These are just a few questions that might prove important to ask when interviewing financial professionals. There is no generic right or wrong answer. At the end of the day, it’s all about understanding what the relationship would be, the expectations for the relationship for both the client and the advisor, and communication. Being logical with interviewing an advisor is critical…look for proof and conviction between what they say they do vs. what they can prove they do.

Our financial well-being is critical for empowering our lives….we work hard for the life we want. And there are almost always some form of financial element to all we do. So please, don’t be afraid to ask the intrusive questions of the advisors you are considering working with. It could mean a great deal to how life gets funded….now and through all ages.

Paying taxes is inevitable. The key to being as efficient as possible about how much one pays in taxes requires careful consideration of the big picture. And while many people simply want to know if they can have a tax-free retirement, it really starts with being clear about how and when taxes get paid…and to defining what a “tax-free retirement” actually means. For example, if someone is striving to have income during retirement that is tax-free AT THAT TIME, then there are a plethora of investment and insurance products out there that could help defer taxes on earnings, and potentially, have tax-free withdrawal benefits for some types of accounts. But that doesn’t mean retirement is “tax-free”.

Let’s clarify what a few of the most common types of taxes are:

Income Tax – taxation on earned income can occur on many levels; local, state and federal. The amount a person would have to pay varies greatly on their situation. And, there are various types of tax credits that could affect the amount of taxes that would be paid on income. Any earned income that is deferred into a qualified retirement account generally means that taxes on that income won’t get paid at the time it is earned, but when that income is taken at a later date, during retirement, taxes are paid at that time. The idea that paying taxes on income later, when one might be in a lower income tax bracket, might prove more beneficial. But a) there is no guarantee what the tax rates will be in the future, and b) there may be several other factors with a person’s overall taxation that could affect what is perceived as a benefit. A tax professional is the best person to help folks evaluate what kinds of strategies are best for their overall situation. At the end of the day, SOME form of income tax will be paid, either when it is received upon earning, or when it is withdrawn from a qualified plan “down the road” in retirement.

What can be done to possibly reduce these taxes? Speak to a tax professional about what tax credits might apply, and also review with them if itemized deductions can play a role in reducing taxation.

Sales Tax – taxation occurs on state levels for various goods and services that get purchased. The percentage of taxation is usually based on the price of said goods and/or services. But that percentage charged can vary greatly from state to state, or even within different municipalities. There are a few states that don’t have any sales tax on most goods and services.

Excise Tax – taxation that is applied to specific types of goods; gas, cigarettes, beer, liquor, etc. These are typically nicknamed as “sin products”. Taxes received for these particular products are generally used to help raise money for bringing awareness to the potential dangers of these products.

What can be done to manage sales and excise tax? Not much. These types of taxes are very hard to “manage”. Changes in lifestyle; consumption of goods that fall within this category, will obviously affect the amount of sales taxes paid.

Property Tax – taxation that is applied to property owned. Taxes received tend to go towards local municipality needs. The amount of property taxes charged is usually based on a percentage of the value of the property.

What can be done to manage or alleviate property tax? Renting instead of owning might prove beneficial with alleviating property tax. However, there may be tax benefits also lost by being a renter instead of an owner. Again, a tax professional is best for helping to calculate what the tax benefits are for both scenarios.

It might not be possible to have a completely tax-free retirement, but by working with a financial professional and a tax professional, the ability to strategize investments and manage how taxation occurs could prove very beneficial. It’s not just about saving and investing…it’s about being as savvy as possible with the decisions along the way.