Planner Paul Ellis enjoys asking clients, "If you could save $300 to $500 on your monthly utility bill through improved efficiency or by converting to green energy, would you be interested?" By the time he mentions that some of his clients have installed solar panels to eliminate electric bills, his audience is all ears.

"As financial advisors, people come to us for ways to save money," says Ellis, a senior financial advisor at Ellis and Associates in Fishkill, N.Y., an Ameriprise Financial Services Inc. advisory. Besides aiding monthly cash flow, lower utility bills ought to make the client's home a little more valuable when he goes to sell it, too. "If we know that greater efficiency and cleaner energy have the potential to benefit a client's long-term financial plan, then that should be part of our recommendations," Ellis says.

Now is a particularly good time to broach the subject with clients. Recent federal legislation has given more tax benefits to those making energy-conscious home improvements. Their cost is thus recoverable faster.

One important change is the nixing of the $2,000 cap on the credit for residential installations of on-site renewables, i.e., heat pumps, solar water heaters, solar photovoltaic systems and small wind-energy systems. This non-refundable tax credit is 30% of the installed cost, but there is now no limitation on the amount the client can claim. The residence may be one already in existence or new construction. It can even be a second home.

Also better, albeit just for this year and next, is the credit for installing energy-efficient windows, insulation, air-conditioning systems and other qualifying improvements to an existing principal residence. The non-refundable credit equals 30% of the cost, although no more than $1,500 in credits may be taken for all improvements made in '09 and '10. Previously, this credit was only 10%, and the dollar ceiling was lower. Furthermore, you can now get the credit for certain asphalt roofs and stoves that burn biomass fuel. (For more on the latest federal, state and local incentives, see the "Green Sites" article. One caution: Not all Energy Star-certified products qualify for a tax break these days.)

What Does Green Mean To You?
Practitioners who advise clients about going green follow a series of steps, beginning as always with goal identification. The term "green" covers such a wide spectrum that certain aspects are likely to resonate deeper with the client than others, says Constance Young, an Ameriprise financial advisor in Walnut Creek, Calif.

"To some people, it's important that their house be made of recycled materials," Young says. "Other people want to generate their own electricity. The advisor should help clients understand what it is they are really trying to achieve."

Some advisors view greening up their own offices as not only good for the planet, but also as a way to bolster their firm's pro-environment brand. (See "The Greening of an RIA.")

You should start by describing to the client the wide range of options available. Then suggest that he learn more by visiting some of the URLs in the info box. Be sure to point out that the greener one goes, the more expensive it gets.

For example, to heat just the water in his home by solar energy, advisor Bruce Herbert, chief executive of Newground Social Investment in Seattle, spent about $9,000. To totally offset a household's electricity bill typically costs more than twice that amount. Ellis has had ambitious clients pay between $20,000 and $30,000 for their systems.

Discovering The Potential
Information gathering, the next step, entails an energy audit. The audit estimates how much the client could save in energy costs simply by improving the home's efficiency, explains Larry Dohrs, vice president at Newground. Often provided by the local power company, energy audits reveal unlikely sources of air leakage, such as at the base of a ceiling fan or around electrical outlets on interior walls.

The list of suggested improvements an audit yields "can seem daunting to clients," according to Dohrs. So encourage prioritization. "Some things, such as caulking and weather-stripping, should be done right away because the payback is substantial compared to the cost," he says.

Clients considering converting to renewable energy need green-oriented contractors to estimate the potential savings. Yet this type of audit serves a second function as well. It allows the contractor to bid for the client's business, says Herbert. This is where the client's visits to those green Web sites can pay off. "The better prepared and more knowledgeable the client, the better off he'll be, just like going to see a financial planner," Herbert says.

In deciding from whom to solicit quotes, Young says select a green contractor "the same way you would choose any contractor. You don't necessarily want to go with the lowest bidder, and you should get references." Ask previous customers whether the contractor finished the job on time at the quoted price, cleaned up afterward and was easy to work with. Clients pursuing LEED certification should find out whether any of the contractor's past projects have been certified, Young says.

Projecting Payback

The advisor can use the results of the audits to estimate the green project's payback period. This is particularly important to do for clients who anticipate moving in the next few years.

Start with the federal tax credit and any state and local incentives your client can get. All together, these breaks totaled $245 for one client of planner Mary Alpers, president of Alpers and Associates Inc. in Monument, Colo. The client last winter put down $686 of insulation in her attic. After the tax benefits, she was $441 out-of-pocket.

Next, account for the energy savings. This is more challenging. To continue the example, Alpers' client immediately noticed a drop of about $50 per month in her utility bill. At that rate, the insulation will pay for itself in less than nine months. Of course, the client's savings could change with the seasons.
Another variable that can change over time is utility rates. Dohrs assumed there would be a constant rate as he calculated an 11-to-12 year payback on his $20,000 residential solar installation, which was designed to reduce but not totally eradicate his electric bills. However, a green contractor's projection may not be so conservative.

"When the bulk of cost recovery comes from future savings, you have to carefully consider the representations as to the savings anticipated," says Kevin Gahagan, a principal at Mosaic Financial Partners in San Francisco. "As in any analysis, if you tilt the assumptions in one direction or another, it can have a significant impact on the conclusion."

Implementation And Beyond

Once the client is ready to act, if significant dollars are involved the advisor should review whether the improvements should be paid for with current cash flow, by borrowing or by drawing down the emergency reserve fund, Ellis says. The goal is to cause the least disruption to the client's financial plan.
Upon completion of the installation, Alpers suggests reminding the client to obtain the manufacturer's certification that the product qualifies for a federal tax credit. Manufacturers are now required to provide this documentation, and taxpayers need it.

Clients, for their part, may reap psychological benefits as well as financial ones from going green. Herbert insists that showering in water heated by the sun feels different. Dohrs gets a charge from seeing how much energy his solar panels produce under varying atmospheric conditions and, during the summer months, from watching his electric meter run backward.

Looking ahead, Ellis believes that as the sustainable energy industry matures, going green will become increasingly financially viable. "Advisors need to help clients take advantage of these technologies as they develop," he says.