Inertia is a powerful force in potential clients, and one that financial advisers must find a way to overcome.
When Charles Bean, president of Heritage Financial Services in Boston, was courting one couple in their mid-60s, there were three things that helped him accomplish this: another client, a sloppy job by a previous adviser and one heck of a good first impression.
The pair was satisfied with their current adviser, but a close friend of theirs who was already on Bean's client list had been pushing them for years to go to Bean and get a second opinion.
They finally relented, and Bean found a way to impress them right from the start. As part of the fact-finding process, he requests that all potential clients bring in their tax returns from the last few years.
"It took a high schooler's ability to see that they had missed out on some huge deductions," he said.
The couple was retired with $5 million in taxable accounts, including stocks, bonds and a $500,000 annuity. They had another $572,000 in a 401(k) and two IRAs. Income had become relatively low recently, and they had left $100,000 in potential tax deductions on the table for each of the past two years. "They could have pulled tax-free money from their IRAs, or converted some of that money into a Roth," he said. "It took me a matter of minutes to turn to page two of their 1040 and say, 'Aha, here's a lost opportunity.' "
The CPA they used to prepare their taxes was recommended by their current adviser who, from what Bean could tell, didn't bother to look over the returns. His mistake was Bean's gain.
"Their jaws just dropped," Bean said. "These were bright people. They went to college. They just couldn't believe that they didn't catch the mistake."
Bean couldn't go back and claim those lost deductions, but he was able to recommend a new CPA. He didn't stop there. He typically schedules two to three meetings with clients as "kick the tires" sessions where he learns about them and they learn about him. He doesn't charge for these meetings.
Bean learned that the clients' assets were poorly diversified. More than 60% of their invested assets were in municipal bonds funds. When pressed, the clients acknowledged that this made them uncomfortable.
So Bean laid out a plan to trim the bonds in the portfolio to 35%, shifting much of them toward equities and alternative investments.
Next, Bean got rid of an expensive (and worthless) rider on the $500,000 annuity they owned. He also identified an extra $6,000 in annual tax savings if the husband opened a solo 401(k). "It was a true win-win situation with plenty of room for improvement," Bean said. "First impressions are everything in this business."
