Editor’s note: Across the gamut of our 2023 articles explaining tax law changes, the bewildering economy, and how to be a better advisor, these Members’ Choice runner-up articles equipped you for powerful performance. These just missed a spot in our annual Top 10 list, but were still among the most popular articles of the year.
With the recent release of the Bob Veres study, software is back in the headlines again. And, notwithstanding the attention that ChatAI is getting, the focus on software makes so much sense. More and more we are seeing that it is nearly impossible to do our job as comprehensive financial planners without the assistance of robust technology tools.
Furthermore, Vanguard’s 2022 study reminds us that an advisor who is focusing on all seven modules of comprehensive planning can add up to and even exceed 3% in net annual returns. Those seven modules include suitable asset location of diversified funds, cost-effective implementation, rebalancing, behavior coaching, asset location, spending strategy, and total return versus income investing.
To me, what is most noteworthy about the Vanguard study is the absence of a thoughtful and advanced discussion on distribution strategies. Vanguard still relies on an archaic and rigid approach in its study. Vanguard simply advocates spending down the portfolio in the following order: required minimum distributions (RMDs) if applicable, followed by cash flows on assets held in taxable accounts, taxable assets, and finally tax-advantaged assets. As a result, those planners who employ a dynamic approach can and do add even more value than the 120 basis points that Vanguard estimates in its study.
However, in order to add all of this value, an advisor needs help. Excel or basic software programs will no longer be the tool of choice. And wasting time going through several iterations is not a long-term solution as it is inefficient, not scalable, and will not always lead to the optimal result. As a result, advisors need software that is designed to do the specific job, and often that is niche software. We discuss below three pieces of software that every advisor should be using if they want to be extraordinary at their job and include some of the advanced planning that many high-net-worth clients need.
1. Start with Holistiplan
You cannot perform even the most basic type of tax planning without a tax return and a tool to review the tax return. This is where Holistiplan makes so much sense. Holistiplan is single-handedly cornering the industry by introducing a way to efficiently review tax returns. The software highlights key figures from the return and also provides a summary analysis as a great starting point. From there, an advisor can identify tax planning opportunities and challenges.
Holistiplan has become an indispensable tool for all of our clients at Taylor Financial Group (TFG). For the smaller clients, it provides a quick overview so that we can easily identify some quick wins for the client, such as a Roth contribution opportunity or a specific tax credit that is attainable. We may also use it for tax bracket management, considering a Roth conversion or other strategies to take advantage of a low tax bracket. And for these smaller clients, we may stop there.
For the larger clients, we use Holistiplan as the first step of a year-long process. We also consider some of the quick wins from above, but then we go deeper. We address Roth conversion opportunities throughout the year, tax-loss trading, capital gain harvesting, tax bracket management, and so on. We also use the tax return as the starting point in addressing distribution planning (more on that later).
They say a journey of a thousand miles starts with the first step. Holistiplan is the first step. It’s that simple.
2. Don’t forget your ‘accumulation’ software
For most advisors, this software is already part of your tech stack. Whether it is Money Guide Pro (MGP) or eMoney, about 66% of advisors are using one of these core financial planning software. It has been interesting to see MGP develop over the years and add client-facing tools and estate plan analysis tools. These innovations and its ease of use have undoubtedly helped MGP to gain a loyal following. Having said that, we also appreciate eMoney for its rigorous cash flow analysis. We use both, but either is fine in most instances.
And remember, as part of your analysis, you should use Social Security analysis software, whether it is the Horsesmouth Social Security tool, Social Security Analyzer, or leveraging the built-in Social Security tool within MGP.
The key here is that every advisor should be using some type of accumulation software to assist clients with their question: “Will I outlive my money?” Research shows that this is the number one question on your client’s mind, so make sure you have the tools in place to answer it.
3. You may also need ‘decumulation’ software
Research shows that the second most important question on your client’s mind is “Will I pay too much in taxes during my lifetime?” The accumulation software mentioned above addresses the most common concern about outliving your money, but how to address the concern about paying too much in taxes in retirement? Anyone trying to address this age-old question is by definition focusing on distributions or sales, as these are the transactions that generate taxes, particularly in retirement.
Up until recently, advisors did not have a good way to address this concern, so instead we relied on back-of-the-envelope calculations, guessing…or we simply ignored the question. We may have also tried to run a variety of iterations in our accumulation software, but anyone who has tried this (and we have at TFG), knows that the accumulation software is not designed to address this issue in any meaningful way.
Even worse, we may have focused on short-term tax savings in an effort to provide some sort of “win” to the client and to demonstrate that we were listening. Those efforts may have been counterproductive, as we now know that we should be focusing on lifetime taxes, and not necessarily just saving taxes in any one year.
And now, we do have a tool to address the concern about paying too much in lifetime taxes. That tool is Income Solver, and for those larger clients, it is an absolute game-changer. Admittedly, the tool requires an extensive learning curve, and you still need to know your tax basics (that’s where Holistiplan can also be helpful). But, for those who have HNW clients or clients with large distributions, this software works well to create a lifetime distribution strategy so that you can minimize taxes.
To be clear, this robust tool is not required for all clients, even those in retirement. We typically perform an Income Solver analysis when the client has (or could have) about $1.5M in an IRA or other traditional retirement account, where there is a large gap in ages between spouses, or there are other large distributions due to significant spending. When we have a large retirement account, the software is critical in modeling out Roth conversions over several years, showing a variety of options and then recommending the favored approach.
The software demonstrates total taxes paid, account values at death, and potential size of Roth accounts. Uploading the client information into the software and modeling out the various distribution options is also eye-opening in so many ways, as you see the potential lifetime taxes and ways to decrease that bill when considering how best to draw down accounts. Either way, Income Solver has become an indispensable tool when guiding our larger clients.
Years ago, advisors didn’t have the tools that we have now to service our larger clients, and some may have wondered what type of value we were bringing. For the savvy advisor who is leveraging this technology, there is no need to ask this question anymore. And what a relief that is.