What Documents Does My Financial Advisor Need?

You’ve finally found a financial advisor you can trust. But, instead of a list of exciting investments or a retirement roadmap to that brand new Mercedes, they’re giving you… a list of documents to gather? Tax returns, financial statements, 403(b)s...you name it. You might be wondering, "Why are they asking me for all these documents?"

Those financial document requests allow your financial advisor to be fully aware of your financial situation. In this episode of Capital Conversations, Colin Day, CFP®, EA, MBA and portfolio manager Ryan Potts discuss what’s included in a financial document request and how they allow your advisor to better serve you.

For recent investment news and our take on the current market, retirement planning, and investment, listen to our podcast Capital Conversations or view our recent blog posts. Below is a transcript from a recent podcast, "What Documents Does My Financial Advisor Need From Me?"



Colin Day: Hi, everyone, and welcome to another Capital Conversations. I'm Colin Day, financial advisor, and with me today is Ryan Potts.

Ryan Potts: Nice to meet you.

Colin Day: Nice to meet you. Ryan sits three doors down from me in the office space here, so of course I know who he is. And Ryan, you've been on at least one other podcast, right?

Ryan Potts: Early on, I think a couple months ago.

Colin Day: We wanted to invite Ryan back on. And the topic du jour is one that you might not think is incredibly interesting, but please don't tune out because we think this is. It's a financial document request.

When we engage with either prospects or clients that are coming on board, we always want to know a little bit more about them. And one of the easiest ways to collect information is by them to literally be provided to us in the form of documents. Many folks are really good about collecting documents for us and making sure that we have all the information for them. But I wanted to talk with Ryan today because we're both very active in this space, and making sure that we understand what our clients' lives are like and why our prospective clients need to provide us with this kind of information so that we can have a good start to our relationships.

Ryan Potts: I think before we talk about maybe some of the documents that we like to request when we're meeting with new prospects or new clients, it's also important to note maybe why we're requesting the information. And a lot of it always reverts back to the financial plan and making sure that all the variables and all the inputs that we are asserting into their plan is as accurate as possible. Then we know kind of all their intricate one off situations that we might not experience with every client.

Colin Day: Yeah, absolutely. For example, so this document request form – if you were to ever engage with us it'd be something that we would forward on to you – the very first thing on there, which might not be the first thing you would assume your financial advisor would want to see, is two of your most recent federal and state income tax returns.

Ryan, why on earth – we're not tax advisors, we don't provide tax advice – why would we want to look at our clients’ tax returns?

Ryan Potts: This kind of goes back to what I just said about making sure and validating the information that we're receiving from our clients. First and foremost, I think it's important that when we ask our clients what their income might be, a lot of times our clients might not understand the difference between a net or gross income. And a lot of our assumptions and calculations typically are involving gross because we are building in the net aspect, or what's being withheld for taxes.

Colin Day: Right.

Ryan Potts: So it's important for us to get an understanding of what is their actual income pre-tax yeah. Then also making sure that they're not missing any tax strategies along the way. Roth conversions might make sense for a recent retiree who doesn't have any income, right? There are some strategies that a second pair of eyes outside of your certified public accountant (CPA) that you might see once a year, and we can provide benefit by seeing those tax returns and seeing, “Are there any opportunities being missed along the way?”

Colin Day: Yeah, absolutely. There was a really good example of this, engaging with somebody more recently, who provided their tax returns, past several years tax returns.

What they had told me about their situation, I thought, “This is going to be a breeze, this is going to be an easy financial plan.” But then I looked at their tax return and, oh boy, it wasn't just like a 20 page return, it was like a 40-page return. I was like, “Okay, well, that's interesting.

Why are there so many pages?” And then I realized, “There's a lot more tax forms on here that are beyond just the regular salary that this person is receiving.” Uncovering that information blows open the doors of opportunity because not only are we talking about a much more significant income than what we were talking about, it provides more interesting planning opportunities.

So it's really important for us as financial advisors because – even though we're not providing you with tax advice – by looking at your documents, we’re at least more knowledgeable about your situation going forward.

Ryan Potts: Aware is the word I always like to use. Being aware of their full situation. Making sure that we understand everything that's going on. To your point about that example, another one that comes off the top of my head is: A client tells me their income. If I didn't ask for the tax return, I would just assume that what they told me was their all encompassing income. Come to find out, they also own rental properties, and they're receiving rental income, and that wasn't included in our conversation about what they're bringing home from their job.

Colin Day: Yeah, absolutely. It's just a great clarifier for us, and we're just doing our due diligence, understanding their situation a little bit better. What else interests you on the document collection sheet?

Ryan Potts: I think one of the most interesting documents that I've seen has to relate with stock options and restricted stock units. Those plans that small businesses and also public corporations offer to their upper management and sometimes executive level employees. Most of the time, clients and prospects that I'm working with that have these type of benefits do not fully grasp or understand what they might look like. And for us, it's important to maybe realize or recognize what the investments are and what the invested period of those options might be.

And the reason that's important is because depending on the type of stock option that they're receiving through this compensation, it could affect their tax situation. There's instances where you'll get taxed immediately upon receiving your stock option. There's also instances where you don't get taxed until the unit has been vested and you are determined to take it at that point in time.

That could really affect your tax situation, which again, we're not tax planners, but we do financial planning and sometimes we have to take into consideration when income levels might fluctuate based on these types of benefits.

Colin Day: Yeah, absolutely. It's one of those things again, where it's something through your employer that we don't have access to, especially with smaller companies. There's somebody that comes to mind, who works for a large publicly traded corporation, very active in the stock space, [it’s] a major component of this individual's income on an annual basis. And without that information just being publicly available on a website – because it's a pretty big company, so they have public facing websites that allow people to kind of understand what the benefits are – I was able to provide that information directly. But if that's something that's not readily available, well, the only way we're going to get it is if you provide it to us from a document request perspective. We have to ask that you work with your employers and say, “Hey, Can you just provide me a 30,000 foot overview? Or could you provide me with some kind of plan description or something like that?”

Ryan Potts: And I think it's also important, a lot of times when we're asking for employer benefit documents, most people immediately refer to their 401(k) or their 403(b) and assume that, “Oh, I'm receiving these types of benefits through work.” And a lot of times they might leave out the fact that they're receiving a stock option or some type of stock compensation. So, it's another one of those refresher/reminders for the client or prospect “Oh yeah, I need to talk to Colin or Ryan about that.”

Colin Day: Yeah, absolutely. And another document that comes to mind that I like to look at for certain folks are pension documents. Not everybody has a pension, of course, or defined benefit plan through their employer, but many of our bread and butter clients that are coming to us as pre-retirees are trying to make a pension election decision. So, whether they are going to take a lump sum, they're using the annuity option, are they doing it based on their lives, on both them and the spouse, is it a certain percentage of income in the future? There's lots of decisions being made there, but we don't know the options unless we see the plan document. My wife is a teacher. She sends that stuff. She says, “Here you go, Colin.” I'm like, “This is your job. You should know about this.” But I'm the one that does those types of reviews. So for me to have the information readily available is easy.

But again, if it's a smaller company, an esoteric plan that we haven't seen before, we're going to need you to provide those kinds of documents to us.

Ryan Potts: And also the benefits of potentially seeing those documents and maybe highlighting some areas where there could be improvement within the plan, which is part of our business as well and ways that we can help some of our employees and business owner clients.

Colin Day: Yeah, absolutely. Why don't we skip down a little bit, Ryan, to the business section.

Ryan Potts: I think one of the things that we ask for with our business owner clients a lot of times maybe takes them aback or off guard slightly. Because they're like “Wow, my financial advisor wants to know a lot about my business. Why might that be?”

I think it's important that we again get a comprehensive view on what's going on and for a lot of our business owner clients, that's where most of their net worth is tied up, and that's where we can really help them in the financial planning process. So, one of the things that we typically ask for are current financial statements, a balance sheet, income statement. A tax return might get thrown in there because a lot of business owners rely on their tax return as kind of a financial statement. And also a profit and loss statement. Why is that important for us? Realistically, we want to know what's going on and how healthy that business is. One, from a cash flow perspective, are we going to need to maybe pull assets from an investment to help sustain a business? That's always nice to know, but really more importantly is as our business owners get closer to retirement, their business is going to be the largest transaction in their life, typically. It's important that they understand that if you are looking to retire in five years and your business is that asset that you plan to retire with, we need to make sure that the business is in order and easily ready to take to market to find a buyer. And most business brokers that I work with will tell you that getting sound financial statements and getting your house in order, as they always say, is the most difficult part. And it can set business owners back even a year or two, because if they haven't been keeping track of these things, it's tough to find buyers. So you might be giving up a multiple, or the value of your business might come down because you don't seem to have your house in order from that stance.

Colin Day: Yeah, absolutely. There was somebody that I engaged with last week who was a business owner who just had a really incredible profitable year. A banner year doing really well. And now [they] came into some funds and are trying to figure out, “What do I do with this? I bought all the equipment, I bought all the machinery that I can incorporate into this business.

So how do I best utilize these funds?” Well, that's a great problem to have. I'm kind of curious about what happened in the past years. “Why are we in this situation?” Having some basic financial statement information on our part could at least allow us to speak more intelligently about their situation, maybe crawl into their brain for a moment, as opposed to maybe just guessing what might be their priorities for not only this year, but also for future years.

Another thing that comes into mind, especially with this particular individual that I engaged with last week, was a retirement plan. When you're in a situation where you have employees or maybe it's just you, maybe it's you and a spouse. Maybe you've had a retirement plan.

Maybe it's just a personal one that you were contributing towards. It could have been as basic as, “I'm funding my Roth every year, Colin.” Or it could be more advanced of, “Hey, my tax person says I can fund a SEP.” “What's a SEP?” Well, that is of course one option, but as we progress through developing a company, becoming larger, having more employees, having more opportunities, wanting to save more as the business grows and preserve more.

From a tax perspective, having a retirement plan document, if there is one, or at least the idea of where they're going within their retirement is very important. Especially with a lot of these business owners, like you said, that's going to be their big liquidity event. It’s what they've been looking forward to to fund their retirement. That might be the only thing that they have.

But if we can be in front of them and say, “Well, you don't have a retirement plan document. Here's an opportunity. Let's diversify. Let's spread out our risk” –not just to be consolidated within the company – “Hey, let's start to invest, let's start to diversify and spread it out so that we're not just, you know, fingers crossed. We're working with that business broker who's been eyeing us up for a couple of years and now we're ready to sell. Man, I really hope that works out for me.” This way, you got something else on the side.

Ryan Potts: Absolutely. I will mention the other thing with the business owners that we do see a lot of, are partnerships. More than one owner in the business, maybe you had a group of people come together and found this great business idea and they put things together. Colin and I do help our clients with insurance as well, and one of the important things with business owners is the buy-sell agreements. If something were to happen, kind of a succession plan, if an owner were to pass away within the business, how does the owner's family stay in a financially healthy situation? And a lot of times it's done through a buy-sell agreement. Again, these are things that Colin and I would love to talk to you about if you had questions about them. This could be a whole other podcast by itself.

Colin Day: Yeah, absolutely. Well, I think we've done our document request form justice here. For a form that seems again, pretty basic, it's just a big checklist of information that we ask from our clients. It really does help in terms of developing the relationship and getting on the right foot, understanding personal situations. If you've not gone through this exercise before, I think it's really great to just consolidate things. Even if you aren't using it for a financial advisor, having all this information in one place isn't bad for your spouse to have, or at least know where it is so that they can get help if something wants to happen to you. If you're incapacitated or you pass away. It could be great for your kids just to have a personal financial statement so that they understand where the funds are. Not a bad exercise to go through. So if you're interested in what our document request form looks like, you of course can email us at info@correctcap.com and we'd be happy to send that on to you.

So, for Ryan Potts, Ryan, thanks again for joining me today.

Ryan Potts: It was a pleasure, Colin. Thank you.

Colin Day: All right. And thank you all for joining us on another Capital Conversation. We'll see you in the next one.

Legal Disclaimer: The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always, please remember, investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.

Correct Capital Wealth Management is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Correct Capital Wealth Management and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Correct Capital Wealth Management unless a client service agreement is in place.

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Financial document requests allow us as financial advisors to provide clarity, reveal hidden opportunities, and gain a greater understanding of our clients needs. Whether you're nearing retirement or just started thinking about your retirement planning, a financial advisor is a vital part of your financial health and achieving the financial goals you've set. If you have any questions about financial planning or are looking to hire a financial advisor, call Correct Capital today at 314-930-401K or fill out our online contact form to get started.