Episode #73: Jeff Porter & Barbara Schelhorn, Sullivan Bruyette Speros & Blayney, “Why Financial Planning? Because Investing Alone Won’t Get You There “
Guest: Jeff Porter and Barbara Schelhorn. Jeff is a Principal and Chief Investment Officer at Sullivan Bruyette Speros & Blayney. He oversees the Investment Policy Committee and the team of supporting professionals responsible for determining SBSB’s investment views, constructing and managing asset allocation models, developing policies, and selecting preferred investment vehicles. Barbara is a Principal and is a Senior Client Advisor at Sullivan Bruyette Speros & Blayney. She advises clients on comprehensive financial planning issues including retirement, investment, tax, and estate planning. She joined the firm in 2001 and has more than 30 years of diversified experience within the financial planning and wealth management industries.
Date Recorded: 9/20/17
- Roofstock – Build long-term wealth and passive income with Roofstock, the leading online marketplace for buying and selling leased single-family rental homes.
To listen to Episode #73 on iTunes, click here
To listen to Episode #73 on Stitcher, click here
To listen to Episode #73 on Pocket Casts, click here
To listen to Episode #73 on Google Play, click here
To stream Episode #73, click here
Comments or suggestions? Email us Feedback@TheMebFaberShow.com or call us to leave a voicemail at 323 834 9159
Interested in sponsoring an episode? Email Jeff at firstname.lastname@example.org
<iframe style=”border: none” src=”//html5-player.libsyn.com/embed/episode/id/5767932/height/360/width/640/theme/standard/autonext/no/thumbnail/yes/autoplay/no/preload/no/no_addthis/no/direction/backward/” height=”360″ width=”640″ scrolling=”no” allowfullscreen webkitallowfullscreen mozallowfullscreen oallowfullscreen msallowfullscreen></iframe>
Summary: In Episode 73, we welcome Jeff Porter and Barbara Schelhorn from the financial planning group, Sullivan Bruyette Speros & Blayney.
We start with Jeff’s background. He was a contemporary of Meb’s at the University of Virginia. The guys share a laugh recalling running out of class to check stock quotes back in the Dot Com boom.
As the conversation turns to investing and financial planning, Meb asks about changes in the industry – with the rise of robo-advisors, indexing, target date portfolios, and so on, how does Jeff, as a financial planner, continue to add value on the investment side?
Jeff tells us how the aforementioned products can be great for many investors, but less so for others. For investors who need more handholding, and/or have more complex financial situations, advisors can add significant value.
What follows is a great discussion on questions Jeff asks his clients as he seeks to evaluate the right market strategy for them, as well as the right implementation. There are myriad issues: what’s the best asset mix? Do you add hedges? Active or passive? Factor tilts? And so on.
Jeff looks to understand what his clients need from a return perspective in order to reach their goals, as well as their ability to handle risk. This includes variables such as when will the client need to take withdrawals. This leads to an interesting conversation about those risky years shortly before and after retirement begins. If luck is against you, and the market is down in those years, it can make a huge difference in your portfolio’s balance and therefore, your retirement lifestyle. Jeff tells the story of how retiring at two different points in time led to two very different outcomes.
Another question Jeff asks clients is what percentage, or dollar value, could they accept as a temporary loss in a bear market?” He tells us another story about a husband/wife client who realized they had very different answers to this question.
Meb asks what’s the average answer to “how much can you stomach being down?”. Apparently, most clients say they can handle about 15-20% declines.
Meb then brings up how portfolio creation and management is just one part of a person’s entire financial picture; therefore, as Jeff and Barbara think about risk and a client’s holistic financial view, where do they begin?
Barbara answers this one. She tells us one of the most important things she does is help clients organize their financial lives. She accomplishes this by asking three questions: Who? What? And how much?
She goes on to give us great details on what really goes into these questions. In essence, she’s helping clients gain far greater control over their financial lives. You’ll hear Meb sound a bit overwhelmed in response, noting how simply the organizational side of getting someone’s financial life in order can be massive – and that he could personally use the help.
The conversation drifts toward allocating cash and savings. But one of the problems is that many investors have way too much cash sitting in accounts earning nothing. At a minimum, they could use that cash to pay down various debts or mortgages. Meb makes the point that countless investors are bad at optimizing the cash/debt equation. He says there are simple techniques to easily turn cash earning 0% into cash earning 1% per year.
Meb continues to steer the conversation toward traditional financial planning topics: Social Security, retirement benefits, health and liability risks, and so on…
Barbara provides some wonderful information on insurance and long-term health care. As an interesting aside, she tells us that most of her male clients don’t want to waste their money on long-term health care, while her female clients find it to be more of a need. Barbara says the reality is somewhere in between.
This hardly even begins to scratch the surface of what’s covered in this episode. (It’s our longest to date!) You’ll hear about umbrella insurance policies (and why Meb could use one for some property he owns in Colorado)… The importance of proper titling of your assets and how it can protect you from litigation… Gifting loved ones with stock rather than cash to get around big capital gains… Effective financial strategies using tax bracket trends… SEP IRAs versus 401Ks vs Roth IRAs… When to start taking Social Security… And way more.
And of course, you’ll hear Jeff and Barbara’s most memorable investments. While Barbara’s is interesting, Jeff’s involves a huge market loss thanks to a bad tip from a certain college friend (you guessed it – Meb was to blame).
What was Meb’s bad investment advice that cost Jeff thousands? Find out in Episode 73.
Links from the Episode:
- Website for Sullivan, Bruyette, Speros & Blayney
- SBSB LinkedIn
- Contact e-mail: email@example.com
- Contact phone number: 703-734-9300
- SBSB YouTube Channel
- SBSB Financial Literacy and Management Skills for Young Adults – Led by Jeff Porter, CIO
- 1:57 – Introducing our guests, Jeff Porter and Barbara Schelhorn, and go into their background
- 3:14 – A look at the company Sullivan, Bruyette, Speros & Blayney
- 11:21 – The important role a financial advisor can still play even in a world of robo-advisors, target date funds and other set-it-and-forget-it investment options.
- 23:29 – Most important trait in a financial advisor
- 27:27 – Corey Hoffstein on Meb Faber Show Podcast
- 27:28 – Corey Hoffstein Tweet US Air Force Cockpit Design
- 28:01 – Why financial advisors are emulating features of robo advisors
- 29:54 – “Putting a Value on Your Value: Quantifying Vanguard Advisor’s Alpha®” – Kinniry, Jaconetti, DiJosepth, Zilbering, Bennyhoff
- 30:24 – Where does the conversation begin with a client when it comes to financial planning
- 37:20 – Unclaimed.org
- 37:53 – Next phase of financial planning, looking at the how much people spend and need
- 43:40 – The importance of human capital that comes into the financial picture
- 46:50 – Thinking about long term care, for your parents or yourself
- 48:22 – What does the representation of insurance tend to look like in people’s portfolio
- 51:33 – Other planning ideas that are often overlooked, like titling, revocable trusts, and beneficiaries
- 53:52 – Why you really need to pay attention to your beneficiary listing in trading accounts
- 56:28 – ROOFSTOCK Sponsor
- 57:38 – Some of the more sophisticated tactics that can be used in financial planning, like forecasting and tax deferral strategies
- 1:07:42 – Considering healthcare costs for later in life
- 1:09:51 – What are strategies for giving away money later in life
- 1:13:01 – How do company benefits play into financial planning
- 1:18:47 – Biggest concerns that clients are seeing today
- 1:25:16 – Financial Literacy for Young Adults YouTube Class – Jeff Porter
- 1:26:25 – Most memorable investments…starting with Meb
- 1:29:13 – Jeff’s
- 1:31:31- Barbara’s
- 1:34:10 – Best way to contact Jeff and Barbara
Transcript of Episode 73:
Welcome Message: Welcome to the Meb Faber Show, where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the Co-founder and Chief Investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Sponsor: Today’s episode is brought to you by Roofstock, the leading online marketplace for buying and selling lease single-family homes. Are you interested in adding rental real estate to your portfolio? The recent white paper called the “Rate of Return on Everything,” examined global asset class returns all the way back to 1870 and concluded that residential real estate, not equity, has been the best long-run investment over the course of modern history. Roofstock offers quality pre-screen, single-family rental homes, located in some of the best real estate markets in the country. The quality of tenants are already in place paying rent.
And now, you can find all these without ever leaving your own stock. Roofstock is making what used to be an incredibly long and difficult researching and buying process, fast and simple. That’s because they do lots of the work for you by vetting properties, tenants, and property management companies so you can have all the info you need to find the right investment for you. Generating great income from rental properties has never been simpler. To learn more, visit roofstock.com/meb. Again, that’s roofstock.com/meb. And now, on to the show.
Meb: Hey, podcast listeners. It’s officially fall time. Broncos are 2-0, hopefully, 3-0 by the time you listen to this. And today, we have a couple great guests on the podcast. This is gonna be a fun one for all those that are interested in all things investing and planning. All the way from Virginia, we have Jeff Porter and Barbara Shelhorn. Welcome to the show.
Jeff: Hey, Meb.
Jeff: Thanks for having us on. I know we’ve been trying to get this booked for a little bit. Glad the calendars linked up and we could nail this down. Look forward to the conversation.
Meb: Yeah, so for a quick background, Jeff and I actually went to university together in Virginia, and their company Sullivan, Bruyette, Speros & Blayney, I will call it SBSB, is a traditional wealth management shop on the East Coast. It manages over $3 billion. And one of the reasons I wanted to have you all on the podcast today is certainly if I needed financial planning, now that I have an infant, I probably will. You know, it’s not something I’d wanna do on my own, and a compliment to give you, Jeff, is that if I were to have someone do it, you’d probably my first call. So, today, I thought it’d be really fun to get deep and talk a lot about the intricacies of planning and wealth management, estate, all that good stuff. So to get started, why don’t you tell us a little bit about company, how you got there, your origin story, how you linked up with Barbara, and we’ll go from there.
Jeff: So you could probably say kind of the journey for me started back in Econ 101 class at UVA. Meb, as you know, I was pretty psycho about getting good grades in high school and college. So that was always the end game for me, but Econ 101 really changed things for me. That was the first class where I actually just absolutely loved the content. And I was actually learning for the sake of learning, and that was strange for me back then.
So that kind of pushed me on a path to the business school at UVA. And, you know, what a great time to be studying finance. That’s what I did, learning about business, markets, and especially behavioral finance because, as you remember, that was the peak of the tech bubble. So it was great to get all that, you know, book knowledge, along with cutting my teeth in my own investments and managing family, money, and such.
Meb: Jeff, I remember back in college, you know, listeners, I was an engineering biotech guy, but I dabbled in investing, in finance, and took a couple courses. But, I mean, this is back in the day where teachers would literally be like stopping or leaving class to go check on stock quotes.
Jeff: Yeah, and I went on so-called bathroom breaks all the time. And I’d go to computer lab, I’d bring up the stocks, and I’d be up like hundreds or, you know, a thousand bucks, you know, during the class. And, you know, back then, that was huge.
Meb: That’s what paid for our happy hours. So Burton would have been the professor at Econ 101. We had a couple pretty famous professors at Virginia, and we’d link to some of their home pages.
Jeff: Exactly. There’s a bunch of famous ones.
Meb: I ended up in my major kind of by the other route, which was taking a bunch of courses that I hated. And that kind of drove me away, guided me the other way rather than finding certainly what I loved. All right. So, Virginia, keep going.
Jeff: Yeah. I mean, I was very in loving the material and loving investing and personal finance, but I didn’t even think about going into that for my profession because people didn’t do that at the business school. They either went investment banking, they went big accounting, or they went big consulting. So I went the consulting route and went to Arthur Anderson for about two years until a little thing called Enron popped up, and that’s when I started to explore kind of personal finance and consulting on that side of the business.
But, you know what? I didn’t know what to do because I didn’t wanna go to New York. I didn’t wanna go to San Francisco. I wanted to stay in Washington D.C, and I didn’t know how to break into the business other than being a broker. And I knew way back in the back of my head that I would not like the sales aspect of being a broker, but I convinced myself that if I didn’t join a big wirehouse, and instead joined a private brokerage firm in D.C, where the culture was a little bit more tame on that front, that I’d be okay.
So I was “building” by my book of business as a broker for about two years. And I didn’t do bad, and I didn’t do great, did pretty well, but it certainly confirmed that I did not like that side of the business. I did not like the sales aspect. I didn’t like consulting clients when I didn’t essentially know my trade, know my craft. And I didn’t like other people kind of rising up not based off of their competency, but based off of how much business they brought in.
So I started to enact plan B pretty quickly. I got the CFA books and passed the level one, and at the same time, was looking around for other opportunities. And I remember staying late at the office one night, and I picked up a Worth Magazine article or magazine. I think it was 2003-2004 timeframe, and it was a bright gold cover, and it said “The 100 Most Exclusive Wealth Advisors in the Country.” So I flipped to the list, and it was broken up by state. And, you know, I live in Virginia, so I flipped to the Virginia, and I wanna say there was probably about seven or eight advisors from Virginia that made the list. And about five of them was from Sullivan, Bruyette, Speros & Blayney, SBSB, and it was right in McLaine, which I had grown up and, you know, spent my whole life there. I’d never heard of them, probably because it sounds like a law firm, but I was certainly intrigued. So I got in there for an interview because it just so happened there was an associate position opening up.
And that’s where I learned about, you know, the other side of personal financial advice, being a registered investment advisor, the fiduciary status that comes with being an IRA. You know, and also the dedication not only to investing, but the dedication to comprehensive deep dive financial planning, tax strategy, you know, and certainly compliance there, as well as, you know, the process and all the ins and outs of working with investment committees with respect to foundations, endowments, and the like.
And I really, you know, liked what I was hearing during the interview. I remember Jim Bruyette was on the other side of the table, and he said, “Jeff, you’ve been used to being a point guard on a high school basketball team, and how do you feel about being a towel boy on an NBA team?” And I said, “I’m cool with that. I’m okay with being a towel boy just as long as one day I can be a point guard on that NBA team.” So he must have liked it because he hired me as an associate on the planning team. They told me to stop the CFA and get the CFP. So I got that, and then went back to get the CFA. And then I just kind of went up the ladder on the planning side to, you know, senior associate manager, senior manager, director, senior director.
And when I hit manager, I was invited on to be a participant in the Investment Policy Committee, which sets investment strategy for the entire firm and all the clients. And I became a voting member. And about a year and a half ago, I was offered the Chief Investment Officer role. And it was a tough decision because I needed to decide whether I was going to focus on planning while also doing portfolio management, or focus on portfolio management while also doing some planning.
And over the past 14 years here, I’ve realized how powerful financial planning is, but what was really getting me up in the morning still was investing. So I decided to take the CIO role, and now I’m just relying more on my teammates for financial planning. And, you know, it’s so important to be on the team, and when we decided to make this podcast some about portfolio, but a lot about planning. That’s why I asked for Barbara to come aboard because she’s known around the halls as one of the best planners here, not only here but probably the East Coast or even the nation. So I’m glad you had her aboard as well.
Meb: Great. Well, there is so much in there that I wanted to interrupt you, but you’re on a roll. I mean, it’s actually, you know, you kind of think about it, it’s a fairly traditional route as far as once you’re the investment advisor, and it sounds like you guys have a lot of different positions and rungs on the ladder. But, you know, it’s funny when you mentioned talking about working at the broker in their early days, I mean, we’ve seen a lot of changes in the fiduciary rule and everything that’s going on now, and one of the biggest challenges of working with a company that’s not a fiduciary, and I used to love hearing some of the companies described there. Revenue is production, and that phrase has always just kind of made my stomach churn a little bit.
Anyway, okay, so let’s talk a little bit about your firm. And I think a great starting point will be, and jumping off point, is the world’s probably changed a lot in the last 14 years, you know, that you’ve been working in particularly at SBSB, where a lot of talk in the media of, obviously, robo-advisors and kind of the separation of both portfolio management and what that means as an investment management company as well as the financial planning side. And so why don’t you tell us a little bit about how your company is structured as far as advisors, how they add value? What’s kind of the model there? And I’ll let you guys just kind of run with it, and we’ll go from there.
Jeff: Yeah, and feel free to, you know, interrupt at any time. I’ll just continue on. But you asked a great question, right? And it’s about, hey, robo-advisors out there and, you know, Vanguard is taking over the world with the indexers, and there’s target date and lifestyle type of funds in retirement accounts. And, you know, are those enough for people? And I think those products and services are fantastic, and I think they are going to serve a heck of a lot of people. I just think there’s a heck of a lot of people where it’s just not a good fit. For example, I think you need to check a number of boxes for it to be a good fit.
One, you know, you can’t have too complex of a situation or have a lot of financial planning questions for it to be good fit. But if you’re young, not complex, you’re just trying to stash away the money that you can save for a long period of time, you know, that might make sense. If you have behavioral discipline, that’s probably a must as well. As you know, at these various services and products, you can dial up the risk, and because you can dial up the risk, you can do it at the wrong time. And not only that, you can jump from strategy to strategy. Meaning, you know, the Vanguard robo-advising product is all indexing, right? But the betterment product has a significant value tilt. They also have a huge international slug in their portfolio.
Then you got the Schwab Intelligent Portfolio that’s probably more diversified. They have a ton of cash. I know you’ve talked about that quite a bit in history here, in the recent history. But they also have commodities. They have real estate. And they’re not just indexers, they’re fundamental indexers. So as this menu continues to broaden out, it’s just going to offer data of all these underperforming or outperforming. And that will lead to, most likely, behavioral responses of chasing performance just like people chase performance in mutual funds and stocks. So you got to have behavioral discipline.
And then, you know, important to have some background on investing. You’re not gonna trust a lot of your money, at least certainly not your entire nest egg to someone you don’t know or a robot. And, you know, anytime you’re doing it yourself, you gotta have the time. You gotta have the time and you gotta have the desire. But if you can check all those boxes, I think, again, those services or products make sense. But for those that can’t, then there’s the advisor route.
And I think advisors can offer a heck of a lot of value. A lot of value on the financial planning side which, you know, we can get to, but even on the portfolio management side, we can add a lot of value. So, you know, let’s take an example. Whenever you’re starting to invest, you know, one of the first questions is, you know, what’s your allocation? Identifying the strategy. And there’s two parts to that. You know, one is the risk assets and low-risk assets, how much is in each bucket, stocks, and bonds, etc? And the other part of it is how you’re gonna implement that allocation? Are you going to be just in stocks and bonds? Are you gonna be in commodities and rights? Are you gonna have other strategies, such as hedge strategies, for your allocation monitoring? Are you gonna be strategic in nature, or are you gonna have any tactical shifts? Are you gonna be passive? Are you gonna be active? Are you gonna use factor tilts? So, as you know, there’s not one way to manage money, and it’s most important just to identify the strategy that you can adhere to, that suits your plan best. And it needs to go so much beyond, so much more beyond just a risk tolerance questionnaire and what’s your time horizon.
Meb: I think one of the best examples that we give is all these risk questionnaires, they’ll spit out a portfolio, but in so many cases, they’re age-based, as an example. And so many young people that I know and talk with all the time, can’t take hardly any volatility and kind of risk in their portfolios. They’re just not set up that way. And these questionnaires will almost automatically guide them to, you know, 100% stocks because, hey, you got a 50-year time horizon. And then vice-versa, there may be an older person who says, “Look, I’m not doing this to generate income. I wanna leave this to my heirs or to this foundation, and so I want a very aggressive portfolio.” And so a lot of the questionnaires, I think, it’s a really tough way to quantify it, you know, which you kind of talked about.
Anyway, so I don’t think they’re to the point yet where they really drilled down on a person. And then one of the biggest challenges, too, I’m sure you’re familiar with is a lot of people don’t know the answer, you know, especially younger people that haven’t been through, say, a bear market. And it will be really fun to see these, you know, a lot of these robo technologies, if and when we ever have another bear market again. You know, they don’t know the answer until they’ve been through it.
Jeff: So, essentially, you got to drill down to get to an answer. And an example of kind of how an advisor, how we might do that, is first concentrating on, you know, what you need, you know, what your returns need to be to satisfy your goals. Do they need to be 9 or 10%? Do they need to be 7 or 8%? Do they need to be 3 or 4%? So it’s important to go through kind of a robust analysis of, you know, what you need. About three or four weeks ago or so, we had a client in, and they’re really nervous, really nervous about their financial situation, really nervous about the markets. And they shouldn’t have been because their balance sheet was great. As a lot of nervous people are, you know, they don’t spend a lot.
So we knew their plan was gonna be fine, but we needed to go through the process to convince them. And when we were able to show them that they could meet all their goals while being a conservative investor, it’s amazing the stress that kind of dripped off of them and their shoulders fell. They were elated because, you know, this was a weight off their shoulders. They didn’t need to play the game and go through the roller coaster to, you know, satisfy, you know, what they wanted to do. So, for them, that was a real important part of getting to the answer of how they managed their money. So, that’s the first thing, right? It’s how much you need.
The other thing we’d like to really drill down on is your ability to take on risks. And this goes beyond, what’s your income? Is your income stable or not? Is it tied to the business cycle in any way or markets? It’s really about the withdrawals. When are you going to need the withdrawals? How much are you going to need? And especially if you get in that period leading up to retirement, as an example, and early in that retirement. Call it 5 to 10 years up to and 5 to 10 years into it, because that’s where sequence of return risk kind of comes into play, and there’s been a lot of good stuff written about sequence of return risk over the past couple of years.
Basically, that’s being unlucky. It’s when your portfolio gets hit in this time period when you’re getting ready to or withdrawing, and thus, you’re pulling out money at the wrong time, and that reduces the principal. So when the market does bounce back, you just don’t get the lift and the longevity really is hurt. So an example that I kind of give clients that I think resonates is let’s take an example of someone who retires with a $1 million portfolio, and they have a 5% withdrawal rate, so $50,000 a year. They earn net 50% stock, 50% cash bond portfolio, and this retiree retires in 1978. So despite this $50,000 distributions, that million dollars would have grown past $6 million a couple of years ago, and now it’s moving on to around $7 million.
So this is what so many people want, you know, that we run into. They wanna satisfy their own lives and their own goals, while they’re here on this earth, but they also have charitable intentions or they wanna leave a specific amount to their heirs. So that’s perfect. But then you take this exact same retiree but don’t retire him in 1978. Let’s retire him in 1973. That million dollars is nowhere close to the $6 million or $7 million. That million dollars ran out in the mid to late ’90s. And that’s because, you know, as you know from history, markets were not good ’73, ’74, ’75 time period, and that really hurt this retiree.
So what it goes back, you know, to the planning route and then the portfolio is that we need to forecast out detailed cash flows for every single year. And we need to prepare for those cash flows. And a good kind of rule of thumb that we used and a starting point in the conversation is whatever you need over the next eight years, that probably shouldn’t be in stocks. And the reason why we, you know, chose eight years ago, you know, back when we started thinking about this in the late ’90s, was that you look at the average bear market, it takes about six years to go down and then come back up and break even.
So you never wanna be selling stocks in that time period. You wanna be selling bonds or other low-risk assets that are likely going up. But you also wanna have the flexibility to rebalance in that time period because research shows that if you can sell bonds and buy stocks, that really helps with the longevity and it helps with the amount that you can withdraw for retirement. So that’s kind of a long way of describing how you dig in and the ability to take on risk.
So you got how much you earn or how much you need, you got how much what your ability to take on risks. So now let’s look at the risk tolerance and, Meb, you just mentioned the difficulty with risk tolerance questionnaires. So I don’t even give clients risk tolerance questionnaires. I give them one question, and I found it to be useful. I basically ask clients and separately for each spouse, what’s the percentage, or more importantly, the dollar value, temporary loss, that you could withstand, be willing to accept, in an average bear market? That usually comes around, you know, every five years or so when you look post-World War II data. You look back further, it’s pretty much every three to five years.
So, for example, you know, a client who has a $3 million portfolio, we’d list out some numbers. You know, 5% loss is a $150,000 loss. Then $300,000 loss, $450k, $600k, $750k, $900,000, etc, to see where their pain point is. So about five, six, seven months ago or something like that, we had a client in the office and had a $3 million portfolio, and we slid this question across the table to the husband and the wife. And we said, “Circle the answer that gives you the most discomfort.” And the husband, which I knew was pretty risk-tolerant through his businesses and his investments, he slid back $900,000. He said, “Anything over $900,000, even I would get a little jumpy.”
So that kind of translates into roughly an 80-90% stock portfolio. The wife slid back the questionnaire, and it circled the lowest number, $150,000. And she said, “I wish there was a lower number than $150,000.” So that translates into like a 10% stock portfolio.
Meb: You should have given this questionnaire, like this should be required pre-marriage. It’s like, “Hey, you were engaged. We need to talk about finances because this might be an issue.”
Jeff: Oh, don’t even start. Don’t even start with me, Meb. I’m not even gonna comment because my wife might listen to this later. But what great conversations we had after, you know, just talking about this. And then kind of blending in the ability to take on risk and their plan, and what they needed to return. And we got to a great, you know, answer that they were comfortable with. And it’s not just the data that we’re pulling out, you know, in this instance. It’s the journey that we’re taking with the client.
A couple of years ago, there was a study that was done, and I don’t know who was done by, but the question in the study was, “If you are looking for an advisor, what do you want most from them?” And it stuck out in my mind because it was four Cs. They said, “Character, competency, caring, and connectivity.” So, Meb, what do you think is the most important one even in that list? Again, character, competency, caring, and connectivity. What do you think is the most important?
Meb: I’m gonna say it’s one of the last two. I feel like it’s probably, I wanna say… Well, connectivity meaning like does he call me and reach out to me?
Meb: Connection? I would say it’s…
Jeff: No, connection.
Meb: Oh, what does that mean?
Jeff: Yeah, connection with your advisor. An emotional connection, a trusting connection.
Meb: Are you like my advisor-soulmate? I’m gonna guess caring.
Jeff: Got it. Well, you’re wrong. It’s connection.
Meb: Well, that was my first guess, but then you kind of requalified it, and I wasn’t really sure what it meant because I’ve seen a lot of these same studies. It’s framed a little different where it’s like what’s the number one reason individuals fire advisors? And it’s almost always, “He never calls me. He never emails me. Like, I never hear from him. He doesn’t care.” So it’s kind of in the same ballpark, but keep going.
Jeff: That’s right. Yeah, you got to the final two.
Meb: It’s almost never investment returns, by the way. All right, keep going.
Jeff: Yeah. Oh, never, never, never. But it is the connection, and you establish that connection mostly on the financial planning side and drilling down to not only, you know, their goals, but their issues as well, and family issues and special needs, and that type of thing. But even on the portfolio side, you know, we just went through a process. And on the portfolio side, that’s another way to establish that connection. So when you establish that connection, you gain trust. And when they trust you, then they’re going to listen to you when bullets are flying by your head, you know, in bear markets, and you need to behaviorally coach at that time.
So that is just a very long-winded example of how an advisor might get to a solution of how you might want to start off investing from an allocation standpoint versus another one.
Meb: Two follow-ups real quick. And it seems to me from a behavioral standpoint that, not just from the client side what we just talked about where they care most about kind of the connection and the advisor caring about them and much less about the investment return. I wonder if that leads to, like kind of universally thinking that in general, for behavioral reasons, too, that you should almost always lean towards slightly less risky portfolios than, you know, even people want for not only compliance reasons for them sticking with it but also, you know, kind of the main thing being the relationship. What is kind of the average, by the way? Is there an average, from your years of doing this that, you know, percent decline that they spit out? I have a guess, but is there kind of a median or average ballpark that you think you could tease out from all these surveys?
Jeff: Yeah. I mean, I’ll give you that answer, but I wanna comment one thing because you just said maybe it’s appropriate to lean a little bit more conservative. And that’s what I think the research would say because I’ve read studies that say that people may cost themselves twice as much money by making mistakes and downturns as they do in upturns. And so if you can get the risk budget right, and then just let the market give you, you know, the returns, you can satisfy your goals. So that was a good comment. But in terms of your question about an average, first of all, it’s all over the place. We get some amazing answers. We get like 0% and we get 40% on the tails. But most of the people around 15 to 20% decline…
Meb: Yeah, that’s my guess.
Jeff: …and what that translates in their portfolio. So you’re talking, you know, anywhere from 50 to 70% type of equity exposure or high-risk experience exposure.
Meb: Interesting. You know, there was a good analogy Corey Hoffstein, who we just had on the podcast from Newfound, he was tweeting about, and it was about the U.S. Air Force designing cockpits in the I think 1920s and ’30s. And they, you know, took averages of a couple hundred pilots, and then built a cockpit, but then found that the cockpit didn’t work because, you know, it ended up obviously that none of the pilots were completely average on all the measures, right? You know, some were 5’5″, some were 6’4″, yadda, yadda. And same thing, I think it’s a great analogy for financial planning where you can kind of come up with this idea of portfolio, but it gets so much more nuanced with individuals and everything else.
Meb: So that kind of takes us through kind of how you originally worked with these clients. And I imagine you guys have also, you know, going way back to the robo conversation, you know, as an advisor, a modern advisor, start to implement a lot of the features of what a lot of these robos do. I mean, I know a lot of RIAs, for example. I’ve been doing tax laws probably since the ’90s, and they do asset location and automated rebalancing. So that’s kind of table stakes at this point. Is that something you’ve kind of noticed is like, look, you know, as an advisor, we adopt all these things already? Any general thoughts there before we start to pivot a little more planning area?
Jeff: Yeah. No, it’s a good question. You know, we’ve been doing it for a long time. You know, we’ve been in IRA and doing this since 1991, and Greg Sullivan and Jim Bruyette met in their Ernst & Ernst & Ernst & Whinney days, big CPAs. So tax has always kind of ran through our blood. And if people are worried about paying a fee to an advisor, you got to show that you can make it up, and then add some, and then throw a heck of a lot of financial planning on there as well, and then the connection like we talked about. And there is. Yeah, I mean, if you can implement asset location appropriately, you can, you know, studies show about 15 to 25 basis points a year, you can add in value just making sure, you know, those appropriate asset classes and appropriate strategies are in the IRAs or retirement accounts versus the brokerage accounts.
If you, you know, don’t have any retirement accounts, you sold the business, and it’s practically all taxable money, then, yeah, getting tax-efficient assets for your exposure, be it low turnover funds, be it indexes. There’s definitely all those things you need to do. You need to make sure people are in low-cost vehicles.
Meb: Yeah. And I think the Vanguard study is probably like the simplest way for advisors if you go down the list of, they talked about it, it’s like a 3% alpha that advisors add. I think number one was behavioral coaching. You know, you mentioned a couple asset allocation, and then tax we’re investing, all that good stuff.
Jeff: Right. All that good stuff.
Meb: But the thing is, when you talk to most people, the portfolio, in general, is just one, I don’t wanna say minor portion of the whole picture, but it is only a portion. So when you start to think about, you know, risks, and a client’s holistic financial view, where do you wanna begin? So when you’re thinking about financial planning and how you organize it with someone, so what’s the beginning process, you know? How do you all get to the whole thing started? Is it allocation first, or do you kind of sit down and then talk about everything else? How does it work?
Barbara: Hey, Meb, this is Barbara.
Meb: Hey, you’re still here. I thought you’re maybe taking a little nap out there.
Barbara: I was just so…I mean…
Jeff: She was looking at me across the table being like, “Shut up.”
Barbara: Yeah. No, not really. This how all our meetings go. I’m just letting you know. But, no, anyway, I think the first thing we do for clients, and probably the primary thing we do for them, is we help them organize their financial lives. What does organize your financial life really mean? Well, we help them answer really three primary questions, and those questions are, “Who, what, and how much?”
And so the “who” question is, first thing is, you know, who are your professional team of advisors, right? Most people come to us, and they’re successful. They have assets, they have a fairly sizeable balance sheet. And they usually have a team of advisors, and generally that includes, you know, their investment advisor who, you know, they could be firing or whatever, their accountants, their attorney, and oftentimes, there’s an insurance agent in there. So identifying who those players are first.
And then the second part of that question of who is figuring out for our clients, who are the key team members in their family, right? So, you know, if I’m not able to make decisions, who’s gonna step in and make those decisions for me, important financial decisions? So who’s your financial power of attorney, your medical power of attorney, your children’s guardian? Who’s gonna execute your wills? Maybe some trustees, you know. Who are your trustees if you’re not a primary trustee on your trust?
So that even goes further, right? And so we’re looking at a client, but we also, if it’s a client maybe around, you know, our age, then you’re starting to ask the question, well, who are the key players for your parents? Because at some point, someone’s gonna have to be stepping in and assisting them, so you wanna know who the key players are for their parents. And, you know, in my case, I have a son who just turned 26. And so who’s the key player over him? He’s an adult. He’s gathering assets. And does he have a medical power of attorney and things like that? So it’s sort of taking someone. Your life doesn’t just end with you. It’s everybody that’s impacted by you and around you. So we start by identifying the who’s in your life, you know?
And then we move on to “what.” And the “what” really is, what do you own, and what do you control, and what do you owe? So at that point, you start building the balance sheet, and you start gathering all the information on their balance sheet. And most people are pretty good about that. They, you know, Jeff had mentioned, we meet a lot of clients that have accumulated a lot of assets, and a lot of times, it’s in a lot of different locations. And so organizing all of that and saying, “Okay, we’re gonna actually take in all of the accounts that you have at all of the different broker houses that you have,” and maybe they had several jobs. And so they have old pension plans and 401ks that are still at the old employer’s location. And so gathering those assets.
Jeff: Yeah. Meb, I got to say, I often tell people that we’re like therapists or we’re like priests. You know, we’ve seen it all, so we’ve seen 30, 40 different accounts spread out all over the world, and it’s amazing what you see.
Meb: It also sounds like a little bit of like an offense of coordinators. And not only are you, like, getting together all the various professional relationships you mentioned, but also just a massive organization of everything that goes into this person’s holistic life. I mean, I start to get anxiety listening to this because I know how much of a mess my own personal was.
Jeff: Yes, that’s our goal.
Meb: It’s like, oh my god. I don’t even wanna think about this. It’s like the prospects of putting this all together is just a nightmare. Okay, keep going.
Barbara: Yeah. So the other thing that occurs is when you start questioning people about their past employment and things like that, you’re gonna uncover assets. And, for example, I think, you know, we have found old pension plans and also five jobs ago. You know, I think I might have a pension at that place. So we get on the horn and we figure out what are the benefits, you know, this person doesn’t even remember that they have, and let’s get that in the record, you know. Maybe there’s unused 529 plan, you know, that still have some value in it and that’s just sitting there, and you kind of forget about that.
You know, life insurance. Life insurances also sometimes accumulate cash value, and that’s an asset. It should show up on the balance sheet. So, you know, helping people walk through what are their assets is really important. And then, you know, obviously, what they owe is really important. But once we get all this information in, and it can be, like you said, a lot of people get a lot of anxiety and sometimes they don’t even start the process. But I think once you get started, it really helps, and you start unwinding the stuff, you really start to feel better about it. And so we organize all the stuff.
And then what we do is, for most clients, we create a virtual vault. And in this virtual vault, we’ll put all the important documents and, you know, sort of backup materials that we need so that, you know, circling back to who are the important players, you know, in your life, if something happens to you, do they have access to the important materials that they need to be able to function and step into your shoes? And so creating that bridge and helping people, I feel much better now that I know that, you know, it’s all in one place, and so and so can call you, and they can get in, and we can get those assets and get those documents and be able to do those things that they need.
Jeff: Yeah, I mean, we see it especially from our older clients, but even our younger clients, there’s usually one person in the relationship that does all the financial, you know, tasks, and the other person in the relationship just hates it, never wants to talk about it. And, especially as you get older, that’s dangerous. When you’re not organized, you don’t have kind of a “death file,” as morbid as that sounds, because you don’t wanna leave that person who’s kind of never been in the game with just a disorganized group of decisions to make.
Meb: There’s a couple good things in there. I mean, this probably isn’t, you know, talked about enough, but just the organizational aspect of putting together someone’s financial life, to me that’s worth a lot, you know. And just having the comfort level of, “Okay, at least I know someone who knows what they’re doing, is looking after all of these various assets and debts and everything else.” I mean, we love the website unclaim.org. You know, we talked about it on here where people can go look for lost property that estates have, and you mentioned the same sort of thing with pension funds. If you find some lost money for someone, that’s like you have that client for life, too, because there’s nothing people like more than finding lost assets.
So, just the organizational aspect. I mean, I’m sure it’s a challenging uphill first couple weeks or months with the clients to get that done, but it has to be, for so many people, I’m sure you’ve seen it, just a huge sigh of relief once that’s kind of put together.
Barbara: It is. And once we’ve built that and they could see their balance sheet and they could see the organization, we can move into the next part, which is sometimes a little touchy and it’s a harder thing. Sometimes, it’s a little more challenging. And that is answering how much, right? And that question, basically, is how much do you spend? And honestly, I mean, I’ve been in the business a long time. And clients have come in, and a lot of them do Excel spreadsheets.
But the reality is, most people don’t have a spending plan. Some people keep records of what they spend, but by far, most people have no idea what they spend. You know, we deal with successful people. They make enough money, and they do what they want, basically, and they come and look at this like. But we really need to drill into this to understand, you know, where their money is going and how they’re using their resources because when we start doing forecasting, this is gonna be critical to talking about the long-term and sort of modeling this out of for them.
So we do a lot of digging into this and a lot of I would call it counseling. Sometimes, there’s couple counseling, but, you know, we sort of back into numbers an sort of test it out on clients. But what happens is, when you don’t know what you’re spending, you fall into one of two camps. The first one is, you tend to run in a deficit. And, you know, you might have credit card debt and you don’t tend to pay it off on a monthly basis, and so it will just gradually accumulate. And so as we know that that’s probably a very expensive way to run your household.
And then the other camp is probably what we see more often is people tend to keep too much cash, right? And so if you’re operating a business and you wanted to operate it very efficiently, you would know what your operating costs were, and you would keep enough in your operating account to cover your operating expenses on a monthly basis, and you would run it that way. You would not have a lot in that account because, you know, it doesn’t earn anything. And so that’s kind of how we approach this. So what we start doing is once we sort of land on what you’re spending, then we can start looking at how are they utilizing the cash, and we create sort of an operating account for clients.
A lot of people tend to use what I call the envelope method. And the envelope method is I’m gonna put aside a little money in the savings account for this vacation. And then I’m thinking about, you know, like a second or third home, so I’m gonna save it over here. And so what happens is you have a bunch of different accounts, and the purpose is whatever they are for, but it’s not necessarily run very efficiently, and they might have different returns or no return.
And so, what we try to do is pull this all together and say, “Okay, let’s talk about what your goals are and what the time horizons on that.” And so the operating accounts, the operating accounts. And then the next level is we’re gonna set up emergency fund or, you know, sort of the set aside money, and, you know, that might be three to six months of living expenses, or you’re accumulating to this dollar amount because it’s for a down payment, etc, you know. And then we try to earn some, you know, we’ll use the high-yield savings account or something like that.
And then what we’ve then decided or we’ve been able to basically solve for is the rest of the cash. And we’re saying, “This is really not working for you. Let’s get this invested in your portfolio. Let’s get it put it back into your investment account and have it working for you because this is all working capital, but it’s not working very efficiently and very well for you. So let’s get this back into the pot and really start using it for your long-term.”
And so it’s a great way, and it’s actually, when we go through this process with clients, by the time we’ve figured out who’s important in their lives, basically, what they own, and we get to the how much question, usually we know them really well. And so at that point, we’re able to sort of start building them their long-term forecast. And, you know, going back to what Jeff was talking about, then we can start sort of building in that risk. And then we can start having the investment conversations.
Jeff: And all the questions that come with that. You know, a couple of years ago, I had a client come in, and they said that they always have a ton of cash. And we’re talking $4-500,000 of cash because it’s an emotional crutch for them. And you don’t wanna always change these emotional feelings. You just wanna work with them, right? So there, we weren’t able to get those invested, but we were able to, you know, shift the assets to some high-yield savings accounts, and we did convince them to pay down some of the mortgage, which at that time, was over 4% versus the nothing that they were getting at their bank account. So, as Barbara said, it’s just making sure everything is efficient at all times.
Meb: And, you know, I think that’s an important point. I think a lot of investors we see are really bad at optimizing, like you said, that sort of cash and debt sort of just equation. And almost most investors that have money sitting at brokerage accounts or savings account, they’re literally earning zero. Very, very simple techniques to get that up to earning 1% a year. Right there, that justifies the value for an advisor if you’re not already doing it.
But it’s funny, listeners, a good kind of exercise will be to go through what Barbara just outlined, you know, and ask yourself, do you have outlined, and a process for that, who, you know, the few providers in your life, the what as far as your assets and balance sheet, and, you know, how much. I guarantee you 99% of people listening to this have no idea how much they’re spending, and I’m guessing the correct answer that they would estimate was gonna be lower than what they actually spend on. I know that would be true for my case.
Maybe you could talk about, and if there’s little more you wanna add there, great, but maybe you could talk a little bit about to an area that I think particularly financial advisors are great at, but particularly most of the automated solutions and a lot of those approaches doesn’t really address at all, and that’s kind of the human capital side, where, you know, you also take into account maybe Social Security or retirement benefits or, you know, what kind of job they’re in. Aand thinking about, in general, also risk that may not be incorporated into a traditional, like a robo or something, like such as health, job, property, etc. You all wanna run with that one?
Barbara: Sure. Sure. So you’re right. I think analyzing risks is really important, and it’s the typical risk that we think about, you know, from a financial planning perspective, you think about health risks or the risk of death, or risk of loss of a job, or risk of property. You know, if one of those things is suddenly out of the equation, what’s the impact to everyone else? What’s the impact to the family or to the fear of financial forecast?
And so running those risks is really important. Most people, you can’t really analyze risk until you really have a good foundation on, you know what you own and what you owe and what it costs you to run your household. And then, when you get to that place, you can kind of start then modeling, “Okay, you know, life insurance, for example, is a necessary evil. Do I need it or don’t I need it, you know? If I lose my job, do I have disability insurance?” And so looking for those types of insurance and making sure that you have the right coverage for the right timeframe is really important.
Jeff: Yeah. And that, you know, I think a lot of people think, you know, Barbara, tell me if you’re wrong, they have a whole bunch of insurance, and then they think all of a sudden, it go drops to zero. Well, along that path, you go from needing a lot to less and less and less. We find people overpaying for insurance all the time just because they’re thinking, “I need a lot, and then I need nothing.”
Barbara: Yeah. It’s, you know, it’s one of those assets that get on your balance sheet and you sort of just roll with it. And then you kind of like, this is what I do and this is what it costs me. You don’t think about it anymore. And so taking a fast approach to, you know, is it relevant for where I am in my life? Is it a future need that I’m trying to ensure, and what’s the purpose of this? And I mean, every asset on your balance sheet should have a purpose, right? It’s either for pleasure, for, you know, lifestyle, for helping me enjoy my life, or it’s an asset that provides for retirement, or it’s something that’s gonna take care of my family if I can’t work. And so it has to have a purpose, and if it doesn’t have a purpose, this is something that’s sitting there because you bought it a hundred years ago. I mean, that doesn’t have purpose, so you need to be maybe thinking about repurposing that particular asset.
One area which is a conversation we have often with clients, and I know that probably a lot of your listeners are younger, but, you know, something to think about is long-term care. Whether you’re gonna sort of go into that with your parents or, you know, if you’re in your 50s, most clients, what we advise is when you get into your mid-50s, you start thinking about long-term care, you know. And I don’t wanna be sexist about this, but I have found that the majority of my male clients feel as though that it’s not something that they necessarily wanna waste their money on. And then the majority of my female clients feel like it’s a really strong need. They really wanna buy long-term care coverage of some sort.
And the reality is, it’s somewhere in between. There’s a lot of different products out there and they do a lot of different things, but in order to assess whether that’s a risky one to take in internally because you think you have enough assets or if it’s something you think you need to ensure, you really need a good balance sheet. And you also need to have a conversation, if you’re married, with your spouse and talk about, you know, if one of us becomes ill, are you gonna step in and help me? You know, are you gonna unlock the checkbook and bring some help in here? Or would a long-term care policy help facilitate that whole, you know, exercise of getting help and getting the care that we need?
Jeff: And it certainly fits into the portfolio, you know, just doing an analysis for a client who wants four years of kind of shared care. If they ended up using it, you know, about a year and a half or so down the road, we were calculating the IRR and it ended up being a pretty good IRR, especially if you use two, three years or so, and then you compare it against market type returns that may or may not be, you know, average. You know, it’s a whole another conversation for the next 15, 20 years or so, and it ends up being a diversification play as well.
Meb: Is there any sort of generalizations when people come to you as far as insurance that you say, well, they’re woefully underrepresented in one or they have way too much of this other that was sold to them? Any broad generalizations that you can kind of talk about?
Barbara: Well, I think, generally, when most clients come to us, they usually have sufficient life insurance. So you think about the people coming to us, and they’re generally pretty successful, and they’ve accumulated quite a few assets. Because life insurance is a small premium, essentially if you’re buying term insurance is really healthy. And so that’s not a big deal. A lot of people are willing to buy it, and they realize at some point they are just gonna profit. But long-term care is an insurance that a lot of people don’t have. And one area that people tend to underinsure is the area of umbrella liability coverage, right?
You know, most people have auto and homeowners coverage, but you wanna protect your assets above and beyond that amount. And so if someone comes on your property and trips and falls, and they realize that you have a net worth that’s fairly sizeable, they’re gonna sue you for as much as they possibly can get. And so that umbrella policy basically covers you above and beyond the liability limits of your auto and homeowners, and so you’re really trying to ensure your net worth. And so that’s an area which I find clients tend to be underinsured.
Jeff: And especially as you get off, you know, 8, 10, $12 million of assets, the people lucky enough to have that, you find that if they are with certain property and casualty companies, it’s very easy to get 1, 3, even $ 5 million umbrella policies, and they’re very cheap. But once you get over $5 million, some companies don’t even offer them. So that’s when you gotta, you know, change companies altogether, to get the coverage that you need. You gotta go to the, you know, the Child of the world, the Fireman’s Farm, and they end up outsourcing it to Lloyd’s or something of that nature. So it’s just, you know, property is just like life. You know, as advisors, we’re not agents, but we got to keep the ER clients reviewing this the whole time, where else it’s just gonna lay dormant.
Meb: It’s funny, my brother and I were just fishing, and we were talking about we have some riverland in Colorado, and there was a local neighbor that had emailed us maybe a year ago about being able to, every once in awhile, kind of crossover under our property and go fishing or sit by the river. And, of course, being good neighbors, we said, “Of course.” And then we were looking up the property on Google Maps, and, you know, my brother had gone fishing with his kids down to Colorado. So he’s on a raft, hanging out with his kids and he passes by, and he looks over and there’s an RV parked on our land.
And so he’s telling me this story, and we looked it up on Google Maps, and sure enough, even Google Maps has the RV. So I don’t know how quick they update Google Maps, but so it’s probably been there for a while. So we basically have a squatter on our land, and it just made me think as we think about that as, “Man, I guarantee we don’t have any insurance about… you know, we got a couple of people out there who knows hunting or firing guns and drown or set fire. I guarantee you we don’t have any insurance for that.”
Anyway, kind of when people come to you, what are some other planning ideas that are often overlooked? Like what do most people whiff on in general as well, in addition to kind of insurance mistakes?
Jeff: Barbara, why don’t you talk about, you know, the titling beneficiary designations? People whiff on that all the time, and…
Barbara: Oh, they do, yeah.
Jeff: …you know, hit on a few.
Barbara: Yeah. So a lot of our clients, as you imagine, we live in the D.C. area, so most of them are attorneys. Not all, but, you know, we have a fair share. And attorneys are very aware of being sued. And so one way to handle that, especially in the state of Virginia, is by titling. And so we have assets that we can title tenants by the entirety. It’s called TbyE. Basically, it’s a way to protect assets, so if, you know, my husband goes out and does something and he’s sued for it, if most of my assets are TbyE, they can’t come after those assets because it’s owned a 100% jointly by both of us, so they can’t come after those assets.
So titling and making sure that’s a reflection of your risk, you know, in conjunction with your insurance, is really important. The other thing is beneficiary designation and matching your state documents to, you know, what’s been drafted. And so an area people whiff on a lot is they’ll go out and get fantastic documents drafted for their estates, and they’re moving things into revocable trusts, and those trust will tell, you know, they’re basically replacing the whole will. But, unfortunately, they never take the time to implement their revocable trust, so they don’t move all their assets into their revocable trust. So, basically, their document is useless because there’s no assets owned by this revocable trust. And so making sure that the estate, you know, documents match titling and ownership is really critical.
And then the last thing is the beneficiary’s battling through, especially for people, when you change jobs, you know, like I was talking about earlier, people have old 401ks and, you know, your mom might be the beneficiary of that, and you’ve so moved on and either married with kids or whatever, you know, that is not an appropriate beneficiary. So making sure beneficiary designations match where you are currently in your life in the estate documents, and where you want your money to flow, is critical. So all of those pieces follow through, you know, to the plan.
Meb: And that’s an interesting one because I actually didn’t know that where, so if you had an E-trade or Fidelity account or whatever, and you listed say your current wife as your beneficiary, and then you get divorced and you set up a new will and say, “Man, I really hate that woman. I wanna make sure that she gets nothing, yadda, yadda, yadda.” But to my knowledge, and correct me if I’m wrong, the beneficiary listed on the Fidelity account overrules the will. So even if you said I’m leaving this all to my children, she would still get the Fidelity account. Is that correct?
Barbara: Yeah, so that’s exactly right. So, you know, will only comes into play after assets don’t know where they go. So anything goes but first, they look at titling. So if it’s tenants by entirety or joint tenants with rights of survivorship, it passes outside of the will and goes directly to the survivor. And then retirement accounts or anything with the beneficiary designation, doesn’t even go into the will. It goes directly to… you know, so Fidelity will look at who’s the beneficiary on this account, and that’s who it will go to. Same with life insurance. And so, you know, your will at that point, only directs anything that didn’t have a beneficiary or a title tied to it with a survivor to it. So, yeah.
Meb: I’m laughing because there’s definitely some ex-girlfriends I’ve had in my younger years that I helped them set up investment accounts, and they listed me as their beneficiary. And I don’t think I can reach out to them at this point and be like, by the way, you need to make sure that you’re not leaving me this million dollars. It would be awkward if this is what I’m doing. There’s no way I will last as long as they will. My actuary tables will be far shorter. Okay, that’s really helpful, and I think that’s useful.
Jeff: Yeah, we can give you, you know, a few other just kind of quick hitters, you know, because there are some quick hitters. We see all the time people gifting with cash and, you know, people gift, you know, to their temple or tithing for church, or some other charity that they really liked it so they’re giving fairly significant assets. And we say, you know, “How are you gifting each year?” And they’re saying, “With cash.” And just the easiest thing in the world is to stop gifting in cash and gift with appreciated stock because if you have, you know, $25,000 in shares with a $20,000 gain, you know, gift that to the charity. The charity will sell it with no tax consequences, and that just avoids for you to having to pay those long-term gains whenever you sell the stock. And if you like the stock, just use the cash that you didn’t gift the charity to buy back the stock, and now you’ve raised your basis.
Meb: Yeah, that’s a big one. That’s a very practical tip.
Sponsor: Let’s pause for a moment to hear again from our sponsor. Today’s episode is brought to you by Roofstock, the leading online marketplace for buying and selling lease single-family rental homes. I actually interviewed Roofstock’s founders, Gary and Gregor are back in episode 63, and I was genuinely impressed with how these guys are radically simplifying rental real estate investing. The process used to be incredibly time-intensive. First, you got to identify your market, look at tons of homes, then do some due diligence, make some offers, negotiate the price, and finally, buy. And then you had to find a property manager to handle leasing and operations for you. What a nightmare!
I’ve always been gun-shy about rental real estate investing due to these various operational headaches that can come with it. But Roofstock has changed all that. Every one of these properties comes leased up and pre-certified by the Roofstock team. They even connect you with the vetted property managers who handle all of the day-to-day headaches for you. To browse properties all over the country, including locally here in Los Angeles and even my hometown Winston-Salem, and learn more about how to generate real estate income with peace of mind, visit roofstock.com/meb. Again, that’s roofstock.com/meb. And now, back to the show.
Meb: Any more practical tips? Because if not, we’ll go even further down the rabbit hole with a little more sophisticated ideas. So now that we kind of covered some of the basics, is anything where you guys get a little deeper or maybe that’s a little more nuanced, that you think are helpful concepts, ideas that can be used by people?
Barbara: Sure. I think one of the really valuable things we do is, you know, when we do the forecast, we’re literally forecasting the rest of your life. So we’re doing tax and cash flow and asset forecasting to age 100 or 95 or, you know, if you’re barely objectional, you’ll say 80. But, anyway, so we’re doing this long-term forecast, and what we’re seeing are, basically, tax bracket trends. And, you know, most people have trends, depending on what we’re building into those forecasts, but you have the high tax bracket trend, where you’re working and you’re earning a lot of money. So that’s the high earning years, but also the high tax years.
And then they trend down. And if someone retires early before like age 70 or something like that, you have this sort of beautiful window of low taxes potentially, and there’s a lot of planning work that can go into those lower tax years. And then you have the post 70 years where you have the higher brackets. And so, and that time is different. So it’s completely sometimes we have a lot of strategies you can implement in age bucket or wherever you are in life. So I think Jeff is gonna talk a little bit about the tax savings strategy on maximizing deferrals.
Jeff: Yeah. I mean, your working years, you have the highest tax bracket, whatever, you just wanna be driving home as much free tax contributions as you can. And one thing that we see all the time, especially if, you know, you’re a sole proprietor. You’re not a W2, you’re a K1. You’re working for yourself, you’re a consultant or whatever. People generally think that the SEP IRA is the only vehicle where you can contribute money to your retirement.
And in pretty much every single instance, you don’t wanna do a SEP. You wanna do an individual 401k because it allows you to put in a heck of a lot more money. Now it is a wash if you’re making a good amount of money, call it $400,000 and you’re under 50, then, yeah, you’re gonna be able to put away $53,000 in the SEP, and you’re gonna be able to put $53,000 in an individual 401k. So that’s a wash.
But that’s the only time that’s a wash. If you are making that amount of money and you’re over 60, you can put away 59,000 in an individual 401k versus a 53, because 401k’s have this catch-up rule, where if you’re over 50, you can contribute $6,000 more. So that, you know, certainly helps. And, of course, if you wanna contribute a heck of a lot more over $200,000, then you’d set up a defined benefit plan for yourself.
But in terms of the SEP versus 401k, where it really helps is when you don’t make $400,000. You make $100,000, for example. So we have a lot of clients where they’re working, and then afterwards, they serve on boards or they’re doing their own little consulting, you’re making a $100,000. If you do a SEP IRA, you can put away $18-19,000 pre-tax, but if you do an individual 401k, you could put away $43,000. So that’s a big difference.
Also, you know, around here, I don’t know if it’s same out there, but there’s a lot of professionals that live in D.C. and surrounding areas that send their kids to private school. So when you have a bunch of kids, two, three, four, five kids that go to private school from kindergarten to high school or through high school, no matter how much you make, that is a severe drag on your retirement ability to save for retirement. So you really need to play catch up at that point.
And, you know, we see a lot of small businesses, be it lobbyist groups, be it attorneys groups, etc, that think that the 401k and the profit sharing option is the only way to go. And what we found is that a lot of them can set up what’s called cash balance plans, and the leaders of the firm can put away, you know, over $200,000-some, and cash balance plans are much more favorable than defined benefit plans with respect to keeping them funded all the time. So those are kind of two ways to maximize the deferral.
Barbara: You also, I mean, during this period of time, we encourage clients, if they’re charitably inclined, to maximize their charitable giving. And you can do that fairly easily by setting up this great little vehicle called the donor-advised fund, that works like a private foundation, but is less expensive. And you put appreciated stock in there, and you can front-end load it. With a donor-advised fund, you don’t have to turn around and immediately give it to charity. You get the charitable deduction when you put in, and then you can dole it out over your lifetime. So while I’m, you know, making a lot of money, I can front-end load my charitable gift and get maximized my deductions, but then dole it out then in my retirement years. So it’s another great strategy for maximizing deductions.
Another thing that we do, and I think it’s really important, is when you’re looking at your balance sheet and when we’re talking about repurposing assets, sometimes clients will have assets that, you know, for example, a rental property. And when you’re earning a lot of income, you might own a rental property that’s creating, you know, it might be negative cash flow, but you don’t get to utilize the negative cash flow because you earn too much money. And so it’s sits there locked to these losses that have occurred over several years are sort of locked down on your tax return but you don’t get to use them.
And so looking at an asset like that, we’ll have a conversation with the client about potentially selling that asset. So if you, you know, sell this rental property that hasn’t done very well for yourself, you know, done so well, if you sell it, basically, you’re unlocking these passive losses, and it directly offsets income. And so it’s nice to unload an asset that necessarily isn’t performing the way you hoped, and you get the tax bang at the same time, you know. So that’s a great opportunity, you know.
So, but what if that asset made that property a good performer? Then we would probably look at, again, looking at managing taxes, looking at moving into the next phase and say, “Why don’t you hold this property until you’re in your next phase? So, say for example, you’re gonna stop working and stop bringing in the income, we expect your bracket to start falling when that occurs, and at that point, that will be a great time to sell that asset. And so during this period, this next phase, which we call pre-70 and a half phase, is an opportunity to, basically, unload assets, you know, that we wanna sell at a gain.
But, more importantly, looking at retirement distributions and, you know, when you turn 70 and a half, you are required by IRS tables to take out a certain amount of all your retirement plans if you’re not actively working and contributing to that plan. And it’s an actuarial table, it’s a calculation. And prior to that, you don’t have to take money out. But if you’re over 59 and a half and you’re in a low bracket, it oftentimes makes sense to take some money out of your retirement plans. And if you don’t need the money, you convert it into a Roth, you know. And Roth IRAs, they are completely tax-free, and you’re never required to take money out for the rest of your life. So this is an opportunity to utilize some IRA distributions and conversions to Roth.
Jeff: And to get further nuanced, it’s a balancing act because when you’re in a low tax bracket, we see some clients with major, you know, net worth, but their tax bracket is 15% or below. And when you sell stocks or funds or investments at a gain and you stay in the 15% tax bracket, you don’t have to pay any federal capital gain on that. So I think, yeah, each and every year, we have clients selling gains and not paying any taxes. So you got to balance that with the Roth conversion idea, etc, and then you’re essentially prepared when your bracket jumps back up at 70 and a half.
Barbara: Yeah. Some other deferrals that we take during this time, you know, clients always have the decision after you retire, if you’re over age 62 is, “When do I wanna start drawing my Social Security?” And so for a lot of people who have accumulated assets outside of retirement plans, deferring Social Security until age 70 is usually a fairly easy decision because post your normal retirement age, every year you wait past that point, so from most clients, you know, who are at retirement age it would be 66 this year for most people. Every year you wait beyond that, you earn 8%, your benefit goes up by 8% per year.
And so if you wait until age 70, again you’ve deferred income to a later in life, and you’ve captured tax bracket low, and you’ve increased your Social Security benefit for you, and if you’re married, then for your spouse, because whoever, you know, dies and the other person can step into the other person’s shoes. So you always collect the highest Social Security benefit. So you’re maximizing Social Security benefits for a couple that way. So, another strategy.
Jeff: Yeah. And probably the last one kind of in this early retirement bucket before 70 and a half, is if you’re under 65. So you’re on the Obamacare exchanges, you’re getting insurance because Medicare hasn’t kicked in yet. If your tax bracket is, or your income is under a certain threshold, and it changes per state, you can get a massive credit for paying for healthcare. So making sure that your investments or other things don’t push you over that $65,000 or whatever the amount for your state is, so you can get that credit, is huge.
Barbara: And, you know, so it sort of transitions us into talking about later in life. When we’re looking at healthcare, for most of our older clients, healthcare, you know, when you’re younger, you never get the health care deduction. You know, you’re on your itemized deductions. It’s 10% of your justice gross income in order to take $1 of deduction. So most people don’t usually utilize that.
But what we find is for clients who are older and they’re getting assistance, if they’re in a nursing home or they’re having people come in to help them, and they have substantial health care needs and expenses, oftentimes, a lot of those expenses are deductible and you actually get to utilize some on your itemized deductions. So that’s a really important thing that I think a lot of people forget about, especially usually when you’re at that stage, it’s somebody else that’s helping you prepare your taxes and sort of managing your expenses, and so they might not realize that the nursing home costs are actually deductible and you should be taking your deduction for that.
And the other thing, what we generally guide people in when they’re in that stage in life, is you don’t wanna be gifting assets away. And you probably don’t wanna be, you know, tax loss harvesting or, you know, selling assets because if you’re getting towards the end of your life, the benefits of a step up in basis generally outweigh pre-paying income taxes for somebody in that case. So you wanna hold on to your money and allow it to pass through the estate so that the basis will then step up to a fair market value. And if you have one spouse that’s particularly sick and one isn’t, transferring those highly appreciated assets to the sick spouse sounds kind of morbid, but truth is, and so that they can get a step up in basis is probably another good tax planning strategy.
Meb: There’s two global thoughts as I listened to kind of you all talked about this. The first is I clearly need a financial planner. Second is, you know, you listen to a lot of these robo-advisers, and there’s one, in particular, that’s like, “We’re you gonna use artificial intelligence to totally replace a financial advisor.” And listening to this podcast, it’s maybe at some point, you know, maybe 30 years from now, but it’s so complicated and so nuanced and so particular, it seems a long way away.
All right, so a couple more ideas before we start to wind down. So, say, you know, you do wanna give it away. So, I sell Cambria $1 billion. I wanna give away this money or, you know, anyone else kind of later in life. Like what’s some strategies there? What’s some general thoughts or specific or both?
Barbara: First thought is, you know, Meb, you’re young, and so you hit it big, and you wanna make a sizeable charitable donation. But the reality is, you’re still probably hopefully gonna live a very, very long time. And so what can you afford to give away? One approach is to, basically, charitable remainder trust allows you to put in highly appreciated assets. So you, basically, would put it into the trust before you have a deal on the table, let’s put it that way, and then when it hits, you know, you got a big charitable deduction, and you put it into the trust.
At that point, basically, you get an income back for life. So you get a big charitable deduction, and then you get an income back. That’s the annuity part. And so you get an income back for life, and then whatever is left at the end of your lifetime goes to charity. So it’s a great strategy for allowing you to give to charity and not give it all away and create an opportunity to get some income back from those assets during your lifetime.
Jeff: Barbara mentioned the donor-advised funds before, you know, I guess 10 or 15 years ago for people who were giving big time money away, they thought, you know, private foundations was pretty much the only way to go. But the problem with private foundations is just huge startup costs, you know, huge legal fees. You must spend 5% annually or expand 5%. You got to file these detailed and, you know, public tax returns on grants and investment fees and trustee fees, soverything is kind of out there. There’s excise tax, you know, 1-2%, etc, etc, etc.
So these donor-advised funds are fantastic. You get to keep most of the control, but with less rules, less costs. It’s very easy to put money in, and then dole it out electronically to charities and administratively getting, you know, having all the record sent to you. So private foundations are really the… you wanna go there if you wanna create a multi-generational platform and get the family really involved. Because, for example, if you have charitable values that you really wanna pass on to your kids, your grandkids, their kids, etc, that’s when the private foundation is probably, you know, the way to go. But other than that, donor-advised funds is just perfect.
Meb: And a lot of the big custodians have those now. I mean, I’m thinking specifically, I believe Fidelity and Schwab. And I just had a memory. I think I emailed you a couple of years ago where I said I really wanna get rid of this private company stock, and I can’t find a way to do it. And the challenge for a lot of those custodians need an ability to sell it at some point. And if it’s completely liquid, you’re kind of [inaudible 01:12:52]. But, yeah, those are pretty awesome. And I think Fidelity may be the biggest. It’s Fidelity or Schwab. But there’s a lot of those that will house them.
Talk to me about company benefits. You know, that’s something that there’s probably less and less of those more and more, but is that an area you guys deal with at all or have any thoughts in general?
Jeff: Yeah, I mean, you’re right. You know, back in the ’90s, there’s benefits of the laws, but, you know, we still see people come through the door and current clients with complicated benefits that are far-reaching from different comp plans, to options to, you know, RSUs, to ESPP shares, you know, etc. We see people not taking advantage of all of them. For example, the ESPP plans are the easiest ways to get an automatic raise because usually those programs are set up that you got a 15% or so discount to buying your stock. And, you know, you put into buying these stocks through your paycheck. So you can’t have cash flow issues to kind of do this deal. You have to have enough cash in your bank account to handle the disruption of cash flow.
But then you end up, for example, buying the shares at the very end of the quarter or the bidding, the first day of the quarter, and then you can turn around and immediately sell it. So it’s just locking in a 15% automatic gain. Now, yeah, you gotta pay taxable income on that, but still, you know, hey, 15% gain automatically without the risk is a 15% gain without a risk. So we see people not doing that, and we always tell them to do that.
Barbara: And, you know, another thing I see people, they put on their balance sheet, but they have no idea, like, what to do with it, are the stock options or restricted shares. You know, so you work for XYZ company, and they have this great package, and per that package is we’re gonna give you, you know, restricted shares. They’re gonna vest each year, you know, a quarter a year for four years. And then we’re gonna give you some stock options, or they might call them performance share units, and we’ll give you some stars, you know. They have all these acronyms, and they’re very complicated, and people are like, “Yeah, great, thanks.”
And then this sits on the balance sheet, and they never know what to do with it. And so, oftentimes when we start looking at these plans, they’ve accumulated a great deal wealth, you know, in a particular company. So I’m working for XYZ company, and they’re paying my salary, and they represent 10-15% of my net worth because I have all of these restricted shares that have vested. I have all these vested stock options, which I don’t know what to do with, you know, and then I’m gonna get more each and every year. So what’s the strategy around this?
And a critical piece of what we do is try to figure out a strategy. First thing is, you know, going back to risk. Well, how much company risk am I taking on by working for this company and owning all the stock with this company? And so we start having that conversation saying, “Okay, let’s put together a strategy that doesn’t kill you in income taxes, that keeps an upside for you because you love this company and you figured you’re gonna keep working for them and keep getting these shares and more options, you know. And so let’s put together a strategy over time that helps you sort of divest some of the risks, but also keeps the upside there for you. But have something in place so if it starts to tick down, you know, you can start exercising these things in a reasonable fashion using your restricted shares that they have vested to buy options and things like that.” So that can be fairly complicated, but it’s a great way to then start moving wealth around and getting them diversified. And I find that it’s a really valuable service that we provide for clients because, honestly, they don’t know what to do with these plans.
Jeff: And probably, the last kind of benefit that we see there’re people doing too much of or too little of or not at all, is deferred comp plans. You know, we see people sometimes loading it up and putting a heck of a lot of their money in deferred comp plans. And, oh, by the way, they’re going to continue to work because they’re workaholics until they’re 70 and a half, and their tax bracket is never gonna down. So they end just putting all this money into a non-qualified plan that could go down, and that’s just risk that they don’t necessarily need.
So if you think you’re gonna always be working, you don’t wanna load it up. But on the other side, you do wanna plan to load it up if it’s a safe company if you’re going to be retiring before 70 and a half. And just what we talked about, you know, your bracket goes down, and if you can choose to space out the distribution of that deferred comp instead of just all being it at one-time, then you can, you know, you’re putting in at the highest tax bracket and you’re taking it out at the 15, you know, or whatever percent tax bracket or a little higher, and you’re getting the difference there in savings.
Meb: You know, it’s funny listening to this. Just, you know, we talked so much about investment management in the podcast, and that’s obviously a really important piece to get at least right or decent, but there are so many easy ways to invest kind of correctly in my mind. But there’s such a massive amount of kind of alpha or, you know, personal finance and estate planning side that people neglect. I’m gonna ask you just a couple more quick questions and we’ll start to wind down. Otherwise, we’ll gonna have you guys here for four hours. This feels like a therapy session. But I’m thinking about all the things that I don’t do. Remsburg, I’m sure you are, too. I’m sure your house is even worse order than mine. But, okay, a couple more just kind of quick questions, and we’ll start to wind down. And I almost feel like having you guys back on in six months and saying, “Look, let’s go through a template for MEB, and you can just do a test case template for all the listeners.”
Jeff: That’s right. Live.
Meb: All the mistakes the CIO of Cambria is making in his own life. So you guys have been, you know, meeting with clients for years, and I’m sure this is very market dependent. But what’s the biggest concerns you’re seeing or hearing from clients and potential clients that come in today?
Jeff: I think it’s a little bit of Pavlov’s dog, Meb. I think everybody is worrying about the next tech bust or the next financial crisis. And stocks going down not just 10% or 20%, but when is the next big one coming, right? When is the next 30% or 40% or 50% decline? And, you know, it’s a reasonable question. It’s what they’re worrking about and we have to deal with it because, as you know, it wouldn’t be out of the ordinary. I think probably if history rhymes, then we could have another 30%,40%,50% decline if we’re going to mean revert to valuations that, you know, we typically go down to.
And I think that’s obviously a big question in our minds, you know, as when we’re sitting around the investment policy committee table, you know. Are we going to fully mean revert, or is this is gonna be kind of a drawn out low return type of environment? And there is no right answer. There’s right answers for specific clients. So, I mean, you look at someone who’s making money and who’s saving. Forty or 50% percent decline is actually a pretty good thing, you know. You look from 2000 to 2017 or so, what’s the market up about high 4% or so? But if you were actually using money to save into that, your IRR would be close to 8% or 9%, which is near the 10%, you know, average return.
So, you don’t necessarily need to be too scared if you’re a saver. But, you know, as we talked about before with the whole sequence of return risk, you can’t bet as a soon-to-be-retiree or retiree, that it’s gonna be different. You can’t bet that we’re only gonna have 10% or 20% declines and valuations are gonna, you know, work themselves out that way. You need to, I guess, play it safe. You need to reduce your risk probably at this part of the cycle. So it’s essentially, what we are doing is counseling. It depends on who asks the question, but we’re counseling people through this big issue of this low return environment and how is it gonna work itself out.
Meb: Funny you mentioned about young people because you can tell them say the best possible thing that could happen to you is the stock market to go down 70%, and you can dollar cost average your way the next decade, and you’re gonna be setting up shop for double-digit returns, and then, you know, watch them try to go through it and be compliant. That’s a different story, but it’s, you know, the classic phrase. It’s really when things go on sale, everyone runs out to the store. You know, applied to investing, it’s an area where it’s easy to counsel people what to do, particularly when they’re younger. It’s hard to actually get on board with it.
Jeff: Right. You don’t wanna lose the young, a lot young client to, you know, them being investors for the long term. You know, you can’t force them into a higher allocation and to buy in. You wanna make sure you’re safe enough even if they’re young, so if that happens, they just don’t trust stocks for the next 30 years because that would be even worse than being more conservative, you know, than you need to be.
Barbara: I think when you layer on the financial planning to what Jeff was talking about, a lot of our clients will look at us and say, “You know what? I know that you say that it’s gonna recover, but my time horizon is not as long as maybe years. And so am I gonna live long enough to ever see this money come back?” And most people are just afraid that their lifestyle has just gone out, you know, down the toilet with the stock market.
And so it’s really talking about those safety assets. And when we do the whole portfolio risk and setting aside assets to cover near-term cash needs, that’s critical because when it does go down, and they look at their net worth, and they look at their investment assets, and they’ve lost 20%, you know, you can say, “You’re still fine because we still can cover what you’re gonna need over the next eight years because we have it in safe assets.” And by the time, the portfolio and the market should recover, and you’re gonna be back on track.
In 2008 and ’09, you know, the worst was when we took clients on in 2007, and they’re like, “Oh, we’re so excited. We’re gonna retire now.” You know, and then they went into ’08 and ’09, and they were drawing down on their portfolios. But we had set them up in advance to sort of take a lot of, you know, and they didn’t like it. A client of ours, they’re like, “Ah, this is really conservative. You know, I’m used to having most of my money in the stock market.” I’m like, “No, we’re gonna start setting up this, you know, sort of final in getting some safety assets in there because, you know, it’s not gonna go up forever.” Okay.
And, honestly, those people were our best clients in ’08 and ’09 because they knew that they didn’t have to worry about where their money was gonna come from, because it was already set aside and they could wait it out. The worst clients are ones that we haven’t had a conversation in a really long time, and maybe they had in stepped into a more aggressive strategy, and it wasn’t appropriate based on the way they feel about, you know, getting back to that question Jeff asked, how much can you lose and still stay in that strategy, you know? So we hadn’t done that in a while, and those were our worst clients through the ’08 and ’09 stock market decline.
Jeff: And I’ll add one last thing, then I’ll put my financial planning hat on here. One of the things that they’re worried about the most is their kids. I think financial literacy is not being taught in high schools or colleges, and their kids are getting out in the workforce, and they’re scared as hell that their kids are gonna make bad decisions and dig themselves into a hole over, you know, the first 5 to 10 years of their working years, and that is a serious fear. And they often ask us for counseling the kids, to the point where we got the request so much, and we needed to obviously do it, you know, efficiently, that about six years or so ago, we set up a class, basically, for our clients’ kids, and it’s held twice a year. And I believe we have it on YouTube as well, and it’s taught by our associates. So it’s kind of peer-to-peer learning.
And that’s when we’re going through everything that they need to know. I mean, credit cards. I mean, how many kids get in credit card issues, you know? The benefits, like we’re talking about, budgeting, saving, you know, how to invest, how to save for a mortgage. You get all this type of things that really kids just don’t know about. And I think parents are really worried about that for their family.
Meb: That’s great to hear. You know, we talked about that a lot on the podcast, the education gap, you know, not just for young people but older people in general, and how much of a shame it’s not taught in high school or only in college if you elect to. And it creates just a massive headache. And for most advisers, the retention rate, by the way, when assets pass from parents or grandparents to the next generation or divorce is so low, largely because they don’t address that. So that’s smart for you guys to do. If you send me an email with a link, we’ll add it to the show notes to people to check out because I think that’s a big need.
So we’re gonna wind down. I usually have a final question. There’s about 30 others that I didn’t even get to, but we’ll have to have you guys back on with some more specifics. And it’s funny because we asked this question of all the guests in 2017. We had a different one last year. And I’m gonna ask you, and then I’m gonna tell a story just to give you a second to think about it, and it’s to both of you, and it’s, what is your most memorable investment personally? It could be good, it could be bad. It could be publicly traded, it could be something else. But while you guys think about it, Jeff, does the Rock Bottom Brewery still exist in Arlington, Virginia?
Jeff: I believe so. In Ballston, right?
Meb: Okay, Ballston, wherever it was, because, does it still have $2 happy hour?
Jeff: Yeah. I mean, that was our, you know, Thursday night place.
Meb: Thursday night. I was gonna say Tuesday night.
Jeff: Yeah, something like that. I don’t know, but you know what, Meb? I’m 40 years old and I’m still lame. You know, I wouldn’t even…
Meb: Well, but the reason I asked is because, you know, I’ve detailed some of my most memorable investments on the podcast, and most of them are awful, and this is another one to stay true to its name. So Rock Bottom Brewery, so when Jeff and I both lived in Northern Virginia, I was in D.C, Gaithersburg working, that was our go-to because it was $2 beers, on Thursday night. I mean, come on. Just out of college, what a good deal. You don’t find that anymore. I was just in Iceland where beers are $15 each, by the way.
Anyway, so $2 beers. Broke college student, you’ll learn about budgeting like that in the SBSB class. Anyway, Rock Bottom Brewery, in the ’90s, so I would have been in high school and then into college, was one of the first stocks I ever bought. And the ticker was brew, B-R-E-W. And it didn’t go anywhere forever, and if it went anywhere, it went down. I think it eventually went private in the late ’90s, and I was trying to Google it just now while we’re leading up to this question, and I think it’s now a conglomerate of other ones, but it was a horrible investment. And it was one of the first times where, you know, growing up, you read Peter Lynch, “Invest in What You know.”
And there are so many good products that, you know, I said, “Hey, this is an awesome brewery.” It was the beginning of the craft beer trend. I mean, you know, there was only a couple breweries doing it. The Sierra Nevada is the world, the Boston St. Adams, and I said, “This is gonna be a massive trend.” And living in Colorado, I got to see it, and then in D.C, and it was a great lesson of huge difference between a company and a business and a stock. And so nowadays, you may have another scenario where you have lot of these great, huge tech companies that are very expensive, and Amazon being an obvious example, you know, where you always have to separate the two, the investment from stocks.
Okay, turn the tables to you guys. Your most memorable investment or trade.
Jeff: All right. So I remembered one while you were talking. It’s very important when people are listening to CNBC or reading something, you know, you get all these ideas, and you wanna do your own homework before you kind of go with one of these ideas. Well, out of school, I was told by a guy named Meb Saber to invest in something called Gene Labs.
Meb: The ticker was Gene, wasn’t it? G-E-N-E?
Jeff: G-E-N-E, and I didn’t do my homework on it because I really trusted this guy Meb.
Meb: I probably didn’t either.
Jeff: And the company had a lupus drug and it was in stage three. And we’re just waiting for this thing to get approval for the pop because we didn’t know that markets back then were discounting mechanisms, and probably people already thought, and it was going to get approved and thus, was in the price. I mean, I remember being at Arthur Anderson in my cubicle when I found out, that news came out that it was not approved, and I saw my thousands of dollars go to practically zero. And I remember, I think it was IMing or emailing this guy named Meb, and I was like, “What happened?”
Meb: That’s all.
Jeff: So I pushed that to my subconscious, but now I brought that up…
Meb: I did, too. I just forgot about it. Why did you…?
Jeff: …and now I got to go to therapy.
Meb: Why did you invest so much? I only had $100 invested in that. I only had like three shares. Well, I’m sure that company no longer exists like most of the biotech companies from that vintage. But a lot of good lessons in there, listeners. Never listen to your neighbor no matter how smart and handsome they are, do your own homework. But the last point I think is really good one, Ken Fisher talks a lot about this, you know, is what you believe or is your thesis already discounted, you know? Or is it something that everyone knows and is expecting, or is it something that you’re the only person that has this alternate opinion? And in many cases, people’s belief is already… If we’re talking about it or if it’s in the newspaper, particularly CNBC, it’s already known about it. All right, Barbara, you got one?
Barbara: Yeah, I’m not gonna be an investment nerd. I’m gonna go a little bit out of the box because I’m a holistic person. And so back in the day, when I was trying to figure out how to get healthy again, I invested. This is an investment because at the time, relative to my income, I bought a really fancy mountain bike. And this was clearly an investment on my part because it was nicer than my car. So this mountain bike started something for me, which has been going on for like 30 years now, of keeping me healthy and just, you know, upgrading my mountain bikes, and just added to my whole sort of well-being, but also, you know, it’s been a great asset on my balance sheet. And so it’s something that I really enjoy and I’m really happy that I did it.
Meb: You know, it’s funny. I talk a lot about I no longer have a mountain bike because going back to the part where I don’t have any health insurance that would probably cover all of my extreme falls. But one of my favorite trips of all time was a mountain bike trip from Telluride to Moab and some of those hots. And I loved… you all got a bunch of great trails on the East Coast, kind of around where you are, too.
Barbara: We do, but I’d done that ride, too.
Meb: Oh, really?
Barbara: Yeah, the hut to hut. Yeah.
Meb: Oh, the same one, hot system, you know?
Barbara: Yup. Yeah, absolutely.
Meb: That first day, when you go up this like massive hill in Telluride, I remember just thinking, “Oh my god. What did I possibly get myself into?” And, like, I just collapsed at the hut. And, like, every day we’d collapsed at like 3 P.M., and just be exhausted. But it was a really special trip. I’d love to do it again someday. But the last day was like… I tend to not have fairly stable emotions. I had like the biggest meltdown in my life because I crashed like 30 times, and my two buddies I was with, they’re like, “Yeah, let’s take the Rim trail. And we met and I was like, “I’m going to directly to the hotel and showering and getting a massage and a steak dinner.” And they’re like, “No, come on. It’s the last day.”
We met some guy, some local on the trail, who, by the way, is wearing mountain bike armor. You know, how people go head to toe with like armor. And I said, “Hey, you know, these two trails, can you kind of like rate? You know, this is from 0 to 10. You know, what this trail on this one?” And he’s like, “Let’s see the one I’m going out.” He’s like, “That’s probably like a two.” And I go, “What’s that one?” He goes, “It’s an 11.” And I go, “Okay, guys, I’m gonna go home.” But the best part about that was is it started raining and lightning while I was in my hotel room, and my poor friends got stuck in like a little hut for like three hours while I was freshly bathed and on my way to a happy hour and dinner. So, lesson learned.
Anyway, guys, look, this was a blast. What’s the best place for… you’re probably gonna get much phone calls, a bunch of inquiries here because if any of the listeners are like me, you know, they need a lot of help. What’s the best place to find you guys?
Jeff: Yeah, probably just, you know, our website is the best. So www.sbsbllc.com. And, you know, we have, you know, webinars on there. We got our bios, contact information, etc.
Meb: Emails, you got emails? Same?
Jeff: We got emails. Email’s right there. And, yeah, you can find us on YouTube for some of those things. And, yeah, I’ll make sure to get that young adults presentation by our associate.
Meb: Great. We’ll post it all in the show notes. Jeff, Barbara, thanks for coming on today. It’s been a blast.
Jeff: Thanks, man. It’s a lot of fun.
Barbara: Thanks. It’s been great. Thank you so much.
Meb: All right, listeners, that was a marathon therapy session. I hope you enjoyed it as much as I do. It generated so many more questions I need to think about. If you have any feedback, questions from the mailbag, send us. If you like this kind of series, the practitioner, I think it’s a cool way to get us all thinking about personal financial situations. You can find the show notes, everything else, mebfaber.com/podcast. We’ll post all the stuff we talked about here today and much more on there. And remember, you can always subscribe to the show on iTunes, Stitcher, Castro, all the good apps. And if you’re enjoying it, leave us a review. Thanks for listening, friends, and good investing.