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Myth-Busting Can Land New Clients

For financial advisors, offering comprehensive financial planning services can be a double edged sword.

Offering to help clients with insurance, tuition planning, risk management, and investing is a powerful way for advisors to differentiate themselves from the competition, but many investors are simply interested in the hottest investment trend and are often reluctant to go through the time-consuming financial planning process.

One potentially effective approach for financial planners, however, is to motivate prospects by dispelling common myths and by explaining the costly ramifications of clinging to those myths.

For example, many clients mistakenly believe that their homes are their most valuable asset. In reality, however, clients’ ability to earn a paycheck is their most valuable asset. After all, most home shoppers can only afford properties that are worth two-and-a-half times their annual earnings, so the value of their homes will often pale in comparison to their lifetime income.

term loss of income that can result from a disability and how disability insurance can help replace that lost income. Such scenarios can also help clients shift their focus away from hot investment tips and toward financial planning.

Consider this: a client generating a 15% return on a $1 million portfolio will have earned $150,000, which of course, is a sizeable amount. Yet, if the client earns $200,000 a year and becomes disabled, the loss in income will far exceed the results of a hot investment.

Another common myth is that everyone needs life insurance. Most people—but not everyone--of course, should have life insurance. The product is primarily used so that clients with dependents can leave of lump sum of money to their survivors to replace the income that the individual was earning.

Having said that, it’s hard to argue that someone without dependents should have life insurance. In such cases, investors would be better served by spending the money for other risk management purchases—such as disability or homeowners insurance—or by using the money to save toward long-term goals.

A third common myth is that individuals should wait as long as possible to withdraw money from traditional individual retirement accounts, 401(k) plans or other qualified retirement programs. In some cases, that may be the best strategy as it allows earnings to continue grow on a tax-deferred basis.

Yet, the myth overlooks tax ramifications. Withdrawals from qualified plans are taxed as ordinary income. If a client has reached the age when he or she can make withdraws and expects their tax rate to increase in future years, perhaps from collecting Social Security, it may make sense to withdraw assets sooner rather than later. That way, the client will pay taxes on the withdrawn assets at a lower rate than would apply at a future date.

It’s important to note, also, that the entire pre-tax value of a qualified retirement account is used when calculating inheritance tax. So, the combination of having to pay inheritance tax on an entire account value plus have to pay the deferred tax on the account can result in tax rates as high as 50%. In such a case, it would make sense to withdraw assets prior to death, pay the taxes on the withdrawn assets and, as a result, remove the amount paid in deferred taxes from the final size of the taxable estate.

While such myths may be too complicated to discuss during an “elevator pitch” they can be power sales tools when meeting with clients. The challenge for advisors is to have compelling strategies and scenarios that help illustrate the above discussed matters.

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