Transcript
Having a Financial Advisor
Paul Winkler: You are, let’s see, we, we’re talking about number one, the different types of investment accounts, talking about what the perception is when somebody hires a financial advisor, working with a financial advisor. Not some people just, they only do like insurance or things like that. Now the term financial advisor can be really, really misleading because people think there’s a degree involved in this and there’s lots of training. I often point out that there is a designation, so to speak—really it’s a series of designations, as they call them. Now, when I first started with series six, which allows you to sell mutual funds, series seven allows you to sell stocks, bonds, options, contracts, those types of things. It was interesting to me that a person could walk in and three weeks later pass that test.
Well, that’s basically what was required to call yourself a planner and be able to be a registered investment advisor representative. So, you know, it doesn’t take a whole lot. In other words, basically what I’m saying. Whereas with financial planning, you look at the different designations. My first designation was a charter financial consultant, which is a certified financial planner, a curriculum.
Another one is wealth management, certified professional. You’re really getting into academics on that one or retirement income certified professional, which is really in how you take an income orders of taking an income formulas, academic principles, how social security works, a big section on how social security works. And this is the type of education that we really value around our firm. I really value this type of information simply because, you know, you walk in there and I don’t like to walk into a meeting, I really don’t understand what you’re dealing with. I don’t really understand how stock options work. I don’t want that feeling of not getting how exactly social security works or how dissimilar price movement and correlations work in an investment portfolio. Oh, that’s just our investment department that handles the investments. No, I better understand it forward and backward because how do I as a financial advisor, how do I know that the investment management being done at my firm is any good. If I don’t understand it myself? I mean, what do you, what are your thoughts on that, Jim?
Continued Education and Designations Are Important
Jim Wood: Well, there’s, I always think continuing education just has to be an integral part of what we do. And that if you don’t understand what you’re talking to your clients about, then, then you’re a fraud. I mean, I think that it’s just part of, you know, you there’s ethics requirements and stuff for some of these different designations. And when so much of that is in terms of integrity and competence.
Paul Winkler: You’re welcome. So, you know, so how do you, how do you measure risk if you can’t control, how do you control risk? If you can’t measure it, how do you measure diversification? If you don’t know how to measure diversification, how do you measure diversification? Well, it happens to be a really well thought out formula that won the Nobel Prize, which is measuring correlations between asset categories. How are they correlated? You know, negatively correlated means that they move opposite. Each positive quarter correlated means that they move with each other, low correlation just means that there is little relationship between the two. So, you know, those coefficients, how do you figure out how you put things together based on correlation, coefficients and co-variants.
And that is exactly what happened with, with a lot of collectibles and, and commodities back in 2008, they had a negative correlation, but their long-term expected return above inflation was zero. So, you know, you really have to think about those types of things as well. So, you know, that is, that is part of the education process. Now making sure that the advisor knows those types of things is really important because you don’t know what you don’t know. Well, you don’t know what they don’t know either. And that is something I like to point out is, you know, you may be thinking well that there is all kinds of background and all kinds of education and all kinds of experience that goes into being a financial advisor.
And just because somebody speaks at a higher level than you, you know, uses, you know, language, and you think, Whoa, this person must be really, really knowledgeable. And I think that in other industries, we see that type of education as a requirement. You know, you go into other industries and you know, you’re going to call yourself, you’re going to practice medicine.
You’re going to be a doctor are, you know, if you’re not going to practice at quite that high of a level, but at a high level, it’d be nurse or, or nurse practitioner or physician’s assistant or something like that. But there are designations and requirements from an educational standpoint,
Jim Wood: No one would ever tell a doctor, fake it until you make it. No, because that was something literally that I was told like early in my career, I said, well, you know, you know, more whatever, you know, even if you don’t know a lot, you know, more than most people out there, so you should be able to, you know, sound smart and, you know, and sell them stuff.
Paul Winkler: Well, I, yeah, I’ve, you know, I have younger people that all the time and asked me, well, what, how do I do what I, what you do? And I always tell them, go in, get the designations, get the degrees. You don’t actually get the education, which is above what even advisors typically see, but go study under and work with an experienced advisor that already has those designations, but has been using them for years. I think that’s really an important thing. So younger people, that that would be what I would do. Jim and I are going to have a conversation on the process itself, the planning process itself, what it ought to look like, because I think there are all kinds of misconceptions regarding that.
A lot of times the investment industry they’ll use people will use, you know, for example, workshops and maybe they’ll have seminars and things like that. And a lot of times, it’s like a marketing type of thing. Maybe they’ll do some, a little bit social security education, for example, or maybe they’ll do some education on taxes in retirement, or maybe they’ll do some education on, you know, insurance products. And they don’t usually typically talk a lot of veteran insurance products as per se. They may actually talk about them as in talk about the features and in what you can do with this. And, you know, a lot of times he’ll hear, well, you’ve got this retirement program or bank on yourself, or, you know, things like that. They’re talking about how they use insurance products in order to meet somebody’s financial goals.
Jim Wood: No little odd, exciting titles, like five things that can kill your retirement or something like that to pull you in.
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The Financial Planning Process
Paul Winkler: So, okay. So the financial planning process, number one, and typically what you’re doing is I would like to educate about investing, understand how markets work, you know, so that people understand where returns come from and how the different types of risks are like inflation risk.
We control inflation risk by using equities because stocks protect against inflation. Why? Because what’s inflation prices going up, who’s raising crisis companies. And then, you know, I protect against market risk. The volatility that you’ll have in the market, by making sure that you hold fixed income on what type of fixed income investment vehicles are held, that will protect against market downside. Then we, then we get into, you know, typically you’re going to get into next. Okay. So what is it that you want to accomplish? You know, where are you in life? What types of things that you have available at work? So one really has to have a really good understanding of pension plans, government, retirement benefits, whether you, you know, with your social security, you know, some people will have where they have some income.
That’s not subject to social security. So you’ll have windfall elimination type of revisions that they have to be aware of when it comes down to social security, or maybe they’ll have a pension at work. And maybe that pension will actually coordinate with social security. Maybe it’ll pay out before you reach age 62, for example. And then the payout will drop at age 62 because they suppose that you would get your social security at that point in time. Well, you may or may not want to actually do that—take your social security at that particular point in time. So you got to think of something else that’s going to carry you from 62 to the point that you actually do take your social security. So it’s really important that the advisor knows those types of things.
Questions to Think About
Jim Wood: Absolutely. And I think that’s an area that sometimes people just haven’t thought of, they can have a date, they want to retire and they can maybe be saving some money and stuff like that. But they’ve never looked at, Hey, does this all fit together? Does this all actually work? And so we’re looking at, you know, what’s your lifestyle? What are you spending now? What are you going to spend in the future? How does that match up?
Paul Winkler: Are you going to work? Are you going to work in retirement or going to work part time? You know, so what effects is that work going to have? Well, it’s going to give you some taxable income. Well, how does that affect social security? If you do it prior to your full retirement age, you could actually have a social security penalty of a dollar for every $2 you earn over threshold. And, you know, so you gotta think about that now. It doesn’t mean that you totally lose social security, but if you think it might work, you know, you might have to think about that. Are you going to have a shorter life expectancy or a longer life expectancy? That’ll determine how, when, and when you take social skills
Jim Wood: And, and if you’re not going to work, what are you going to do? Because you have all this free time and showing that free time might potentially cost some money, might have all these bucket list items, whether it’s travel, work on the house, all those things, you know, that typically costs money. How does that fit into the process
Marginal and Average Tax Rates
Paul Winkler: And think of it also in regards to, for example, when, if you’re in a high marginal tax rate right now, you might actually be using pre-tax investments, you know, do use a traditional IRA, use traditional 401(k)s because you’re avoiding the high rate right now. In other words, your last dollar is at a higher rate than the last. All you earn is taxed at a higher rate than other dollars or what you’re likely to be paying down the road. You have something called the marginal rate, and you have the average rate.
And it goes on up until you get to 37%. Now, what happens after that is that then, you know, you don’t, you don’t have excuses. What happens is that you have somebody look at your taxes and go, well, here’s your taxes. Here’s what your taxes are, your taxes divided by your income. And that is your average rate, you know, so you may have an average rate of 11% or something like that. And that may be your tax rate 11%, but your actual marginal rate is 22%. You know, so you have to think about your next dollar.
And what you are in the 22 average year taxes might be 11%. So, you know, what we’re looking at in retirement is, you know, what are the likelihood that you’ll be in a higher or paying higher taxes in retirement versus right now think about those types of things. And it might be a period of time between retirement and the time you take social security that you’re actually doing Roth IRA conversions. Yeah, because maybe you’re in a super, super low tax bracket for just a few years, because you’re not taking social security yet. And maybe you’re living off of maybe a sold a business, or maybe you sold a house, or maybe you have a non-qualified account. You live off of some of that money. And because the taxes on that have already been paid, your tax rate may be extremely low allowing for Roth IRA conversion.
So those are the types of things that the planner ought to be doing.
Tax Diversification
Jim Wood: Yeah. Those opportunities for tax diversification and, and even that’s not only the planning process of retirement, but on up to retirement, doesn’t make sense to do any Roth conversions. Then even if it’s, you know, sometimes it makes sense. Even if it’s at a little bit more of a higher tax bracket, we’ve run the numbers with some software we have. And sometimes the answer is kind of surprising that it still makes sense based on the individual circumstances, but having that tax diversification in retirement might be a huge advantage. Just like you were saying, do you use non-qualified dollars? Do you use Roth dollars to use taxable dollars or are tax deferred dollars and figuring all that out to lower your taxes as much as possible and maximize what you get to keep from social security.
Paul Winkler: Right? Cause that’s part of it. What are your taxes in retirement? No question about it. It’s a software driven process these days. I mean, I do some things where I will work from a calculator just to give people kind of an idea, you know, if they need something really fairly quick, but you know, th the closer you get to retirement, the more the software is actually necessary because it gets, so there there’s so many complexities and inner working parts regarding how your taxable income affects your social security, but also affects your Medicare premiums. And I think it’s so often a misconception because people have never had the experience of actually working with degreed planners.
They are used to going in and having somebody sell them something. And they don’t realize that there’s a whole lot more to it. And I find that that’s true.
You Need Good Investments and a Good Plan
Jim Wood: No, and absolutely. I think when people typically come in, they just think that the whole process is just about investing. And there’s so much more because how always put it to the client says, you know, you can have good investments, but you don’t have a good plan. Then you might not end up where you want to be and vice versa. Well, you can have the great plan, but poor investments, and it might not work either. And that’s why you have to pay attention to all parts of the equation.
Paul Winkler: In malpractice, if somebody comes in and just as, Oh, here, here are the investments that you ought to have, and they know nothing about every other working part of your life. You know, they ought to understand your employee benefits. What do you have access to? I have even found clients that, Oh, you actually allocate our 401(k) all. Yeah. I, you know, help you in choosing the investments in the 401(k) is because, you know, you’ll have these target funds and they can often be often I’m like understating it, the wholly inappropriate, and the way those portfolios are managed based on somebody’s time horizon, when they’re going to retire or the level of diversification that you find in them. So it’s really, really important to look at the whole process.
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