By Brendan Frazier
As someone who has built an entire brand around the “human side of money,” when I was asked to deliver a presentation at the Retirement Tax Services Annual Summit last month, my first response was, “Are you sure you have the right guy?”
At first glance, taxes and psychology seem to have as much in common as Democrats and Republicans.
But after some time pondering it, I realized there is indeed a human side to taxes.
And here’s what quickly emerged from a few conversations:
For Advisors, tax planning can be a beneficial value-add.
But layering in the human side of tax planning? That’s a game-changer.
Here are five ways to leverage behavioral and psychological principles in your tax planning process to help you convert prospects and help clients follow through with your recommendations.
5 Ways You Can Leverage Behavioral and Psychological Principles in Tax Planning Conversations
1. Always Get to the “Why”
If you believe in the power of tax planning, you understand its ultimate benefit is the potential to lower a client’s tax bill.
That’s what the client wants.
But what they actually want is more than that.
Remember this: Behind every what lies a why.
Behind what people want to do is the emotional reason why they want to do it.
It’s never just about paying less taxes. Always seek your client’s “why.”
Why do they want to pay less taxes?
I once had a client who said they wanted to pay less taxes. I asked, “I’m curious what brings that up…”
She replied, “I’m tired of sending that amount of money every year if I don’t have to.”
So, I started looking for her “why” by asking, “If you didn’t have to send it and could keep that money instead, what would you do with it?”
Her answer immediately revealed the “why.”
She said, “Oh, that’s easy. I’d put it all directly in my retirement accounts because I’m tired of my job and ready for some flexibility in my life.”
In this case, it was never about paying less taxes but finding flexibility in life.
If you can move beyond the “what” and uncover their “why,” you not only build an unparalleled level of connection but, also discover what truly matters to your clients.
Related: What Clients Need Isn’t Always What They Want
2. Use Tax Returns to Facilitate Great Conversations
I often think of tax returns as an x-ray of the client’s life. If you know where to look, they can potentially help facilitate some of the best conversations you’ll ever have.
Here are three key areas to look for:
- Dependents (Form 1040, Line 6C): Very few things are more meaningful in our lives than those we care for. Obviously, this is where you’ll find kids listed (but we’ll assume you already know about them). You’ll also be able to see if your client cares for an elderly parent or even potentially a niece or nephew due to a family situation.
- Charitable Donations (Schedule A): This can either serve as a window into the causes your clients care about or initiate a conversation around their current giving strategy. If nothing shows up, it can be a way to start a conversation to see if giving to charity is important to them.
- Realized Gains (Schedule D): I often hear Advisors complain that they find out about major life and financial decisions after the fact. One way to check and see if that’s the case is by looking at realized gains. If you see a larger-than-expected (or larger than normal) number of realized gains, it can often be tied to a major life event. For example, a client who sold their house to pay for their kid’s graduate school costs.
3. Quantify and Multiply
Tax recommendations can be valuable, just as financial planning recommendations can.
However, the greatest tax strategies are often rendered useless without execution.
Developing and presenting the strategy is only half the battle. Implementation is the other half.
This is one way to leverage human behavior to your advantage and maximize the likelihood of follow-through:
Next time you recommend a tax strategy, use the “Quantify and Multiply” approach.
- Quantify the Amount: “This could help you save $15,000 in taxes next year.”
- Multiply It Out: “Doing it for 10 years could help you save $150,000.”
Potentially saving $15,000 might help some people focus in the midst of their busy lives, but most people will clear their calendars at the thought of potentially saving $150,000.
4. Leverage Tax Friction to Avoid Costly Decisions
This is specifically for clients who want to sell out of a non-qualified (taxable) account with gains.
There are numerous possible reasons for selling (e.g., fearing the market, finding a new investment opportunity, or buying a beach house).
When it comes to big decisions with equally large financial ramifications, creating more space between the idea and the action often leads to better decision-making.
For example, think about a client who is worried that the market might tank and wants to sell out completely.
If that money is in a taxable account with built-up gains, you could run the numbers for them and point out that selling out now could potentially create a $12,000 tax bill they wouldn’t otherwise have.
Often, simply informing them that the decision has a potential $12,000 price tag naturally prompts a more deliberate and less emotional decision-making process.
5. Connect Purpose and Planning
You already know one reason to dive beyond the “what” and focus on the “why.”
Here’s another powerful way to incorporate the why to improve follow-through:
Anytime you recommend a tax strategy, tie it back to their “why.”
For example, here are two ways to present a recommendation – you decide which option is better.
“We recommend this strategy because it will help you to leave a potential $196,000.”
OR
“We recommend this strategy because it will help create a potential $196,000 to pay for your grandkids’ education.”
As an Advisor, it’s easy to think your clients are naturally making this connection, but that’s not always true.
Don’t just recommend what to do. Remind them why they’re doing it!
Related: How to Gain Clients as a Financial Advisor: Ask the Right Questions
Tax planning is not only a value-add but also a differentiator.
But tax planning that embeds the human side is a game-changer for winning prospects and influencing clients.
RFG and Private Client Services do not offer tax or legal advice.