Root Ready

Why We Wait Until the Third Meeting to Talk About Investments (and Why It Works)

• James Conole, CFP® • Episode 20

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This episode of Root Ready digs into one of the most overlooked parts of the client process: the proper timing for investments to enter the conversation. It’s a masterclass in pacing, patience, and purpose. You will walk away from this video knowing how smart advisors earn trust and set the foundation before talking portfolios.

James unpacks why great planning starts with clarity around lifestyle, cash flow, and strategy — not product recommendations or asset allocation. You’ll learn how to reframe client expectations, keep the process focused on what truly matters, and lead conversations that put life before numbers.

Because great advisors know the goal isn’t to manage money. It’s to help clients live better with it.

Listen to this episode to learn how to structure your meetings with intention, elevate your value beyond investments, and create a client experience that builds confidence from the very first conversation.

Submit a question for James here: https://rootreadypodcast.com/

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Advisory services are offered through Root Financial Partners, LLC, an SEC-registered investment adviser. This content is intended for informational and educational purposes only and should not be considered personalized investment, tax, or legal advice. Viewing this content does not create an advisory relationship. We do not provide tax preparation or legal services. Always consult an investment, tax or legal professional regarding your specific situation.

The strategies, case studies, and examples discussed may not be suitable for everyone. They are hypothetical and for illustrative and educational purposes only. They do not reflect actual client results and are not guarantees of future performance. All investments involve risk, including the potential loss of principal.

Comments reflect the views of individual users and do not necessarily represent the views of Root Financial. They are not verified, may not be accurate, and should not be considered testimonials or endorsements

Participation in the Retirement Planning Academy or Early Retirement Academy does not create an advisory relationship with Root Financial. These programs are educational in nature and are not a substitute for personalized financial advice. Advisory services are offered only under a written agreement with Root Financial.

SPEAKER_00:

Welcome back to another episode of the Root Ready Podcast. I'm your host, James Cannoll. Today's episode is all about understanding why the order in which we talk about certain financial planning topics matters. For newer advisors, this is especially important to understand because you're going to run into many situations where the first time you talk to a new client, their first conversations or the first questions are going to be around investments. How do I invest? Their first question is going to be around how do I save money on taxes? Their first question is going to be around, what do I do with my 401k? What do I do with this life insurance policy? And it's okay at times to give a direct answer. I'll actually address that later in this episode, but we always must redirect. We always must help pull the client back to the system, to the process, and help them understand why it's so important that we talk about certain things in a particular order. Let me tell you a story to illustrate this. I'm talking to a client and I show her on paper how I can very easily save her over a million dollars over the course of her retirement on taxes with the Roth conversion strategy I laid out. So she's ecstatic. A million dollars saved, of course, this makes a ton of sense. Let's do it. How do we make this happen? Then I show her. I say, well, you keep your expenses super, super low. You know, those trips you wanted to take, don't take them. The lifestyle you want to live, don't live it. Keep your expenses so low that you can live off this cash and brokerage account that you have and stay in the 0% tax bracket. Now, while you're doing that, what we're going to start to do is we're going to start to convert parts of your IRA into your Roth IRA. And look, if we do this for the next 20 plus years, there's a million dollars of taxes that you're going to save over the course of your retirement lifetime. Now, this is an absurd example because you can start to see where I'm going with this. That that person is looking at me. She's saying, why on earth would I sacrifice my retirement, my lifestyle, the trips I want to take to save a million dollars in taxes? It's not going to go with me when I die. So why would I prioritize that over the life that I actually want to live? That's exactly the point. If we're not talking about things in their proper order, we're going to start to prioritize the tactical over the strategic. We're going to start winning the battles but losing the wars. We're going to start prioritizing the things that seem most urgent but aren't actually most important. So that's where the right framework comes into play to help us understand what's the most important thing. What's the single most important thing? Let's get to that first. With that in mind or controlling for that, how do we then address the second most important thing? Then, controlling for that, how do we then optimize or address the third most important thing? And so it's almost like this series of optimizations of what do we optimize for first? And we make sure that that's what we're protecting. Then, with that in mind and not sacrificing that, how do we optimize the second most important thing, the third most important thing, the fourth most important thing, so on and so forth. So tying this back to what I mentioned first, clients coming to you right off the bat, hey, I need help with the Roth conversion strategy. What do you recommend? New clients come to you right off the bat. What should I do with this concentrated stock position? What should I do with you filling the blank? You need to be able to address the question directly, but then help them understand how there is a process that's designed to help them make the right decision, but within the context of a well-designed plan. So let's talk about how we specifically do that here at Root. We have our Sequoia system. So every single client that comes to us, we're going to go through the Sequoia system. We're not jumping right into here's how you should invest. We're not jumping right into here's how much long-term care insurance you might need. We're not jumping right into should you make beneficiary updates on your investment accounts. We're explaining to them this process. And the process is as follows. The first meeting is our kickoff meeting. The kickoff meeting is where we need to understand everything that's most important to you. What are you afraid of? What are you most hopeful for? What are your values? What are your goals? Ask the types of questions that help us truly understand what we're planning for. Because what we're planning for isn't Roth conversions, what we're planning for isn't investment strategies, what we're planning for isn't estate strategies. Those are tactical things designed to support the strategic goal, which is helping this client get the most out of life with their money. Using their money as a tool to accomplish what's actually important, which is enabling them to live the life that they want to live. So to start, we're gonna start by talking about the life they want to live. What are we actually trying to accomplish here? That's what we're going to accomplish in the kickoff meeting. Now, just a side note as I go through this, I'm gonna talk about a client that's very specifically in the retirement phase of life or coming up on the retirement phase of life. If you are talking to clients in different phases of life, you might tweak some of these things. But the example I'm using is someone, of course, approaching retirement. So we start with kickoff. Then the income meeting or the cash flow meeting, that's number two. That's number two because now what we're trying to do is we're saying, how do we tie together all the pieces? Your social security benefit, potential pensions, income sources from portfolio. How do we understand what your expenses are going to be? We're modeling out the cash flows and the income needs designed to support number one, to support that first thing that we're trying to optimize, which is you living the life you want to live. So this is where we're exploring do you have the cash flow needed to retire? Do you need to continue working to be able to live this life you want to live? Do we need to find somewhere to cut back on expenses? Do we need to save more? Really start and design the infrastructure of that plan, the foundation of that plan to say, can you do this? Can you live this life that you want to live? If we haven't already done a kickoff meeting, what we're doing is we're just doing cookie-cutter planning. We're just giving someone the output of what we think an average retiree might want. We're just doing something that's an average of maybe all the retirees we've worked with or what people think you should be doing as a retiree, but it's not customized in any way to that particular client. So when should you collect Social Security? When should you retire? How much do you need to save? Those are all questions specifically tied back to the life you want to live. If I don't know that first, I can't properly design an income plan or a cash flow plan to help you get there. The third meeting in our Sequoia system is the investment meeting. Now, a lot of people want to know why we are waiting? Three meetings to talk about investments. The portfolio is what most people, what most clients think of when they're working with a financial advisor. Why is that not until the third meeting that we're actually even talking about the portfolio? Well, here's exactly why. All money is designed for consumption, either current consumption or future consumption. So money that we put away in our 401ks or Roth IRAs, our savings account, we are putting that away not just to build a portfolio, but for future consumption. Now, that might be our consumption, that might be our family's consumption, that might be a charity's consumption, that might be the IRS's consumption. It's going to go somewhere. And we can talk about where it's going to go and how to make sure we're balancing that the right way. But all portfolio assets are designed for some type of future consumption. That is really important to keep in mind because there's this subtle shift away from thinking of the portfolio just as a number. Thinking of the portfolio as the goal of this thing is to continue growing this forever. There's no value in the portfolio by itself. There's only value in what the portfolio can do for us. And practically speaking, that looks like what type of income can this portfolio generate for myself, for my spouse, for my family, for my loved ones. That's what we really want to understand. But here's the thing: if we hadn't already done the cash flow planning, there's no way to properly give good feedback on what you should do with your portfolio. Because here's why. The portfolio should be that thing that's going to supplement any social security income sources, pension income sources, other income sources the client has to meet their desired standard of living. So to put it most simply, if someone wants to live on$10,000 per month and they have$4,000 per month coming in from Social Security, that$6,000 is what needs to come from the portfolio. So we want to think of the portfolio in terms of what's the income we need from it, not just what's the value of it. So that's a very subtle shift that really matters. And here's why. Let's assume a client has a$3 million portfolio. And they say, you know what? We went through the cash flow plan. James, you helped me walk through that kind of kickoff meeting, understand what's important to me, what do I want to do, what does retirement look like. We then went through the cash flow plan and we saw, okay, how much is coming in from Social Security, how much is coming in from pension? Uh, how much do I have coming in from those sources? And what we identified is I have a$60,000 gap. Now I have a$3 million portfolio, but I need$60,000 from it each year to ensure that I can meet my income needs throughout retirement. So$60,000, the way we think about it at root is we like to think of something called root reserves. Root reserves is high quality, short-term fixed income designed to say we need to make sure that we have something that's not designed for maximum growth. It's designed for protection because there will be times in retirement, multiple times in retirement, where markets face 30 plus percent downturns. We do not want to have to dip into your excellent stock investments at that time. We need something to protect it. Think of this as like the moat that's protecting what you have in your growth bucket of your investment portfolio. We think of that in five years. The average bear market is two and a half years. Double that, sometimes in worst case scenarios, is about five years. So five years of high quality short-term fixed income is going to give us what we believe to be something that's going to allow us to be freed up to invest for growth with the rest of your portfolio. So going back to this client,$3 million,$60,000 per year needed from that portfolio.$60,000 times five, so five years is$300,000. That individual needs about 10% of their portfolio. So$300,000 is 10% of$3 million in root reserves. Keep that in mind. That's a starting point. Compare that to a similar individual. Same exact process, same portfolio value, also$3 million, but they want to spend$150,000 per year from their portfolio. That's the amount they need to supplement their social security, their pension, their other income sources to live the life they want to live. Well,$150,000 times five is$750,000.$750,000 represents 25% of their overall portfolio. So a$75,000-25 allocation might be more appropriate for them, whereas a 90-10 allocation might be more appropriate for that initial individual. Now I'm of course really simplifying this. There's other considerations to take into account here. But as you look at it, you can see two individuals, same stage of life, same portfolio values, different recommended portfolios to help them reach their retirement goals. That's why if we jump right into investments, we're missing the bigger picture. We're going right to the tactical without understanding the strategic. The strategic being how much do we even need from this thing to support our income needs? And those income needs, then of course support our vision for what we want life to look like. So if we jump right into investments, we're missing that. So when someone comes to you with an investment question, excellent question, Mr. Client, or excellent question, Mrs. Client, I'm going to get to that. We're going to help you understand what role your portfolio plays here. But if we don't first understand what you're trying to create, your vision for retirement, if we don't first have a really dialed-in cash flow plan for you, we're not going to have full context of what do we actually need from your portfolio. Because my goal here is not just to optimize your portfolio. My goal is to optimize your life using your portfolio as one of the major tools we have to do so. So you can start to see why that matters. We don't talk about it until the third meeting because if we talk about it prematurely, we don't yet have proper context of what do we need from this. So stop thinking about the portfolio as the almighty portfolio. What can we do to protect this thing? Yes, we want to protect it. Yes, we want to grow it. But most importantly, we want to use it to support what we're actually trying to accomplish. Step number four in the Sequoia system is taxes. Here is something not enough planners take into account. If you jump right into Roth Conversions, so Roth Conversions, we love talking about that, hot topic. It seems like something that we can do to save tons of money for taxes for clients. And it can be in the right scenario, but we skip over steps sometimes. We skip over some underlying assumptions that can dramatically change what that recommendation ends up looking like for Roth Conversions. Here's an example. You have a client, and this client has$4 million total.$2 million is in a brokerage account,$1 million is in an IRA, and they retire at age 60. Now the plan is to live on the brokerage account, live on the brokerage account so that they can take IRA assets and start to convert those to Roth assets. We all get that, we all understand that. That's the concept of a Roth conversion. Keep your income sources from other areas as low as possible while simultaneously converting money from IRA accounts or pre-tax accounts to after tax accounts, Roth accounts. So that all makes sense. We get that as planners. Here's where people go to first. They go to how much should I convert each year? And they're typically saying, should I fill up the 12% bracket, the 22% bracket, the 24% bracket? They go right to that. Well, how can you possibly go right to that if you don't first know where's this client gonna be in the future? Is this client gonna be in a much higher tax bracket in the future? Are they gonna be a much lower tax bracket in the future? One of the things, one of the major things that's gonna determine that is what's the growth rate gonna be on that$2 million IRA that they have. So going back to the example, this client is 60 years old, they want to retire at 75. That's a long time. That's 15 years of time that they could potentially be doing Roth conversions. So how much should they convert? Well, let's look at two examples. What if that IRA grows at 5% versus what if it grows at 10%? Some of you are thinking, what the heck does that do with conversions? I'm gonna show you. If that IRA grows at 5% per year, that$2 million at age 60 turns into a little bit more than$4.1 million at age 75. Now take the other individual. The other individual also had$2 million at 60, but their portfolio is growing at 10% per year. Again, these are not guarantees, these are simply hypothetical return numbers to show you the impact of different growth rates. At a 10% growth rate, that$2 million would turn into$8.4 million at the end of that 15-year time period. So individual number one has about$4.00 in their traditional IRA at age 75. Individual number two has about$8.4 million in their traditional IRA at age 75. Now let me translate those numbers into possible tax impacts for them. The first year required minimum distribution for individual one with about$4.1 million in their IRA at age 75 is going to be about$166,000. The first year required distribution for individual number two with$8.4 million in their portfolio or in their traditional IRA portfolio, their RMD is going to be closer to$319,000. So what you can quickly see here is this individual that has more money in their IRA, their required distribution is going to be more than$150,000 additional dollars at the age of 75. What does that mean, practically speaking? It means more than likely that person is going to be in a much higher tax bracket than is the individual with fewer dollars in their IRA. This is why we don't do the tax meeting until after we've done the investment meeting. If I go through the investment meeting, I might have conservative recommendations, moderate recommendations, aggressive recommendations based upon your needs, your cash flow needs, your comfortability with the stock market, a whole variety of factors. But what that's going to do is that's going to allow me to best project what growth rate might we expect on your IRA, because different growth rates are going to lead to me as your advisor likely recommending different conversion amounts every year to ensure that we're trying to balance out what we can pay in taxes today to avoid paying taxes at a higher rate in the future. If you're expected to be in a much higher tax bracket in the future, because higher required distributions, which could be driven by much higher growth rates on your IRA, I might recommend more in Roth conversions now. If we're not expecting a ton of growth on your IRA, I might recommend a lot less in Roth conversions simply because I don't want to pay taxes on something today if my tax liability in the future is not going to be all that dramatic. So you can see here, if we start talking about Roth conversions before we even understand what the portfolio mix is going to be, we can't properly do that analysis. Or let me use another example. Maybe in your kickoff meeting with this client, you learned that charitable giving is a hugely important part of what they most value. They want to give large amounts of money away to charity. Well, maybe you don't do any Roth conversions. Maybe you simply start implementing qualified charitable distributions at 70.5 and beyond, and that is going to mitigate the impact of required distributions in the future. Or maybe it has nothing to do with IRAs. Maybe it's a completely separate thing. Maybe you're looking at their brokerage account. Ideally, or hopefully, you're thinking about the most tax-efficient investment strategy for them. So how can you do that if you don't know what their investment allocation is going to be? Is it going to be aggressive? Is it going to be conservative? If you don't know that first, you can't understand what from a tax perspective is going to be the right thing to do with asset location, asset allocation, the specific investments used. So what you can start to see here is there's an order of operations here, and the order in which we do things matters. Now I want to call back that first example I started this episode with of me giving that hypothetical example. If I showed a client how she could save over a million dollars in taxes in retirement by implementing my Roth conversion strategy, but it meant she had to sacrifice the vacations, lifestyle, all the things that she actually wanted to do. That is a very, very important thing to look at right here. The temptation as an advisor is we want to show our value. We want to show a number that says, let me quantify how much I can save you, how much I can earn you, how much I can do for you. Be very careful of that here. When you're talking about taxes, there's going to be a temptation to say, look, the less you do, the less you pull from your portfolio up front, the less you spend up front, I can do all kinds of things with my financial planning software. I can do all kinds of things with my holistic plan subscription. That's great. But keep in mind that your value as an advisor is not trying to prove yourself in the value that you can show on paper. It's your client's ability to live a better life. It's your client's ability to do the things that they actually want to do. So think about it from this framework. Controlling for the life your client wants to live. What's the most amount of taxes you can save in that situation? For every one of the clients I've worked with, I could probably get much more money in taxes saved, way better potential growth rates over time, way more, way more, way more in all these different categories if I completely ask them to unravel all the things they actually wanted to do, to unwind the actual things that added value to them. So just to reiterate this one more time, because this is so important, this is where it's actually a great thing to show your client this. Show your client, Mr. Client, Mrs. Client, look at this. I can show you on paper all these savings. But you know what? I'm going to recommend against that. Because if I recommend this strategy, it's actually violating what you actually hired me to do, which is to help you get the most out of life with your money. And I would way rather see you take those trips, do the things you want to do with your family, live the life you want to live and save a little bit less on taxes than I would to sacrifice all the things on the lifestyle front just so that you could save more money on taxes and have that money go with you to the grave. So it's an important thing to keep in mind here. And it's why we think about these, not just as steps in the planning process, but in order of priority of what's most important, second, third, fourth. Again, not saying any of these things are not important, but if you prioritize the tactical over the strategic, you're likely costing your client something far more important than just tax savings. So those are the first four steps in the Sequoia system. And the fifth step is security. Now, security is the estate planning against the insurance. And the goal for that is to say that comes at the end, not because it's not important, but because now we know what we need to protect. Now we know the projections of what are our assets going to look like. So we can go to our estate plan and say, do we need to make any adjustments? Do we need to implement any gifting strategies? Do we need to start thinking about what we can do today to avoid estate tax liabilities in the future? Or we can go to our assets and say, do we need to adjust any of our property and casualty insurance amounts? Do we need to adjust this life insurance that we have? Do we even need it anymore after running some of these projections? Do we need to adjust our out-of-pocket max? Do we need to adjust our medical insurances? All of these things we now have better context for because it's not starting by saying, what's the right insurance for someone who's retiring? We're starting with the plan and then we're coming back and saying, what insurances, what estate strategies, what overall security precautions can we take to make sure this plan we now have built for you is fully protected. So that's the process. I now want to address what do you do when someone comes to you and asks you an investment question? What do you do when someone comes to you and asks you a tax question? You don't just say, I'm not going to talk about that in the third meeting. You know, I'm not going to talk about it in the fourth meeting. That is a ridiculous thing to say to a client. You have to acknowledge it. You have to acknowledge that's a really great question. That's something that I'm so glad you asked, and I'm going to answer it for you. I'm going to answer that investment question. But until I understand what's important to you, and still I've built out a cash flow plan, an income plan to show you how we can accomplish that. I don't have proper context to give you investment feedback today. Or if it's a tax question, you know what, Mr. Client, I don't even know if you need to do a Roth conversion today. In fact, my goal is to actually see can we not do any Roth conversions and make your plan successful? Everyone loves to talk about Roth conversions, but Roth conversions, they're painful. It means you're writing five-figure, six-figure tax bills that you otherwise wouldn't have had to implement this strategy. So I first want to see based upon your kickoff meeting, your income meeting, your investment meeting, are there other things we can do? Qualified charitable distributions, spin down your IRA first, different types of other gifting strategies. What are other things that might potentially lead to not doing a Roth conversion? So I'm so glad you asked and I'm going to address it. But if you don't mind, this is the process we go through. So when I'm giving you feedback, it's specific to you. It's not just arbitrary retirement advice. It's not just cookie-cutter investment advice that anyone might get. So when you start to explain this to a prospective client or to a client, it builds confidence. Because what we're doing is we're not just here to give answers. We're not just here to be another human form of Google and spit out answers to questions. We're here to take them through a process. We're here to help unpack what's most important. We're here to help understand that's the strategy, and we never want to deviate from what's actually most important. And then every step of this process, these are the tactical things that we're going to do, not for the sake of tax optimization, not for the sake of investment optimization, but for the sake of saying, how can we do things here that contribute to a life well lived? So when you take clients through that process, you build a highly personalized plan and you build confidence that you're the right advisor for them. So that's it. But before we fully wrap, quick announcement is we are now on a separate YouTube channel. I previously had these episodes under Root Financials YouTube page. There is now a separate, distinct Root Ready YouTube channel. So if you're listening on the podcast, be sure to check that out. You'll see the full video. We can interact there if you want to leave comments or ask questions. Thank you as always for listening, and I'll see you next time.