Taxes, Direct Indexing, and Concentrated Stock Diversification Strategies for Smarter Wealth Planning
On this week’s Money Matters, Scott and Pat dig into market performance, tariffs, AI, interest rates, and long-term planning. At the heart of the episode are three essential topics: taxes, direct indexing, and concentrated stock diversification strategies.
They help a young family balance life insurance with retirement savings, guide a retiree facing a heavy dividend tax bill, and show why smart planning matters at every stage. Along the way, they reveal how taxes can quietly erode wealth, why direct indexing creates new opportunities for tax-efficient investing, and how concentrated stock diversification strategies protect those holding too much company stock.
Whether you’re building wealth, preparing for retirement, or simply trying to minimize taxes, this episode blends practical advice with advanced insights to help you secure your financial future.
Join Money Matters: Get your most pressing financial questions answered by Allworth's co-founders Scott Hanson and Pat McClain live on-air! Call 833-99-WORTH. Or ask a question by clicking here. You can also be on the air by emailing Scott and Pat at questions@moneymatters.com.
Announcer: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401(k)s, Scott Hanson and Pat McClain would like to help you by answering your call. To join Allworth's "Money Matters," call now at 833-99-WORTH. That's 833-99-W-O-R-T-H.
Scott: Welcome to Allworth's Money Matters. Scott Hanson.
Pat: Pat McClain. Thanks for joining us.
Scott: You know what's funny, Pat? We've been doing the show a long time. And as I'm driving into the studio today, I'm thinking, "Oh, man. I've been doing this a long time." And I started thinking about all of the shows that eventually ended, and I thought, "But now that I'm here, I'm having a great time [crosstalk 00:00:42]"
Pat: Isn't that so much about life? Not just radio show. Work in general, some relationships, Christmas with the family.
Scott: I remember talking to my daughter. She was debating [inaudible 00:00:53] she was gonna go to some event. It was a church youth group thing. "I don't know if I wanna go tonight. Should I go, dad? Should I not go? I don't know if I wanna go." And I said, "When was the last time that you decided, that you went, you were going through this, and you went, and you regretted going?"
Pat: And she said?
Scott: "I can't think of any." So, well, then maybe you should go.
Pat: Isn't that perfect.
Scott: You'll see all your friends. It's a good, wholesome atmosphere...
Pat: Yes.
Scott: ...and all that kind of stuff.
Pat: It's kind of the same way I... Work, gym, [inaudible 00:01:20] Most of life. So, Scott...
Scott: Anyway, we're financial advisors. That's what we're gonna talk about, not our daughters or our gym life.
Pat: Yes. So... Well, I did wanna talk about the markets. Just reflecting on the year.
Scott: It's that... I mean, so, [crosstalk 00:01:41]
Pat: We're up at, what...
Scott: Roughly 10%, almost 10% [crosstalk 00:01:44]
Pat: Almost 10%
Scott: on the S&P 500.
Pat: Five percent, a little bit over 5% over its last high.
Scott: Phenomenal.
Pat: Up, what 25%, [crosstalk 00:01:57] 29% from its low?
Scott: That's based... And that's after two great years.
Pat: Yes. Yes. So, if you would have started January and looked at a chart, just a chart, you would have said, "Oh, well, clearly. 2025's not gonna be a good year." And maybe it won't be a good year by the time we finish.
Pat: We don't know. We're... We don't know.
Scott: We're in August still.
Pat: Right? So, I was reflecting... So, if you're like, "Oh, it's up 10% for the year," and you're like, "Yeah, it's pretty good." But, it's up almost 30% from its low. Twenty-eight, somewhere around there?
Scott: It's most recent low.
Pat: It's most recent low. Thank you.
Scott: It's up 99.9% from its real low.
Pat: Okay, okay. Okay. Everything is time-based, right? The effective tariff rates on import, highest they've been since the 1930s. Right? That's the effective tariff. No one...
Scott: That's amazing, isn't it?
Pat: It [inaudible 00:03:00]
Scott: It is starting to come... It is working its way through.
Pat: Oh, it will work its way through.
Scott: Yeah, for sure.
Pat: But it could change in minutes. Truly, in minutes.
Scott: What, no, Trump is so predictable. What do you mean?
Pat: It just... The biggest companies out there, their S&P 500, largest companies in the S&P 500, they feel like they're a little bit insulated from...
Scott: But [inaudible 00:03:28] you look at the earnings growth, Pat.
Pat: That's right.
Scott: People are expecting Q2 to be about 5% for the broad stock market.
Pat: Yep.
Scott: We're coming in north of 10%, like 12%.
Pat: This quarter, more than 40% of companies in the S&P 500 index raised their earnings estimate. Forty percent. In the first quarter this year, 17% raised. And so, what, all that is is the company actually giving guidance [crosstalk 00:03:53]
Scott: They always sandbag a little.
Pat: Really?
Scott: Right?
Pat Yes.
Scott: I mean, you think you're gonna earn $100 million, where you're like, "Mm, let's say we think we're gonna earn $92 million, and that way, if we do better...
Pat: We look great.
Scott: "...we get rewarded, as opposed to being punished.
Pat: Yes. So, at the end of the first quarter, 17% of companies raised their expectation. The end of this last quarter, 40%. And it's hard to point to... The retailers and restaurants are really struggling with the tariff situation, but...
Scott: Certain industries are, for sure.
Pat: Most certainly. But the implementation of AI is really, really actually taking place.
Scott: Well, it's, what's fascinating, Pat, you look at, so, like, Nvidia, and the companies, some of these companies that call themselves AI companies, you look at the market caps of these things, right? Then you look at these pay packages that...
Pat: They're paying these...
Scott: ...these hot-shot engineers are getting paid to come work for Mark Zuckerberg or whomever. I, like, it's kinda crazy money. But it's all gonna have to trickle down into more productivity and more profits for the companies that are paying for the services, right?
Pat: That's right.
Scott: Because you're not gonna pay for a technology unless it's gonna give you a return. No matter how cool the technology is, if it can't give you a return, you're not gonna bother spending the money as a business.
Pat: That's right. That's right.
Scott: So, all the businesses just...
Pat: But, it just, it's...
Scott: I mean, the bet is that the pull-through on this is going to be substantial.
Pat: And then you think, "Well, is this the dot com all over again?"
Scott: [inaudible 00:05:36] it...
Pat: Doesn't feel...
Scott: There might be some companies priced that way, but...
Pat: Yeah, where they're...
Scott: But even the dot com was transformational. Look how we...
Pat: It was.
Scott: Look how we buy and sell.
Pat: Yeah.
Scott: I mean, just, my oldest daughter was thinking of moving, she's in Denver, thinking about moving back to Truckee. We met with a real estate agent not too long ago, in his office. And, kinda curious about different neighborhoods, all on a screen there, different neighborhoods, all [crosstalk 00:06:04]
Pat: [crosstalk 00:06:04] get in a car?
Scott: No.
Pat: [crosstalk 00:06:06]
Scott: No. No. And then it's, well, then it's... "So, in this [inaudible 00:06:09] then here's the houses that are available. Here's the ones that had sold before." And in an hour, what we accomplished in an hour, sitting in the office, looking at a big screen, would have taken us a few days 25 years ago.
Pat: Yeah. At least for the initial screen.
Scott: And that's not even AI-induced, some of this.
Pat: [inaudible 00:06:24] It's interesting. I just... I was just reflecting this morning on it, and I just thought this is... And then I just remind myself, this stuff happens all the time. I just forget about it.
Scott: [crosstalk 00:06:41]
Pat: Then the market's just, like, the beginning of COVID, how quickly the market fell and how quickly it recovered.
Scott: Well, it's been an amazing time, because our downturns have been so short-lived.
Pat: Right? And what do you think...is it...what do you think's...is it by the dips, that the investing public is just...
Scott: Well, if you think of the last two major downturns, right? So, the dot com, what we had there was over-hyped companies that, there was no there there. It was all hype. They had a web presence, dot com, they hardly had any employees, they had no revenue, they had no real business model.
Pat: And then it hyped up the rest of the market.
Scott: And there were mutual funds, that was still a big mutual fund day, where grandma in Kansas City would put money into a mutual fund. Essentially, it was a wealth transfer from individual savers to some of these dot com creators. When that blew over, that created a big downturn. Add 9/11 on top of that.
Pat: Okay.
Scott: Because that was about halfway through, is then suddenly we had 9/11. So there were some real headwinds. And same thing with the financial crisis. That was...
Pat: That was real. I mean, that wasn't an emotional reaction to something that was going on.
Scott: No, no, no, no. There were millions of homeowners that had mortgages that became worth more than their homes.
Pat: Oftentimes from the day they purchased them.
Scott: That's... Okay. But it created this downward... And so, we've not had anything quite like that. We had COVID, but that was short-lived. Government stimulus kinda helped bridge that gap. We knew we weren't gonna all die from the virus, so once that was clear, things rallied back up. And then this tariff thing, I think people realized pretty quickly that whether you like the tariffs or not, and the way it's being implemented, it's not gonna blow up the economy. And you could always reverse them.
Pat: Yes. You can pull them back.
Scott: Things get slow, you can reverse them. It's not like the housing crisis that's in a free-for-all.
Pat: Yes.
Scott: So, I think that's... Until we have some structural issue...
Pat: The markets, there'll be buybacks.
Scott: I think they'll [crosstalk 00:08:50] my guess.
Pat: These were, like, emotional reactions to the marketplace.
Scott: But as soon as I start to believe I have some idea what's gonna happen in the future...
Pat: Yes.
Scott: As I was talking to this...
Pat: You'll become a terrible investor.
Scott: ...real estate agent a couple days ago...
Pat: He told you...
Scott: Well, no. Where, "We'll see interest rates next year..." and he said...
Pat: He said that to you, where they're gonna go?
Scott: And I stopped and I looked at him. I said, "You know where interest rates are headed?"
Pat: What did he say?
Scott: He kinda... Because I almost said, "Because if that's the case, if I knew where interest rates are going, show us the biggest house here."
Pat: Why are we stopping? Let's look at the $50 million houses.
Scott: Right.
Pat: If we [inaudible 00:09:30] Did he have interest rates going down?
Scott: Of course.
Pat: Oh. That's interesting.
Scott: They're gonna be... If you need a loan, you could be able to refinance in a few months for less. It's [inaudible 00:09:43] by the way, when someone tells you the interest rates are gonna go up or gonna go down, it's no different than someone telling you where the stock market's gonna be in 6 or 12 months.
Pat: Oh. This guy was pitching me a real estate portfolio, a friend of a friend, was, like, trying to tell me, okay, he's buying all these houses in Idaho. He said, "Yeah, we're gonna refinance these homes in three years at 4%."
Scott: That's their business model?
Pat: I said, yeah, yeah, yeah.
Scott: What if the interest rates are 10% then?
Pat: Scott, it can't be.
Scott: You realize, interest rate, like, mortgage interest rates, if you go back 50 years...
Pat: They're historically still low. Yeah. But any time that they throw out these projections...
Scott: Because I remember my first home. We bought a home in 1992. I believe it was 7.75%, if I'm not mistaken.
Pat: Mine was north of 9%, my first home. Yeah.
Scott: Couple years before I did. Yeah.
Pat: Yeah, yeah.
Scott: And that's when the rates were coming... [crosstalk 00:10:34] Anyway, why are we talking about our homes...home mortgages [inaudible 00:10:37] [crosstalk 00:10:38] But the thing about, I think the thing to always remember about the markets, like, you cannot predict the future. And just because things feel great right now, nasty times are gonna come.
Pat: That's right.
Scott: And we don't know when.
Pat: Whether you're Democrat or Republican.
Scott: That's right.
Pat: Whether you're guy's in office or not in office.
Scott: That's right. Something bad's gonna happen. Markets are gonna go down.
Pat: And then the U.S. economy is gonna take a hit, and then everyone's gonna be...
Scott: And it's different this time.
Pat: ...a reset, a little bit, and then smart people are gonna figure out how to go back and make money.
Scott: And the market's gonna recover, again.
Pat: Again.
Scott: And we'll hit new highs.
Pat: Again.
Scott: The Dow Jones Industrial Average is, what, roughly 45,000? When I started in the industry, 1990, July of 1990, it was roughly 2600.
Pat: Yeah. It's a lot. It's increased quite a bit.
Scott: It's increased [crosstalk 00:11:34]
Pat: Yeah. You joined the industry in, what...
Scott: Phenomenal.
Pat: ...1920?
Scott: 1990. July of 1990.
Pat: There you go. Good reminder.
Scott: Was it August? July of 1990.
Pat: You crawled a wall of worry, is what they call it in investing.
Scott: Yeah. Well, all right. Let's, why don't we go...
Pat: [crosstalk 00:11:48] calls.
Scott: Yeah. Let's take... And if you wanna join us, you can send us an email, questions@moneymatters.com. By the way, we like taking calls. And if you've got a decent question, we'll take your call. It's not like we vet out 100 calls for every one we take. If it's a good question, there's a high probability...
Pat: If we were vetting, you'd think we'd have much better calls.
Scott: Well, we might...wait till you get this next one. Because we're talking with David. David, you're with Allworth's "Money Matters."
David: Hey, gentlemen. How you doing today?
Scott: We're doing outstanding. How can we be of help?
David: Perfect. Well, I got a two-parter for you.
Scott: Okay.
David: Two-parter. First one is, how are we doing so far? And then the second one is, where do we go from here?
Pat: All right. Give us a breakdown.
David: Yeah. So, I'm 36, married. We have four kids.
Scott: By the way, you're doing well. The fact that you're 36, listening to a financial program, and calling for advice, that tells me you're doing well. So, you're 36, married, and four kids?
David: Four kids, yeah.
Pat: Okay.
David: We got started young. Yeah. So, I work full-time in professional industry. My wife is a part-time engineering consultant. Together, we bring in about $200,000. About $170,000 is me, $30,000 for my wife, primary caregiver, of course, in the home. We've got a house that...
Scott: Is she employed somewhere, or is she self-employed? Is she a contractor of sorts?
David: Self-employed contractor.
Pat: Okay.
David: Yep. We have a house. We've got about $215,000 left on that, about 10 years on the mortgage left, and it's worth maybe $800,000. We have about $500,000 [crosstalk 00:13:31]
Pat: Interest rate is what?
Scott: How old's your oldest kid?
David: Oldest kid is 12, and interest rate, 2.25%
Pat: Okay. All right. Thanks.
David: Yep. For savings, we've got $530,000 in retirement. Most of that's 401(k). I have a little bit, like, $15,000, in a Roth IRA. And then we've got some cash in checking, some cash in emergency fund, and that's kinda the snapshot so far.
Pat: How much life insurance do you have on yourself?
David: I've got a million. And it was a 20-year policy we did maybe 5 years ago, and I think we have about $500,000 on my wife.
Pat: I'd double it on both of you.
Scott: Yeah. I don't know if I...
Pat: I'd double it on both.
Scott: Yeah, you would need, your kids, you would need people to drive your kids around and everything else, should something happen to your wife, so... And it's so inexpensive.
Pat: Yeah, I'd double it. Double it.
David: [crosstalk 00:14:23] yeah. Okay.
Pat: And how old's your youngest?
David: Five.
Pat: I would double it, and I'd probably buy a...
David: Ten, 15?
Pat: Yeah. That's an actually...
Scott: Yeah, I'd look at a...
Pat: I'd probably buy a 15-year level term.
Scott: Yeah. That gets your 5-year-old to 20.
Pat: Yeah. I'd buy a 15-year-old level term. 15-year level term.
Scott: And you're gonna, by the way, in 15, but, and your financial situation's... You're, look, you're in phenomenally good shape here. Right? Right, you've been out of the...you've been in the workforce... Did you graduate college in '22, '23, somewhere in there, right? So, 12, 13, 14 years you've been working. You're married. You guys have four children. Your home is almost paid for, relative to the value of the house. You've got half a million dollars in savings. You've got no debt. You've got emergency reserves.
Pat: I'd buy a disability policy as well.
Scott: What do you have offered through your employer?
David: I'd have to check it out. I've never really considered it. I'm sure we have something.
Pat: You wanna buy as much as they sell you through your employer.
Scott: Because it's cheap through the employer.
Pat: It's very expensive in the private and public markets, but you should buy as much as...
Scott: My next door neighbor is a surgeon.
Pat: Yeah?
Scott: Fully disabled. He's 40... I mean, he can't do his surgeon... He can't... He has had a neck, something in his neck. Can't operate. Can't... Had to quit being a surgeon.
Pat: He's still a doctor, though.
Scott: Yeah. He's got five kids.
Pat: Wow.
Scott: Had some good disability insurance. And he's trying to figure out his next chapter and all that stuff, but...
Pat: Yeah, because it...
Scott: Yeah, it happens. I mean...
Pat: It happens.
Scott: Yeah.
Pat: Yeah. So, you wanna buy as much disability as they will sell you through your employer. And then I would... Even if it, as long as it covers 75%. Anything less than that, I would actually consider going to the market. You're giving me a look, Scott.
Scott: No, I'm thinking.
Pat: Okay.
Scott: Yeah. I mean, I did at this age, when I was that age.
Pat: Oh, yeah. A lot.
Scott: Yeah. I did as well, at that age.
David: Okay.
Pat: Yeah.
David: That's great. [crosstalk 00:16:33]
Pat: All right. And then, so, double the term life insurance.
Scott: And if you end up with some disability, get something with a really long waiting period. You don't care about it at six month or a year... I mean, you know, that's not financially devastating, a six-month or a year disability.
Pat: Yeah.
Scott: A lifetime disability is disastrous.
Pat: Yeah. You want, like, at least a year waiting period, and then lifetime coverage.
David: Okay.
Pat: Okay. And then...
Scott: How much are you saving?
David: A month? I'm putting away about 8% of my salary, and there's a pretty fair matching program [crosstalk 00:17:06]
Pat: You were putting a lot more away at one point in time.
David: Well, so, there's... I was putting 10% to 12%. We paused that a little bit for starting kids' college funds, and some other things.
Scott: Well, what do you have in the college funds?
David: About $60,000 between all the kids. And we're doing about a hundred bucks a month for each of them.
Pat: Okay.
David: So, what's going into the 401(k) is, like, about $2,000 a month, so that's [crosstalk 00:17:37]
Pat: Can you afford to put a little bit more into the 401(k)?
David: I think so. And I guess this kinda gets into my next question, the second part, the where do we go from here. And the big context behind that is, actually contemplating a career move. I've been teaching part-time, so that's where a lot of the, some of the extra cash comes from, that we can put away for saving, for kids' college and other things. And this career move would actually take me full-time into teaching at the university level. I've been doing that part-time for about six years.
Scott: And what's it mean for your pay?
David: Pretty significant cut.
Pat: How big?
David: So, we're... Well, for me, about half. So, but I need to pick up some part-time work in industry, through the summers and through the school year, and then my wife's getting to a point where she can take on more work, so it's, you know, mine cuts in half, but we're gonna try to build up from there, now that the kids are a little bit older, in school, and...
Pat: What type of university would it be?
David: Be at Cal State. CSU.
Pat: Okay.
Scott: And would you get a pension?
Pat: He would.
David: I would. Yeah, there'd be a defined benefit plan.
Pat: Yeah.
David: So, you know, let's assume that I work for the next 26, 27 years there. I'd be 62 or so, and be eligible [crosstalk 00:18:50]
Scott: I mean, you've got a really...you're in a good place right now, right?
David: Yeah.
Scott: It's not like you're starting out with zero and four kids. You don't have a ton saved for retirement, but you've got a, I mean, it's a decent amount for a 36-year-old. Life's about the journey.
Pat: Well, you would be able to take up contract work. Have you talked to your existing employer?
David: I could talk to them. And I also have quite a few industry contacts that I think would be willing to [crosstalk 00:19:22]
Scott: I gotta tell you, I've... Look, I can't tell you how many people I've talked to... Pat, and you have as well. They're early 50s, mid-50s, and they come in and they say, "Pat, I hate my job. How many more years do I have to do this before I can retire?" Right? You've heard that...
Pat: Yeah. Yeah. Yeah.
Scott: ...hundreds of times.
Pat: If you were my son, I would...this is what I would tell you: Figure out how to make it work.
Scott: Yeah. I would too.
Pat: First of all, that advice I gave you about the disability policy, the university has a great disability policy.
Scott: That's right. You don't need to worry about it. And they might have...
Pat: And the great life insurance as well.
Scott: That's right.
Pat: Right?
David: Yeah.
Pat: My guess is that the health insurance is probably better than what you're getting through your existing employer.
Scott: You'll make it work anyway.
Pat: You'll make it work.
Scott: At least you have the financial discipline.
Pat: Yes.
David: Yeah. Yeah. I think we're gonna make it work, and we're gonna figure out how much we need to make, so the big question is, with the...obviously, we have to continue to contribute, so is it just, we max out our IRAs, and...?
Pat: David, you're gonna hire an advisor. They're gonna tell you exactly, exactly what to do. And they're gonna model this...
Scott: And you might say, for the next 18 months, the next 2 years, you got a 5-year-old, right? I don't think the kid's in full-time school yet. Is he? She? [crosstalk 00:20:45]
David: Yeah. Kindergarten.
Scott: Okay.
David: Yeah.
Scott: Full-time?
David: Yeah.
Scott: Okay. So, you just hit that point?
David: Yes.
Scott: You're talking about your wife being able to work more, because you got kids in school full-time. But if it means that you pause retirement saving for a year or so, so be it.
Pat: David, look, if you were my son, right, you're a little bit older than my oldest, I would hire a financial advisor for you, and make you actually go to a Zoom meeting. Make you. Ask you nicely, to go to a Zoom meeting, to figure out how it works. Because what they'll be able to do is give you some clarity on how much income you need to make up so that you're not out there thinking, "Oh, I need to land every contract."
Scott: That's right.
Pat: And, they'll give you clarity about what your retirement will look like when you're at 60 or 65.
Scott: Well, and if you're a professor, I mean, you might [inaudible 00:21:39]
Pat: I have a friend I spent a couple weeks with, ago, I spent the weekend with him, a friend from high school. And I just remember... He's a college professor, and he always told us when he was in high school he wanted to be a college professor because it was the only job he could think of where he didn't have to get up before 10 a.m.
Scott: He's still teaching?
Pat: He loves it. Loves it. He's 62.
Scott: Yeah.
Pat: Pay for advice. I'll tell you what. I'm gonna have someone... I'm gonna do this. I'm gonna do this for free, Scott. I just... Listen, right?
Scott: We've got your contact [crosstalk 00:22:18]
Pat: We got your contact. I'm gonna have someone call you, and they'll walk you through a free financial plan.
David: Hey, that'd be awesome, guys. Really appreciate that.
Pat: This is... The anticipation is because, like, how do I take care of my family and make this leap, right?
Scott: Of course.
Pat: Which is really scary.
Scott: He's got four kids. They play sports and all that stuff, and it's gonna...
Pat: Yeah. The better visibility that you have into what the future looks like, the better you'll do. Yeah.
Scott: And not being so stressed, like, "Oh, I better go find another little contract to make some more side money."
Pat: Yeah. Yeah.
Scott: And maybe you'll be at a point saying, I'm just gonna do the...see how I make myself more valuable at Cal State.
Pat: Who knows?
David: Yeah.
Pat: You're 36.
Scott: I think it's cool.
Pat: Are you an engineering... What kind of a professor will you be? Will it be engineering?
David: Yeah. Engineering construction. Just kind of a crossover.
Pat: There we go.
David: Yep. Yep.
Pat: Good for you.
Scott: Yeah.
Pat: Seriously.
David: Well, thanks, guys. Really appreciate it.
Scott: All right, David. You know what's interesting, Pat.
Pat: Good for you. Keep it up.
Scott: My favorite kind of [inaudible 00:23:17] literally, my favorite...
Pat: By the way, if... I'm sorry, Scott. Let me give this disclaimer. Don't call the show looking for a free financial plan.
Scott: My favorite kind of planning is working with someone mid-career, whether they're this young, or older, that is trying to say, how do I do something that I really love to do, with less money, and still have financial independence?
Pat: Yeah. And he's teaching on the side, so he knows what it's like.
Scott: Because, I mean, we're financial guys, right? Wealth managers, financial advisors, call us whatever you want. But it's not necessarily about the highest dollar amount. Obviously, that's not, what life's not about. For most people. Oh, I did read a... I think it was last week, there was an opinion piece in "The Wall Street Journal" about this... And I agree with the headlines. It was pretty much, "Forget work-life balance in your 20s."
Pat: Oh, yeah. I read that article.
Scott: Right? And I kind of agree with it. You've gotta figure your career out.
Pat: Yes.
Scott: But then the more I read it, he limited his relationships, how many people in his life, and he was hoping to be a billionaire, and then once he had the billion dollars, he was gonna change, and start saving the world or something.
Pat: I read the article. He seemed a little unhinged.
Scott: I didn't agree with it at all, but...after I read the thing, but [crosstalk 00:24:32]
Pat: He hired someone that would... Anything that was less valuable than his time through his employer, he had someone else do for him. Like, what's the humanity? What's the...
Scott: His goal was to accumulate a billion dollars. Maybe he will, maybe he won't. For most people, what's the point?
Pat: What do you think the chances of accumulating a billion dollars?
Scott: How many billionaires are there in the world? Couple hundred?
Pat: Not a lot.
Scott: So, there's...
Pat: And don't forget, hard work, and there is a...
Scott: Luck.
Pat: There is luck.
Scott: There's a lot of luck, too. Come on.
Pat: There's luck.
Scott: Of course, there's a lot of luck.
Pat: There's luck.
Scott: Yeah. For sure. Anyway. But there are a lot of people in their 50s that hate their job, that don't have quite the financial independence to just call it quits. But there are times, instead of hating your job and quitting at age 60, go do something you love to do, and work till 65 or 70.
Pat: Yeah.
Scott: Yeah. Anyway.
Pat: [inaudible 00:25:32]
Scott: Let's continue on here. We're gonna talk with Ed, in Philadelphia. Ed, you're with Allworth's "Money Matters."
Ed: Yes. Thanks for letting me call in.
Scott: Thank you.
Ed: I have a question for you guys. I am retired. I got, I believe, more money than I need for retirement. And most of my income from retirement is in dividends. My question for you two is, I have a lot of money, I believe a lot of money, sitting in my checking account at the end of the year. And for the last 30 years, I've been reinvesting most of that back into the dividend-paying stocks, and my tax bill's getting pretty big.
Pat: How old are you, Ed?
Ed: I'm 63.
Pat: Are you married?
Ed: Yes.
Scott: And how much do you have in stock...what's your stock portfolio value, that are paying these dividends?
Ed: Just under $9 million.
Pat: And you only have $500,000 in your IRA.
Ed: Yes.
Pat: And why dividend stocks? Just out of curiosity.
Ed: I've been infatuated with dividends ever since I was, like, a teenager.
Scott: It's worked for you, right? So...
Ed: I've been, like... Oh, they have. They have.
Scott: Yeah, yeah. Not gonna try to get you changed on that one. It's clearly worked for you.
Pat: And what's the problem?
Scott: Yeah.
Ed: My problem is is at the end of the year, when I'm done paying all bills and the taxes and everything, I still have a lot of money, I believe too much money, sitting in my checking account. And for the last 40-some years, I've been taking a lot of what's left over at the end of the year and putting it back into the dividends that I...to reinvest into the dividends, but my tax bill now is getting to be pretty big.
Pat: Well, if I gave you a solution, you're not gonna like it.
Ed: Okay.
Pat: I'm gonna tell you that you should quit buying dividend-paying stocks.
Ed: And do what? Just leave the [crosstalk 00:27:45]
Scott: How about buy some stocks that don't pay dividends? Stocks that don't...
Pat: Buy some growth stocks. Some growth stocks.
Scott: My guess is that your portfolio is highly tilted towards value companies. You could just buy an index.
Pat: You're not managing this portfolio in a tax-efficient manner.
Scott: No, not at all.
Pat: Not even... There's been no attention paid to the tax efficiency of your portfolio. None. Because, I would make the argument that you should have 50% of your portfolio in non-dividend-paying stocks. And the reason behind that is, obviously, for current taxations, also because, at death, appreciated assets, under current law, receive a full step-up in basis.
Scott: So you can avoid the tax.
Pat: Completely.
Ed: Okay.
Pat: So, I appreciate the fact that you've got, that this investment philosophy has worked for you. It would have worked for you had the portfolio been growth stocks as well. In fact, it would have worked better.
Scott: How much do you have in the...how much you have in cash?
Ed: Right now... Excuse me. Right now, I got about $90,000.
Pat: Ah, well, that's not bad.
Scott: No.
Pat: Have you started gifting? Do you have children?
Ed: Yes.
Pat: Have you started gifting to them?
Ed: Yes.
Pat: And, the maximum amount?
Scott: Do you give them stocks?
Ed: I give them money right out of my checking account.
Pat: Are they in a lower tax bracket than you?
Ed: Yes.
Pat: Why not give them stocks?
Scott: I'd give them stocks.
Ed: Never thought about that. Okay.
Pat: Well, [crosstalk 00:29:25] you did call a financial show to get an idea of something that you're not doing. Right? So, what happens...
Ed: Yes.
Pat: Here's the reality. If you came into our office today, we would look at this portfolio, and the first thing we'd do is we'd look at the allocation. My guess is, as Scott's is, it's mostly [crosstalk 00:29:45]
Scott: Highly allocated towards value stocks [crosstalk 00:29:46]
Pat: ...value. And large cap value, would be my guess. Large cap value. So, we'd look at the portfolio, and the first thing we'd do is say, okay, where are the risk in the asset allocation itself? Well, you know, if I had a square with nine different squares inside of it, yours would be mostly concentrated in the top-left hand. We'd say, let's try to actually mimic more of what the market is, which is growth, mid cap, small cap. Then, after we said, okay, this is really how it should look, how can we build this so it's as tax-efficient as possible? So, the...
Scott: And using a...I'd use a direct index on technology on this.
Pat: That's right.
Scott: You build a synthetic index, then, and it's managed for tax, you do some tax loss harvesting.
Pat: That's right. And so, what happens is that... And by the way, if some of these terms are new to the listeners, or yourself, it's because they weren't around 10 years ago.
Scott: Three years ago.
Pat: And the reason they weren't around was is the cost of friction, which is the cost of trading, was oftentimes more expensive...
Scott: Yeah. Now, it's [crosstalk 00:30:57]
Pat: It costs nothing. So, what we call friction was the cost of buying and selling. And the other thing is that we use technology today that didn't exist five years ago. Certainly didn't exist 10 years ago. We use that to actually manage portfolios. So, technology, in the investment advisory world, has changed. It brings...it's the democratization of investments, by the use of technology. It brings private office-type services to the middle class, or the high net worth, which you would be. You wouldn't be ultra high net worth, but you'd be considered a high-net-worth client. So, what you're doing, and you're probably doing all of this yourself, correct?
Ed: Correct.
Pat: And you probably don't want to turn this on to anyone else. My advice to you is, you're missing out on technologies...
Scott: Oh, not only that. I mean... So, we've mentioned one idea. You're gifting your children. That's an easy one. Just give stocks now, appreciated ones. They're in a lower tax bracket. They could probably have, if they plan it right, they have no capital gains when they sell it. But you also might say, maybe we take some portion of this and use a charitable remainder trust, and get a nice, big tax deduction from that, [crosstalk 00:32:23] today, with a guaranteed income tomorrow. And we can do, as we do that, the tax deduction, we can turn around and sell some of the existing stocks that we have now, encourage the capital gain, I mean...
Pat: Incur.
Scott: ...realize the capital gain, but have them wash out each other. And then we can invest in something that's much more tax-efficient. There's a... You got a lot of options here in front of you, but it would mean moving a little bit away from having 100%
Pat: Large cap value.
Scott: Yeah, large cap value, which, what you're invested in.
Ed: And I do have a lot of growth stocks in the IRA.
Pat: Which, by the way, is exactly opposite.
Ed: Mm?
Pat: You've got it completely [crosstalk 00:33:06]
Scott: Opposite.
Pat: You've got it completely wrong. Like, if I said, "Let's make this tax-efficient," I'm like, "Let's call Ed." Or "Let's lose tax efficiency in this portfolio. Let's call Ed." Because your growth stocks should be in the IRA, and the dividend...
Scott: Meaning, your dividends should be in the IRA.
Pat: Excuse me. The dividends should be in the IRA, and the growth stocks should be in the brokerage account.
Scott: And I think it got... Look, Ed, you've done a great job. You've...
Pat: A great saver.
Scott: Good saver. This has worked for you, right?
Ed: [crosstalk 00:33:38]
Scott: But it's at a point now, now you've created a new problem for yourself, and it's the taxation of this, right? Because you've got, what, four... You probably got, I don't...depending on what kind of dividend stocks, you might have $400,000 coming in, that you have to pay taxes on each year, in dividends, right?
Ed: Little bit more. Yeah. Little bit more than that.
Scott: Okay.
Ed: Yeah.
Pat: Which tells us it's even worse than we suspected, in terms of large cap value. Right?
Ed: [crosstalk 00:34:09]
Scott: And... Here's what I would do. You're my brother. I'd say, "Hey, Ed, go interview two qualified financial advisors, certified financial planners. Give them [inaudible 00:34:21] go meet with two different ones, and just hear what they have to say. Hear about their ideas. And if one resonates with you, [inaudible 00:34:31] just say, look, "Let's, why don't you do a financial plan," pay for them to do a financial plan, that they can come up with all these strategies, to show you the impact it could have on you financially.
Pat: The money you would actually save in taxation would more than pay for the cost of professional asset management on this account.
Ed: Okay.
Pat: That's a promise.
Scott: Oh yeah, for sure.
Pat: I mean, [inaudible 00:34:55] manage this account for, what, four tenths, five tenths of a percent, and cut your tax bill in half.
Scott: Yeah, yeah, yeah.
Pat: Promise.
Ed: All right.
Pat: Promise.
Ed: That's good. I'm glad I called.
Scott: Well, I'm glad you are too. And by the way, you've done well, so...
Pat: Listen, if you did nothing...
Scott: You're still gonna be fine.
Pat: You're still gonna be fine.
Scott: That's right.
Pat: If you did nothing...
Ed: I'm not worried about outliving my money. I'm just, I'm worried about what you guys, what I called in about, is my tax bill...
Scott: Yeah, yeah.
Ed: ...is getting, is huge.
Scott: Yeah. Well, I get it. And...
Pat: You have to take a different approach than the approach that you're taking today.
Scott: And you, truly...
Pat: You could get this tax bill...
Scott: And you might choose to take some portion, some of your stocks each year, and put them in a donor-advised fund, where you can dole out to some charities in the future.
Pat: And you may actually choose to actually accelerate how you're actually giving this, the money to the children, and use up part of your unified credit.
Scott: Yeah.
Ed: Yeah.
Pat: Right?
Ed: Okay.
Pat: I mean, no one says that you can't go in and give the kids a million dollars today, because you can. It's just less money that you could pass on at your death.
Ed: [inaudible 00:36:09]
Scott: Well, hey, we're gonna take a little time to... We've got a special guest in our studio. Special to us, anyway. Victoria Bogner, who is our head of wealth planning at Allworth. And she's out.... You're out in this part of the... We're in Folsom, California. Sacramento, essentially.
Victoria: Beautiful. Kansas City's, like, 99 degrees right now.
Scott: Oh.
Victoria: So... [crosstalk 00:36:32]
Pat: [crosstalk 00:36:35] to do. No humidity, though.
Victoria: Yeah, that's true. Makes a big difference.
Pat: Yes.
Scott: Yeah. And you're gonna... You've got...we were chatting, and she has, like, and, just some good planning with a client we thought it'd be interesting for her to talk about, so...
Pat: And they bring you in... Well, you're the head of financial planning, but...
Scott: Head of wealth planning.
Pat: Wealth planning. So, more complicated.
Victoria: Right.
Pat: Like, super-complicated?
Victoria: So complicated. Yes. We see it all, let me tell you.
Pat: All right. Well, give us your educational background, just for a basis to start with.
Victoria: Sure. I've been in the business since 2005.
Pat: Okay.
Victoria: Started as a temp worker, actually. But my background is in mathematics, originally, in computer science. So, I stumbled into this career, and along the way, became a financial advisor.
Scott: You have a degree in mathematics?
Victoria: I do.
Scott: Okay.
Victoria: That's my true passion, spreadsheets. So, I got a degree. A degree in mathematics, computer science. Then I joined McDaniel Knutson Financial Partners, in Lawrence, Kansas, became a temp for them, then became an advisor. Then I became the chief investment officer because of my math background, and eventually became the CEO of the company. And in that time, I got my certified financial planner designation, my chartered financial analyst designation, and an accredited investment fiduciary designation, all over the span of 20 years.
Pat: The CFA, though, is rough.
Scott: That's a tough one. Yes.
Victoria: It is rough. We got marital counseling after that one. Three years being in the trenches. Yeah.
Pat: That is a rough...
Scott: Well...
Victoria: It's...
Pat: And then you joined us, what, three years ago?
Victoria: Two years ago.
Scott: Two years? It's only two years?
Victoria: It's only been two years.
Scott: Goodness gracious.
Victoria: I know. It feels like I've been here for 20 years.
Scott: It does.
Victoria: Just two.
Scott: [inaudible 00:38:17]
Victoria: Yeah.
Pat: Well, actually, when you joined the firm, I remember saying to you, "You're gonna love it here."
Victoria: Oh, and I do. It's fantastic. I mean, I went from working for a small boutique firm to a large boutique firm. I mean, Allworth is large, but still has that very personal feel. And I love that. I've found that that's pretty rare in our industry, too.
Scott: Oh, well...
Pat: Well, we're glad you joined us.
Victoria: Yes.
Pat: And I don't see you very often. Just kinda...
Victoria: I know. I was looking into your eyes right now.
Pat: We're no longer the CEOs of the firm. We brought in someone more experienced than ourselves, which, by the way, if you're a business owner, it's hard to do.
Scott: It's been the right thing for our clients, and the right thing for our advisors. No question.
Pat: Yes. He does such a better job than we did.
Scott: [crosstalk 00:39:03] absolutely [crosstalk 00:39:04]
Victoria: He's pretty great. Yeah.
Pat: It takes... You've gotta give up that. Anyway, back to this client story.
Victoria: Yes.
Pat: Bring us through ages, account size, complications, solutions, the whole bit.
Victoria: You got it. Okay. So, we got two clients, married couple, 62 and 60. They came to us with, you know, he worked for a company that I won't name, because then, if he's listening to this podcast, he'll be like, "Oh, yeah. That was me." But ABC Company, basically his whole career. I mean, he's one of those people that got a job at 22, and worked there for 40 years. But in that time, he participated in the employee stock purchase plan. And then he was also purchasing company stock inside his 401(k). So, they come to us. They now have a net worth of $7 million. Three million of it is an ABC stock.
Scott: Wow.
Pat: Wow.
Victoria: Yeah.
Pat: And an ESOP, and a 401(k).
Victoria: In his employee stock purchase plan, so, ESPP. So that means that he was purchasing this stock at a 15% discount. It's in a taxable...
Scott: And never sold it?
Victoria: Never sold it.
Scott: Because [crosstalk 00:40:09] you can sell it every six months or whatever [crosstalk 00:40:11]
Victoria: Never sold it. No. So he's got a lot of stock...
Scott: Wow.
Victoria: ...with a little bit of cost basis but not [crosstalk 00:40:17]
Scott: By the way, how had that stock done the last 10 years versus the broad market?
Victoria: It's not Apple, okay. I'll tell you that. But it's a good blue chip stock.
Scott: So it's done...
Victoria: So it's done pretty well.
Pat: So, total...
Scott: Has it outperformed the market?
Victoria: It's performed pretty much in line with the market, but still.
Scott: So, just the only reason I ask.
Victoria: Yeah.
Scott: It's an example of taking on more risk without being compensated for it.
Victoria: Correct. Absolutely. Because, inside of his 401(k), he's got, you know, $1.5 million of it. And then, in the employee stock purchase plan, he's got another $1.5 million of it.
Pat: Were they matching with the company stock, or was he purchasing it?
Victoria: Inside the 401(k), it was part of his contribution. So, they were matching his contribution into the 401(k). He was just choosing to allocate some of that to company stock.
Pat: Got it. Got it, got it, got it.
Victoria: Right.
Pat: Okay. And so, $7 dollars.
Victoria: Seven million dollars...
Pat: And what kind of income did this family make?
Victoria: He made about $250,000 a year, [crosstalk 00:41:13]
Pat: Wow. Easily gonna be able to replace...
Victoria: Yes.
Pat: Standard living would...
Victoria: Easily.
Pat: ...go up significantly.
Victoria: Right. So they can absolutely retire, but of course, the number one question is, and this is very common... You know, "I have so much of my net worth, 3/7 of it, in this company stock, but it's a ticking tax time bomb. Right? I can't just sell it, and then pay..."
Scott: But what about the 401(k)? Just, I mean, that's an easy one, right?
Victoria: Well, there's something special that you can do with the 401(k), if it makes sense, and in his case, it did. He had both preferred shares and common shares inside the 401(k). With the preferred shares, that's where the bulk of this was, he only had a cost basis, meaning that he actually put money in the 401(k), his own money, purchased $100,000 worth of this stock, and the preferred shares were worth about a million dollars.
Scott: Oh.
Pat: All right. So, he had $900,000...
Victoria: Of [crosstalk 00:42:09]
Scott: [crosstalk 00:42:10]
Pat: And I assume we're gonna get to what we call NUA here?
Victoria: Correct. So, what we recommended is for those preferred shares, the common shares, he had, you know, very high cost basis, so this doesn't make sense for that. But it made sense for the preferred shares. What you do is you take that million dollars, you move it into a taxable brokerage account, you move the rest of the 401(k) [crosstalk 00:42:31]
Pat: In shares.
Victoria: In shares. Yes.
Scott: And this only works if the company...actual, actual shares in the 401(k), not some sort of fund that mirrors the preferred...
Pat: Or units.
Victoria: Correct. It's gotta be the actual...
Scott: Yeah.
Pat: Or units.
Victoria: Correct.
Scott: Because you might... Others, listen, you might work for a company that you have money in the company's 401(k), in the, your company stock, but it's, you don't technically own the shares. You own some sort of [crosstalk 00:42:52]
Victoria: Right. So this is if you own the shares. So, you move those shares, in kind, to a taxable brokerage. You move the rest to an IRA. You gotta do it all in one year. You gotta empty the 401(k) in one year. You can't stagger it, but... So, you take that million dollars, you move it to a taxable brokerage, in those shares, in kind. Then what happens is, you're only taxed on the $100,000 of basis. That's ordinary income. On day one, that $900,000 of gain is long-term capital gain. Then, any growth beyond that million, that's short-term capital gain until you hit the 12-month mark. So, you've got three kinda tax buckets going on in that account at the same time.
Scott: And I...
Pat: Why wouldn't you just... I'm sorry, Scott.
Scott: I knew this at one point in time, but do you still get a full step-up basis upon death, too, with that? Is it [crosstalk 00:43:42]
Victoria: Yes, you do.
Scott: Okay.
Victoria: Yes, you do.
Pat: And, would you just hold for 12 months, and then put collars around it, use options in order to get some downside protection?
Victoria: Well, here's what we were able to do, so, to see the story through a little bit further [crosstalk 00:43:53]
Pat: Are we getting ahead of ourselves?
Victoria: You're getting a little ahead of yourself [crosstalk 00:43:55]
Pat: A little excited about this?
Scott: Well, and, net unrealized appreciation, an example like that, he doesn't have to worry about requirement of distributions anymore.
Victoria: No. That's exactly right.
Scott: He's taking something that went from ordinary income when he withdrew, to now he's got dividends taxed at favorable event, capital gains taxed at favorable event. [crosstalk 00:44:11]
Victoria: Exactly. On day one, that $900 grand's long-term capital gains, which, the top bracket for that's 20%.
Scott: Yeah.
Victoria: Ordinary income tax top bracket is 37%, as of today. So, by doing that, and, since he's retiring this year, that that will factor in in a second, we moved the IRA, or the 401(k) money, the bulk that was left, into an IRA. And then he's also got this employee stock purchase plan, with a bunch of this company stock in it, with a very low basis, right? So, what we're able to do, then, is say, all right, we wanna go ahead and minimize the amount of time you have to be glued to the earnings report of this company, because if something happens to it, you're gonna be sunk, right?
Scott: Oh. Yeah. [crosstalk 00:44:56] same thing [crosstalk 00:44:57] retire from GE.
Pat: [crosstalk 00:44:58] Enron, WorldCom, GE.
Scott: Or just Intel.
Pat: Intel.
Victoria: Yep, yep. So many different things that could happen. So, there are actually a few different strategies that we could employ, depending on how much liquidity he needs, but this is the direction we decided to go for him, because he wanted the most amount of flexibility and liquidity. So, for the money that was originally in the ESPP, okay, we put...that's in a taxable brokerage. We wanna go ahead and minimize the risk of that, right away, without having to sell it. So, how do you do that? Well, one way to do it is you can collar it. So, what that means is you're basically saying that, "I'm willing...I can participate in the gain of this stock, up to, say, a 15% cap. And after that, I'm willing to sell the future annual gains, beyond 15%, to buy some downside protection." So, let's say my comfort level is...
Scott: So, essentially, you're gonna buy some insurance on it, and the way...
Victoria: You're right.
Scott: ...the way to pay for it, you say, "Eh, if the stock just takes off like bananas, I'll forego some of that upside."
Victoria: Right. And we're not doing it with all of it. We're doing with 30% of it, right, just to take down some of the risk. So, you're basically pre-selling future growth, in order to fund downside protection. In this case...
Pat: But you could just fund downside protection, and keep all future growth.
Victoria: You could, if you want to. If you want to pay out of pocket for that downside protection.
Pat: That's right. That's right.
Victoria: A lot of folks decide, hey, let's make this a cash-neutral event, okay. So, "I don't wanna have to pay out of pocket for the protection. Let's go ahead and sell some future gain, and then we can fund the downside protection," so...
Pat: And you start the downside protection at 10% negative, 15% negative?
Victoria: Yeah. It depends on their comfort level. So, for them, it was, we'll participate in the first 10% of loss. And then after that, we're gonna be fine.
Pat: Okay.
Victoria: And the more loss you're willing to take, then the higher that upside cap is, right. So, for them, they were able to participate in the first 15% of gain every year. So, this is annually. And then, if it went gangbusters and went up 30%, okay, well, on that piece, we protected, I guess we missed out on some upside. But, for that, we're able to protect them.
Scott: You're able to pay for the capital gain, because you just had the big [inaudible 00:47:10]
Victoria: That's right. So that's another perk, is that we don't then actually sell the stock if it gets called, and this is getting a little advanced, but then we just pay for another stock option to cover that call. It's a loss. Then we get to use that loss to sell some of the stock, and write off the gain. So, it's really a great strategy. Then in the meantime, we were able to sell enough of the stock that he was still in a 0% capital gains bracket, okay?
Scott: Okay.
Victoria: So, there are lots of different income tax brackets. There's not just your income tax. There's also capital gains tax bracket. There's your IRMAA tax bracket. Social Security tax bracket, right? So you wanna make sure that all of these are working in tandem. So, especially in 2026, we can sell a lot of that stock in the 0% capital gains bracket. So, then we can take that money and kickstart what's called a direct indexing account. So, how that works is, instead of going out and buying the S&P 500 ETF, instead you put it in a direct indexing account, where you're buying all 500 individual stocks. [crosstalk 00:48:15] It's a beautiful strategy. And then...
Scott: [crosstalk 00:48:18] in this situation, right?
Victoria: Yeah.
Scott: Every situation's unique, but I know where this is going.
Victoria: But in this situation, it works.
Pat: Yeah.
Victoria: So, over the course of 2026, some of those stocks are gonna do great. Some of them are gonna be stinkers. If you hold just an index fund, then you're just along for the ride. But owning 500 individual stocks of the S&P, well then you can sell the stinkers, to realize loss, and offset the capital gain from selling some of that stock.
Scott: [crosstalk 00:48:46] the ABC stock.
Pat: And Victoria, did you carve out any part of that direct index from the industry, since he's already had a... Because you only did a collar on one-third of the portfolio in the ESPP.
Scott: Yeah, you could say I don't...
Victoria: Yeah.
Scott: ...wanna own that particular company, or I don't even want [crosstalk 00:49:02]
Pat: [crosstalk 00:40:03] whole industry.
Victoria: Correct. Yes. So...
Pat: So, you [crosstalk 00:49:05] beyond a regular direct index, you actually excluded, let's just say that it was manufacturing, you excluded that sector of manufacturing out of the index.
Victoria: Right. So, what we were able to do is say, okay, in the S&P, we obviously don't wanna own more of this particular sector, so let's carve that out, because we already are over-weighted in that. And we have that flexibility to do that. So, spot-on. Yes, that's absolutely what we did. So, then, we have this engine now, that's producing these capital losses, while you're still making the returns of the S&P 500, because you're invested in the entirety of the S&P 500. You're just manufacturing these capital losses, so you can sell this over-weighted stock.
Pat: How much more expensive is a portfolio like this versus a regular ETF?
Scott: And what's the direct indexing cost nowadays?
Victoria: So, to add this strategy is a whopping 0.4%. But the amount of tax alpha...
Scott: Just on the direct index. Yeah.
Victoria: Yeah, just on the direct index. But you're owning individual stocks, so there's no cost to that.
Pat: Yeah, correct. So that the alpha is incredible.
Victoria: Yeah. The alpha is amazing, especially in this particular situation, where, if you sell all the stock outright, then you're paying 20% capital gains tax on most of it.
Scott: That's right.
Pat: I'm trying to think of how many different techniques you used in this one client. Right? And by the way, if you retired 10 or 15 years ago, and you're like, "My advisor never talked about this," or they don't talk about it today, the reason... This is really, really advanced, and what has brought the cost down significantly is the use of technology in the portfolios.
Victoria: You're spot-on, because 10, 15 years ago, you had to be an institutional investor, or somebody with $10 million plus in net worth, to even touch some of these strategies.
Pat: And it wouldn't have been this inexpensive. It'd be much, much more expensive.
Victoria: Much more expensive.
Pat: And this is all run by algorithms.
Victoria: Mm-hmm. Yeah. That's right. Which is a lot more reliable than a human being.
Pat: And, the cost will continue to fall.
Victoria: Yeah. Yeah, so, these are strategies that are available to the everyday investor, but you need to have an advisor that knows how to put the pieces together, to maximize that tax outcome.
Scott: And understand that those pieces even exist.
Victoria: Yeah, [crosstalk 00:51:15]
Pat: So, in our firm, we have different level of advisors where they... You specialize in really complex things, right? So, they actually refer business up to you and you work in tandem with the advisor. How's it work?
Victoria: That's right. So, the advisor is still the head of the relationship. We're basically their team, right? So, they are the coach on that relationship. We are on the advisor's team. So, they can bring us in whenever they have the need to have a complex situation evaluated. Then we can do the planning. We can even present the plan to the client. But the advisor is always the head of that relationship.
Scott: Yeah. I always love hearing stuff like this. I mean, Pat, we built this company 37 years ago, and the stuff that we can do now for average investors...
Pat: It's crazy.
Scott: ...like this is so great, so...
Pat: Crazy.
Scott: Vicki, thanks for taking some time to join us.
Victoria: Absolutely.
Scott: This is all the time we've got. We'll see you again next week. Scott Hanson and Pat McClain, Allworth Financial.
Announcer: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or estate planning attorney to conduct your own due diligence.
Scott: Welcome to Allworth's Money Matters. Scott Hanson.
Pat: Pat McClain. Thanks for joining us.
Scott: You know what's funny, Pat? We've been doing the show a long time. And as I'm driving into the studio today, I'm thinking, "Oh, man. I've been doing this a long time." And I started thinking about all of the shows that eventually ended, and I thought, "But now that I'm here, I'm having a great time [crosstalk 00:00:42]"
Pat: Isn't that so much about life? Not just radio show. Work in general, some relationships, Christmas with the family.
Scott: I remember talking to my daughter. She was debating [inaudible 00:00:53] she was gonna go to some event. It was a church youth group thing. "I don't know if I wanna go tonight. Should I go, dad? Should I not go? I don't know if I wanna go." And I said, "When was the last time that you decided, that you went, you were going through this, and you went, and you regretted going?"
Pat: And she said?
Scott: "I can't think of any." So, well, then maybe you should go.
Pat: Isn't that perfect.
Scott: You'll see all your friends. It's a good, wholesome atmosphere...
Pat: Yes.
Scott: ...and all that kind of stuff.
Pat: It's kind of the same way I... Work, gym, [inaudible 00:01:20] Most of life. So, Scott...
Scott: Anyway, we're financial advisors. That's what we're gonna talk about, not our daughters or our gym life.
Pat: Yes. So... Well, I did wanna talk about the markets. Just reflecting on the year.
Scott: It's that... I mean, so, [crosstalk 00:01:41]
Pat: We're up at, what...
Scott: Roughly 10%, almost 10% [crosstalk 00:01:44]
Pat: Almost 10%
Scott: on the S&P 500.
Pat: Five percent, a little bit over 5% over its last high.
Scott: Phenomenal.
Pat: Up, what 25%, [crosstalk 00:01:57] 29% from its low?
Scott: That's based... And that's after two great years.
Pat: Yes. Yes. So, if you would have started January and looked at a chart, just a chart, you would have said, "Oh, well, clearly. 2025's not gonna be a good year." And maybe it won't be a good year by the time we finish.
Pat: We don't know. We're... We don't know.
Scott: We're in August still.
Pat: Right? So, I was reflecting... So, if you're like, "Oh, it's up 10% for the year," and you're like, "Yeah, it's pretty good." But, it's up almost 30% from its low. Twenty-eight, somewhere around there?
Scott: It's most recent low.
Pat: It's most recent low. Thank you.
Scott: It's up 99.9% from its real low.
Pat: Okay, okay. Okay. Everything is time-based, right? The effective tariff rates on import, highest they've been since the 1930s. Right? That's the effective tariff. No one...
Scott: That's amazing, isn't it?
Pat: It [inaudible 00:03:00]
Scott: It is starting to come... It is working its way through.
Pat: Oh, it will work its way through.
Scott: Yeah, for sure.
Pat: But it could change in minutes. Truly, in minutes.
Scott: What, no, Trump is so predictable. What do you mean?
Pat: It just... The biggest companies out there, their S&P 500, largest companies in the S&P 500, they feel like they're a little bit insulated from...
Scott: But [inaudible 00:03:28] you look at the earnings growth, Pat.
Pat: That's right.
Scott: People are expecting Q2 to be about 5% for the broad stock market.
Pat: Yep.
Scott: We're coming in north of 10%, like 12%.
Pat: This quarter, more than 40% of companies in the S&P 500 index raised their earnings estimate. Forty percent. In the first quarter this year, 17% raised. And so, what, all that is is the company actually giving guidance [crosstalk 00:03:53]
Scott: They always sandbag a little.
Pat: Really?
Scott: Right?
Pat Yes.
Scott: I mean, you think you're gonna earn $100 million, where you're like, "Mm, let's say we think we're gonna earn $92 million, and that way, if we do better...
Pat: We look great.
Scott: "...we get rewarded, as opposed to being punished.
Pat: Yes. So, at the end of the first quarter, 17% of companies raised their expectation. The end of this last quarter, 40%. And it's hard to point to... The retailers and restaurants are really struggling with the tariff situation, but...
Scott: Certain industries are, for sure.
Pat: Most certainly. But the implementation of AI is really, really actually taking place.
Scott: Well, it's, what's fascinating, Pat, you look at, so, like, Nvidia, and the companies, some of these companies that call themselves AI companies, you look at the market caps of these things, right? Then you look at these pay packages that...
Pat: They're paying these...
Scott: ...these hot-shot engineers are getting paid to come work for Mark Zuckerberg or whomever. I, like, it's kinda crazy money. But it's all gonna have to trickle down into more productivity and more profits for the companies that are paying for the services, right?
Pat: That's right.
Scott: Because you're not gonna pay for a technology unless it's gonna give you a return. No matter how cool the technology is, if it can't give you a return, you're not gonna bother spending the money as a business.
Pat: That's right. That's right.
Scott: So, all the businesses just...
Pat: But, it just, it's...
Scott: I mean, the bet is that the pull-through on this is going to be substantial.
Pat: And then you think, "Well, is this the dot com all over again?"
Scott: [inaudible 00:05:36] it...
Pat: Doesn't feel...
Scott: There might be some companies priced that way, but...
Pat: Yeah, where they're...
Scott: But even the dot com was transformational. Look how we...
Pat: It was.
Scott: Look how we buy and sell.
Pat: Yeah.
Scott: I mean, just, my oldest daughter was thinking of moving, she's in Denver, thinking about moving back to Truckee. We met with a real estate agent not too long ago, in his office. And, kinda curious about different neighborhoods, all on a screen there, different neighborhoods, all [crosstalk 00:06:04]
Pat: [crosstalk 00:06:04] get in a car?
Scott: No.
Pat: [crosstalk 00:06:06]
Scott: No. No. And then it's, well, then it's... "So, in this [inaudible 00:06:09] then here's the houses that are available. Here's the ones that had sold before." And in an hour, what we accomplished in an hour, sitting in the office, looking at a big screen, would have taken us a few days 25 years ago.
Pat: Yeah. At least for the initial screen.
Scott: And that's not even AI-induced, some of this.
Pat: [inaudible 00:06:24] It's interesting. I just... I was just reflecting this morning on it, and I just thought this is... And then I just remind myself, this stuff happens all the time. I just forget about it.
Scott: [crosstalk 00:06:41]
Pat: Then the market's just, like, the beginning of COVID, how quickly the market fell and how quickly it recovered.
Scott: Well, it's been an amazing time, because our downturns have been so short-lived.
Pat: Right? And what do you think...is it...what do you think's...is it by the dips, that the investing public is just...
Scott: Well, if you think of the last two major downturns, right? So, the dot com, what we had there was over-hyped companies that, there was no there there. It was all hype. They had a web presence, dot com, they hardly had any employees, they had no revenue, they had no real business model.
Pat: And then it hyped up the rest of the market.
Scott: And there were mutual funds, that was still a big mutual fund day, where grandma in Kansas City would put money into a mutual fund. Essentially, it was a wealth transfer from individual savers to some of these dot com creators. When that blew over, that created a big downturn. Add 9/11 on top of that.
Pat: Okay.
Scott: Because that was about halfway through, is then suddenly we had 9/11. So there were some real headwinds. And same thing with the financial crisis. That was...
Pat: That was real. I mean, that wasn't an emotional reaction to something that was going on.
Scott: No, no, no, no. There were millions of homeowners that had mortgages that became worth more than their homes.
Pat: Oftentimes from the day they purchased them.
Scott: That's... Okay. But it created this downward... And so, we've not had anything quite like that. We had COVID, but that was short-lived. Government stimulus kinda helped bridge that gap. We knew we weren't gonna all die from the virus, so once that was clear, things rallied back up. And then this tariff thing, I think people realized pretty quickly that whether you like the tariffs or not, and the way it's being implemented, it's not gonna blow up the economy. And you could always reverse them.
Pat: Yes. You can pull them back.
Scott: Things get slow, you can reverse them. It's not like the housing crisis that's in a free-for-all.
Pat: Yes.
Scott: So, I think that's... Until we have some structural issue...
Pat: The markets, there'll be buybacks.
Scott: I think they'll [crosstalk 00:08:50] my guess.
Pat: These were, like, emotional reactions to the marketplace.
Scott: But as soon as I start to believe I have some idea what's gonna happen in the future...
Pat: Yes.
Scott: As I was talking to this...
Pat: You'll become a terrible investor.
Scott: ...real estate agent a couple days ago...
Pat: He told you...
Scott: Well, no. Where, "We'll see interest rates next year..." and he said...
Pat: He said that to you, where they're gonna go?
Scott: And I stopped and I looked at him. I said, "You know where interest rates are headed?"
Pat: What did he say?
Scott: He kinda... Because I almost said, "Because if that's the case, if I knew where interest rates are going, show us the biggest house here."
Pat: Why are we stopping? Let's look at the $50 million houses.
Scott: Right.
Pat: If we [inaudible 00:09:30] Did he have interest rates going down?
Scott: Of course.
Pat: Oh. That's interesting.
Scott: They're gonna be... If you need a loan, you could be able to refinance in a few months for less. It's [inaudible 00:09:43] by the way, when someone tells you the interest rates are gonna go up or gonna go down, it's no different than someone telling you where the stock market's gonna be in 6 or 12 months.
Pat: Oh. This guy was pitching me a real estate portfolio, a friend of a friend, was, like, trying to tell me, okay, he's buying all these houses in Idaho. He said, "Yeah, we're gonna refinance these homes in three years at 4%."
Scott: That's their business model?
Pat: I said, yeah, yeah, yeah.
Scott: What if the interest rates are 10% then?
Pat: Scott, it can't be.
Scott: You realize, interest rate, like, mortgage interest rates, if you go back 50 years...
Pat: They're historically still low. Yeah. But any time that they throw out these projections...
Scott: Because I remember my first home. We bought a home in 1992. I believe it was 7.75%, if I'm not mistaken.
Pat: Mine was north of 9%, my first home. Yeah.
Scott: Couple years before I did. Yeah.
Pat: Yeah, yeah.
Scott: And that's when the rates were coming... [crosstalk 00:10:34] Anyway, why are we talking about our homes...home mortgages [inaudible 00:10:37] [crosstalk 00:10:38] But the thing about, I think the thing to always remember about the markets, like, you cannot predict the future. And just because things feel great right now, nasty times are gonna come.
Pat: That's right.
Scott: And we don't know when.
Pat: Whether you're Democrat or Republican.
Scott: That's right.
Pat: Whether you're guy's in office or not in office.
Scott: That's right. Something bad's gonna happen. Markets are gonna go down.
Pat: And then the U.S. economy is gonna take a hit, and then everyone's gonna be...
Scott: And it's different this time.
Pat: ...a reset, a little bit, and then smart people are gonna figure out how to go back and make money.
Scott: And the market's gonna recover, again.
Pat: Again.
Scott: And we'll hit new highs.
Pat: Again.
Scott: The Dow Jones Industrial Average is, what, roughly 45,000? When I started in the industry, 1990, July of 1990, it was roughly 2600.
Pat: Yeah. It's a lot. It's increased quite a bit.
Scott: It's increased [crosstalk 00:11:34]
Pat: Yeah. You joined the industry in, what...
Scott: Phenomenal.
Pat: ...1920?
Scott: 1990. July of 1990.
Pat: There you go. Good reminder.
Scott: Was it August? July of 1990.
Pat: You crawled a wall of worry, is what they call it in investing.
Scott: Yeah. Well, all right. Let's, why don't we go...
Pat: [crosstalk 00:11:48] calls.
Scott: Yeah. Let's take... And if you wanna join us, you can send us an email, questions@moneymatters.com. By the way, we like taking calls. And if you've got a decent question, we'll take your call. It's not like we vet out 100 calls for every one we take. If it's a good question, there's a high probability...
Pat: If we were vetting, you'd think we'd have much better calls.
Scott: Well, we might...wait till you get this next one. Because we're talking with David. David, you're with Allworth's "Money Matters."
David: Hey, gentlemen. How you doing today?
Scott: We're doing outstanding. How can we be of help?
David: Perfect. Well, I got a two-parter for you.
Scott: Okay.
David: Two-parter. First one is, how are we doing so far? And then the second one is, where do we go from here?
Pat: All right. Give us a breakdown.
David: Yeah. So, I'm 36, married. We have four kids.
Scott: By the way, you're doing well. The fact that you're 36, listening to a financial program, and calling for advice, that tells me you're doing well. So, you're 36, married, and four kids?
David: Four kids, yeah.
Pat: Okay.
David: We got started young. Yeah. So, I work full-time in professional industry. My wife is a part-time engineering consultant. Together, we bring in about $200,000. About $170,000 is me, $30,000 for my wife, primary caregiver, of course, in the home. We've got a house that...
Scott: Is she employed somewhere, or is she self-employed? Is she a contractor of sorts?
David: Self-employed contractor.
Pat: Okay.
David: Yep. We have a house. We've got about $215,000 left on that, about 10 years on the mortgage left, and it's worth maybe $800,000. We have about $500,000 [crosstalk 00:13:31]
Pat: Interest rate is what?
Scott: How old's your oldest kid?
David: Oldest kid is 12, and interest rate, 2.25%
Pat: Okay. All right. Thanks.
David: Yep. For savings, we've got $530,000 in retirement. Most of that's 401(k). I have a little bit, like, $15,000, in a Roth IRA. And then we've got some cash in checking, some cash in emergency fund, and that's kinda the snapshot so far.
Pat: How much life insurance do you have on yourself?
David: I've got a million. And it was a 20-year policy we did maybe 5 years ago, and I think we have about $500,000 on my wife.
Pat: I'd double it on both of you.
Scott: Yeah. I don't know if I...
Pat: I'd double it on both.
Scott: Yeah, you would need, your kids, you would need people to drive your kids around and everything else, should something happen to your wife, so... And it's so inexpensive.
Pat: Yeah, I'd double it. Double it.
David: [crosstalk 00:14:23] yeah. Okay.
Pat: And how old's your youngest?
David: Five.
Pat: I would double it, and I'd probably buy a...
David: Ten, 15?
Pat: Yeah. That's an actually...
Scott: Yeah, I'd look at a...
Pat: I'd probably buy a 15-year level term.
Scott: Yeah. That gets your 5-year-old to 20.
Pat: Yeah. I'd buy a 15-year-old level term. 15-year level term.
Scott: And you're gonna, by the way, in 15, but, and your financial situation's... You're, look, you're in phenomenally good shape here. Right? Right, you've been out of the...you've been in the workforce... Did you graduate college in '22, '23, somewhere in there, right? So, 12, 13, 14 years you've been working. You're married. You guys have four children. Your home is almost paid for, relative to the value of the house. You've got half a million dollars in savings. You've got no debt. You've got emergency reserves.
Pat: I'd buy a disability policy as well.
Scott: What do you have offered through your employer?
David: I'd have to check it out. I've never really considered it. I'm sure we have something.
Pat: You wanna buy as much as they sell you through your employer.
Scott: Because it's cheap through the employer.
Pat: It's very expensive in the private and public markets, but you should buy as much as...
Scott: My next door neighbor is a surgeon.
Pat: Yeah?
Scott: Fully disabled. He's 40... I mean, he can't do his surgeon... He can't... He has had a neck, something in his neck. Can't operate. Can't... Had to quit being a surgeon.
Pat: He's still a doctor, though.
Scott: Yeah. He's got five kids.
Pat: Wow.
Scott: Had some good disability insurance. And he's trying to figure out his next chapter and all that stuff, but...
Pat: Yeah, because it...
Scott: Yeah, it happens. I mean...
Pat: It happens.
Scott: Yeah.
Pat: Yeah. So, you wanna buy as much disability as they will sell you through your employer. And then I would... Even if it, as long as it covers 75%. Anything less than that, I would actually consider going to the market. You're giving me a look, Scott.
Scott: No, I'm thinking.
Pat: Okay.
Scott: Yeah. I mean, I did at this age, when I was that age.
Pat: Oh, yeah. A lot.
Scott: Yeah. I did as well, at that age.
David: Okay.
Pat: Yeah.
David: That's great. [crosstalk 00:16:33]
Pat: All right. And then, so, double the term life insurance.
Scott: And if you end up with some disability, get something with a really long waiting period. You don't care about it at six month or a year... I mean, you know, that's not financially devastating, a six-month or a year disability.
Pat: Yeah.
Scott: A lifetime disability is disastrous.
Pat: Yeah. You want, like, at least a year waiting period, and then lifetime coverage.
David: Okay.
Pat: Okay. And then...
Scott: How much are you saving?
David: A month? I'm putting away about 8% of my salary, and there's a pretty fair matching program [crosstalk 00:17:06]
Pat: You were putting a lot more away at one point in time.
David: Well, so, there's... I was putting 10% to 12%. We paused that a little bit for starting kids' college funds, and some other things.
Scott: Well, what do you have in the college funds?
David: About $60,000 between all the kids. And we're doing about a hundred bucks a month for each of them.
Pat: Okay.
David: So, what's going into the 401(k) is, like, about $2,000 a month, so that's [crosstalk 00:17:37]
Pat: Can you afford to put a little bit more into the 401(k)?
David: I think so. And I guess this kinda gets into my next question, the second part, the where do we go from here. And the big context behind that is, actually contemplating a career move. I've been teaching part-time, so that's where a lot of the, some of the extra cash comes from, that we can put away for saving, for kids' college and other things. And this career move would actually take me full-time into teaching at the university level. I've been doing that part-time for about six years.
Scott: And what's it mean for your pay?
David: Pretty significant cut.
Pat: How big?
David: So, we're... Well, for me, about half. So, but I need to pick up some part-time work in industry, through the summers and through the school year, and then my wife's getting to a point where she can take on more work, so it's, you know, mine cuts in half, but we're gonna try to build up from there, now that the kids are a little bit older, in school, and...
Pat: What type of university would it be?
David: Be at Cal State. CSU.
Pat: Okay.
Scott: And would you get a pension?
Pat: He would.
David: I would. Yeah, there'd be a defined benefit plan.
Pat: Yeah.
David: So, you know, let's assume that I work for the next 26, 27 years there. I'd be 62 or so, and be eligible [crosstalk 00:18:50]
Scott: I mean, you've got a really...you're in a good place right now, right?
David: Yeah.
Scott: It's not like you're starting out with zero and four kids. You don't have a ton saved for retirement, but you've got a, I mean, it's a decent amount for a 36-year-old. Life's about the journey.
Pat: Well, you would be able to take up contract work. Have you talked to your existing employer?
David: I could talk to them. And I also have quite a few industry contacts that I think would be willing to [crosstalk 00:19:22]
Scott: I gotta tell you, I've... Look, I can't tell you how many people I've talked to... Pat, and you have as well. They're early 50s, mid-50s, and they come in and they say, "Pat, I hate my job. How many more years do I have to do this before I can retire?" Right? You've heard that...
Pat: Yeah. Yeah. Yeah.
Scott: ...hundreds of times.
Pat: If you were my son, I would...this is what I would tell you: Figure out how to make it work.
Scott: Yeah. I would too.
Pat: First of all, that advice I gave you about the disability policy, the university has a great disability policy.
Scott: That's right. You don't need to worry about it. And they might have...
Pat: And the great life insurance as well.
Scott: That's right.
Pat: Right?
David: Yeah.
Pat: My guess is that the health insurance is probably better than what you're getting through your existing employer.
Scott: You'll make it work anyway.
Pat: You'll make it work.
Scott: At least you have the financial discipline.
Pat: Yes.
David: Yeah. Yeah. I think we're gonna make it work, and we're gonna figure out how much we need to make, so the big question is, with the...obviously, we have to continue to contribute, so is it just, we max out our IRAs, and...?
Pat: David, you're gonna hire an advisor. They're gonna tell you exactly, exactly what to do. And they're gonna model this...
Scott: And you might say, for the next 18 months, the next 2 years, you got a 5-year-old, right? I don't think the kid's in full-time school yet. Is he? She? [crosstalk 00:20:45]
David: Yeah. Kindergarten.
Scott: Okay.
David: Yeah.
Scott: Full-time?
David: Yeah.
Scott: Okay. So, you just hit that point?
David: Yes.
Scott: You're talking about your wife being able to work more, because you got kids in school full-time. But if it means that you pause retirement saving for a year or so, so be it.
Pat: David, look, if you were my son, right, you're a little bit older than my oldest, I would hire a financial advisor for you, and make you actually go to a Zoom meeting. Make you. Ask you nicely, to go to a Zoom meeting, to figure out how it works. Because what they'll be able to do is give you some clarity on how much income you need to make up so that you're not out there thinking, "Oh, I need to land every contract."
Scott: That's right.
Pat: And, they'll give you clarity about what your retirement will look like when you're at 60 or 65.
Scott: Well, and if you're a professor, I mean, you might [inaudible 00:21:39]
Pat: I have a friend I spent a couple weeks with, ago, I spent the weekend with him, a friend from high school. And I just remember... He's a college professor, and he always told us when he was in high school he wanted to be a college professor because it was the only job he could think of where he didn't have to get up before 10 a.m.
Scott: He's still teaching?
Pat: He loves it. Loves it. He's 62.
Scott: Yeah.
Pat: Pay for advice. I'll tell you what. I'm gonna have someone... I'm gonna do this. I'm gonna do this for free, Scott. I just... Listen, right?
Scott: We've got your contact [crosstalk 00:22:18]
Pat: We got your contact. I'm gonna have someone call you, and they'll walk you through a free financial plan.
David: Hey, that'd be awesome, guys. Really appreciate that.
Pat: This is... The anticipation is because, like, how do I take care of my family and make this leap, right?
Scott: Of course.
Pat: Which is really scary.
Scott: He's got four kids. They play sports and all that stuff, and it's gonna...
Pat: Yeah. The better visibility that you have into what the future looks like, the better you'll do. Yeah.
Scott: And not being so stressed, like, "Oh, I better go find another little contract to make some more side money."
Pat: Yeah. Yeah.
Scott: And maybe you'll be at a point saying, I'm just gonna do the...see how I make myself more valuable at Cal State.
Pat: Who knows?
David: Yeah.
Pat: You're 36.
Scott: I think it's cool.
Pat: Are you an engineering... What kind of a professor will you be? Will it be engineering?
David: Yeah. Engineering construction. Just kind of a crossover.
Pat: There we go.
David: Yep. Yep.
Pat: Good for you.
Scott: Yeah.
Pat: Seriously.
David: Well, thanks, guys. Really appreciate it.
Scott: All right, David. You know what's interesting, Pat.
Pat: Good for you. Keep it up.
Scott: My favorite kind of [inaudible 00:23:17] literally, my favorite...
Pat: By the way, if... I'm sorry, Scott. Let me give this disclaimer. Don't call the show looking for a free financial plan.
Scott: My favorite kind of planning is working with someone mid-career, whether they're this young, or older, that is trying to say, how do I do something that I really love to do, with less money, and still have financial independence?
Pat: Yeah. And he's teaching on the side, so he knows what it's like.
Scott: Because, I mean, we're financial guys, right? Wealth managers, financial advisors, call us whatever you want. But it's not necessarily about the highest dollar amount. Obviously, that's not, what life's not about. For most people. Oh, I did read a... I think it was last week, there was an opinion piece in "The Wall Street Journal" about this... And I agree with the headlines. It was pretty much, "Forget work-life balance in your 20s."
Pat: Oh, yeah. I read that article.
Scott: Right? And I kind of agree with it. You've gotta figure your career out.
Pat: Yes.
Scott: But then the more I read it, he limited his relationships, how many people in his life, and he was hoping to be a billionaire, and then once he had the billion dollars, he was gonna change, and start saving the world or something.
Pat: I read the article. He seemed a little unhinged.
Scott: I didn't agree with it at all, but...after I read the thing, but [crosstalk 00:24:32]
Pat: He hired someone that would... Anything that was less valuable than his time through his employer, he had someone else do for him. Like, what's the humanity? What's the...
Scott: His goal was to accumulate a billion dollars. Maybe he will, maybe he won't. For most people, what's the point?
Pat: What do you think the chances of accumulating a billion dollars?
Scott: How many billionaires are there in the world? Couple hundred?
Pat: Not a lot.
Scott: So, there's...
Pat: And don't forget, hard work, and there is a...
Scott: Luck.
Pat: There is luck.
Scott: There's a lot of luck, too. Come on.
Pat: There's luck.
Scott: Of course, there's a lot of luck.
Pat: There's luck.
Scott: Yeah. For sure. Anyway. But there are a lot of people in their 50s that hate their job, that don't have quite the financial independence to just call it quits. But there are times, instead of hating your job and quitting at age 60, go do something you love to do, and work till 65 or 70.
Pat: Yeah.
Scott: Yeah. Anyway.
Pat: [inaudible 00:25:32]
Scott: Let's continue on here. We're gonna talk with Ed, in Philadelphia. Ed, you're with Allworth's "Money Matters."
Ed: Yes. Thanks for letting me call in.
Scott: Thank you.
Ed: I have a question for you guys. I am retired. I got, I believe, more money than I need for retirement. And most of my income from retirement is in dividends. My question for you two is, I have a lot of money, I believe a lot of money, sitting in my checking account at the end of the year. And for the last 30 years, I've been reinvesting most of that back into the dividend-paying stocks, and my tax bill's getting pretty big.
Pat: How old are you, Ed?
Ed: I'm 63.
Pat: Are you married?
Ed: Yes.
Scott: And how much do you have in stock...what's your stock portfolio value, that are paying these dividends?
Ed: Just under $9 million.
Pat: And you only have $500,000 in your IRA.
Ed: Yes.
Pat: And why dividend stocks? Just out of curiosity.
Ed: I've been infatuated with dividends ever since I was, like, a teenager.
Scott: It's worked for you, right? So...
Ed: I've been, like... Oh, they have. They have.
Scott: Yeah, yeah. Not gonna try to get you changed on that one. It's clearly worked for you.
Pat: And what's the problem?
Scott: Yeah.
Ed: My problem is is at the end of the year, when I'm done paying all bills and the taxes and everything, I still have a lot of money, I believe too much money, sitting in my checking account. And for the last 40-some years, I've been taking a lot of what's left over at the end of the year and putting it back into the dividends that I...to reinvest into the dividends, but my tax bill now is getting to be pretty big.
Pat: Well, if I gave you a solution, you're not gonna like it.
Ed: Okay.
Pat: I'm gonna tell you that you should quit buying dividend-paying stocks.
Ed: And do what? Just leave the [crosstalk 00:27:45]
Scott: How about buy some stocks that don't pay dividends? Stocks that don't...
Pat: Buy some growth stocks. Some growth stocks.
Scott: My guess is that your portfolio is highly tilted towards value companies. You could just buy an index.
Pat: You're not managing this portfolio in a tax-efficient manner.
Scott: No, not at all.
Pat: Not even... There's been no attention paid to the tax efficiency of your portfolio. None. Because, I would make the argument that you should have 50% of your portfolio in non-dividend-paying stocks. And the reason behind that is, obviously, for current taxations, also because, at death, appreciated assets, under current law, receive a full step-up in basis.
Scott: So you can avoid the tax.
Pat: Completely.
Ed: Okay.
Pat: So, I appreciate the fact that you've got, that this investment philosophy has worked for you. It would have worked for you had the portfolio been growth stocks as well. In fact, it would have worked better.
Scott: How much do you have in the...how much you have in cash?
Ed: Right now... Excuse me. Right now, I got about $90,000.
Pat: Ah, well, that's not bad.
Scott: No.
Pat: Have you started gifting? Do you have children?
Ed: Yes.
Pat: Have you started gifting to them?
Ed: Yes.
Pat: And, the maximum amount?
Scott: Do you give them stocks?
Ed: I give them money right out of my checking account.
Pat: Are they in a lower tax bracket than you?
Ed: Yes.
Pat: Why not give them stocks?
Scott: I'd give them stocks.
Ed: Never thought about that. Okay.
Pat: Well, [crosstalk 00:29:25] you did call a financial show to get an idea of something that you're not doing. Right? So, what happens...
Ed: Yes.
Pat: Here's the reality. If you came into our office today, we would look at this portfolio, and the first thing we'd do is we'd look at the allocation. My guess is, as Scott's is, it's mostly [crosstalk 00:29:45]
Scott: Highly allocated towards value stocks [crosstalk 00:29:46]
Pat: ...value. And large cap value, would be my guess. Large cap value. So, we'd look at the portfolio, and the first thing we'd do is say, okay, where are the risk in the asset allocation itself? Well, you know, if I had a square with nine different squares inside of it, yours would be mostly concentrated in the top-left hand. We'd say, let's try to actually mimic more of what the market is, which is growth, mid cap, small cap. Then, after we said, okay, this is really how it should look, how can we build this so it's as tax-efficient as possible? So, the...
Scott: And using a...I'd use a direct index on technology on this.
Pat: That's right.
Scott: You build a synthetic index, then, and it's managed for tax, you do some tax loss harvesting.
Pat: That's right. And so, what happens is that... And by the way, if some of these terms are new to the listeners, or yourself, it's because they weren't around 10 years ago.
Scott: Three years ago.
Pat: And the reason they weren't around was is the cost of friction, which is the cost of trading, was oftentimes more expensive...
Scott: Yeah. Now, it's [crosstalk 00:30:57]
Pat: It costs nothing. So, what we call friction was the cost of buying and selling. And the other thing is that we use technology today that didn't exist five years ago. Certainly didn't exist 10 years ago. We use that to actually manage portfolios. So, technology, in the investment advisory world, has changed. It brings...it's the democratization of investments, by the use of technology. It brings private office-type services to the middle class, or the high net worth, which you would be. You wouldn't be ultra high net worth, but you'd be considered a high-net-worth client. So, what you're doing, and you're probably doing all of this yourself, correct?
Ed: Correct.
Pat: And you probably don't want to turn this on to anyone else. My advice to you is, you're missing out on technologies...
Scott: Oh, not only that. I mean... So, we've mentioned one idea. You're gifting your children. That's an easy one. Just give stocks now, appreciated ones. They're in a lower tax bracket. They could probably have, if they plan it right, they have no capital gains when they sell it. But you also might say, maybe we take some portion of this and use a charitable remainder trust, and get a nice, big tax deduction from that, [crosstalk 00:32:23] today, with a guaranteed income tomorrow. And we can do, as we do that, the tax deduction, we can turn around and sell some of the existing stocks that we have now, encourage the capital gain, I mean...
Pat: Incur.
Scott: ...realize the capital gain, but have them wash out each other. And then we can invest in something that's much more tax-efficient. There's a... You got a lot of options here in front of you, but it would mean moving a little bit away from having 100%
Pat: Large cap value.
Scott: Yeah, large cap value, which, what you're invested in.
Ed: And I do have a lot of growth stocks in the IRA.
Pat: Which, by the way, is exactly opposite.
Ed: Mm?
Pat: You've got it completely [crosstalk 00:33:06]
Scott: Opposite.
Pat: You've got it completely wrong. Like, if I said, "Let's make this tax-efficient," I'm like, "Let's call Ed." Or "Let's lose tax efficiency in this portfolio. Let's call Ed." Because your growth stocks should be in the IRA, and the dividend...
Scott: Meaning, your dividends should be in the IRA.
Pat: Excuse me. The dividends should be in the IRA, and the growth stocks should be in the brokerage account.
Scott: And I think it got... Look, Ed, you've done a great job. You've...
Pat: A great saver.
Scott: Good saver. This has worked for you, right?
Ed: [crosstalk 00:33:38]
Scott: But it's at a point now, now you've created a new problem for yourself, and it's the taxation of this, right? Because you've got, what, four... You probably got, I don't...depending on what kind of dividend stocks, you might have $400,000 coming in, that you have to pay taxes on each year, in dividends, right?
Ed: Little bit more. Yeah. Little bit more than that.
Scott: Okay.
Ed: Yeah.
Pat: Which tells us it's even worse than we suspected, in terms of large cap value. Right?
Ed: [crosstalk 00:34:09]
Scott: And... Here's what I would do. You're my brother. I'd say, "Hey, Ed, go interview two qualified financial advisors, certified financial planners. Give them [inaudible 00:34:21] go meet with two different ones, and just hear what they have to say. Hear about their ideas. And if one resonates with you, [inaudible 00:34:31] just say, look, "Let's, why don't you do a financial plan," pay for them to do a financial plan, that they can come up with all these strategies, to show you the impact it could have on you financially.
Pat: The money you would actually save in taxation would more than pay for the cost of professional asset management on this account.
Ed: Okay.
Pat: That's a promise.
Scott: Oh yeah, for sure.
Pat: I mean, [inaudible 00:34:55] manage this account for, what, four tenths, five tenths of a percent, and cut your tax bill in half.
Scott: Yeah, yeah, yeah.
Pat: Promise.
Ed: All right.
Pat: Promise.
Ed: That's good. I'm glad I called.
Scott: Well, I'm glad you are too. And by the way, you've done well, so...
Pat: Listen, if you did nothing...
Scott: You're still gonna be fine.
Pat: You're still gonna be fine.
Scott: That's right.
Pat: If you did nothing...
Ed: I'm not worried about outliving my money. I'm just, I'm worried about what you guys, what I called in about, is my tax bill...
Scott: Yeah, yeah.
Ed: ...is getting, is huge.
Scott: Yeah. Well, I get it. And...
Pat: You have to take a different approach than the approach that you're taking today.
Scott: And you, truly...
Pat: You could get this tax bill...
Scott: And you might choose to take some portion, some of your stocks each year, and put them in a donor-advised fund, where you can dole out to some charities in the future.
Pat: And you may actually choose to actually accelerate how you're actually giving this, the money to the children, and use up part of your unified credit.
Scott: Yeah.
Ed: Yeah.
Pat: Right?
Ed: Okay.
Pat: I mean, no one says that you can't go in and give the kids a million dollars today, because you can. It's just less money that you could pass on at your death.
Ed: [inaudible 00:36:09]
Scott: Well, hey, we're gonna take a little time to... We've got a special guest in our studio. Special to us, anyway. Victoria Bogner, who is our head of wealth planning at Allworth. And she's out.... You're out in this part of the... We're in Folsom, California. Sacramento, essentially.
Victoria: Beautiful. Kansas City's, like, 99 degrees right now.
Scott: Oh.
Victoria: So... [crosstalk 00:36:32]
Pat: [crosstalk 00:36:35] to do. No humidity, though.
Victoria: Yeah, that's true. Makes a big difference.
Pat: Yes.
Scott: Yeah. And you're gonna... You've got...we were chatting, and she has, like, and, just some good planning with a client we thought it'd be interesting for her to talk about, so...
Pat: And they bring you in... Well, you're the head of financial planning, but...
Scott: Head of wealth planning.
Pat: Wealth planning. So, more complicated.
Victoria: Right.
Pat: Like, super-complicated?
Victoria: So complicated. Yes. We see it all, let me tell you.
Pat: All right. Well, give us your educational background, just for a basis to start with.
Victoria: Sure. I've been in the business since 2005.
Pat: Okay.
Victoria: Started as a temp worker, actually. But my background is in mathematics, originally, in computer science. So, I stumbled into this career, and along the way, became a financial advisor.
Scott: You have a degree in mathematics?
Victoria: I do.
Scott: Okay.
Victoria: That's my true passion, spreadsheets. So, I got a degree. A degree in mathematics, computer science. Then I joined McDaniel Knutson Financial Partners, in Lawrence, Kansas, became a temp for them, then became an advisor. Then I became the chief investment officer because of my math background, and eventually became the CEO of the company. And in that time, I got my certified financial planner designation, my chartered financial analyst designation, and an accredited investment fiduciary designation, all over the span of 20 years.
Pat: The CFA, though, is rough.
Scott: That's a tough one. Yes.
Victoria: It is rough. We got marital counseling after that one. Three years being in the trenches. Yeah.
Pat: That is a rough...
Scott: Well...
Victoria: It's...
Pat: And then you joined us, what, three years ago?
Victoria: Two years ago.
Scott: Two years? It's only two years?
Victoria: It's only been two years.
Scott: Goodness gracious.
Victoria: I know. It feels like I've been here for 20 years.
Scott: It does.
Victoria: Just two.
Scott: [inaudible 00:38:17]
Victoria: Yeah.
Pat: Well, actually, when you joined the firm, I remember saying to you, "You're gonna love it here."
Victoria: Oh, and I do. It's fantastic. I mean, I went from working for a small boutique firm to a large boutique firm. I mean, Allworth is large, but still has that very personal feel. And I love that. I've found that that's pretty rare in our industry, too.
Scott: Oh, well...
Pat: Well, we're glad you joined us.
Victoria: Yes.
Pat: And I don't see you very often. Just kinda...
Victoria: I know. I was looking into your eyes right now.
Pat: We're no longer the CEOs of the firm. We brought in someone more experienced than ourselves, which, by the way, if you're a business owner, it's hard to do.
Scott: It's been the right thing for our clients, and the right thing for our advisors. No question.
Pat: Yes. He does such a better job than we did.
Scott: [crosstalk 00:39:03] absolutely [crosstalk 00:39:04]
Victoria: He's pretty great. Yeah.
Pat: It takes... You've gotta give up that. Anyway, back to this client story.
Victoria: Yes.
Pat: Bring us through ages, account size, complications, solutions, the whole bit.
Victoria: You got it. Okay. So, we got two clients, married couple, 62 and 60. They came to us with, you know, he worked for a company that I won't name, because then, if he's listening to this podcast, he'll be like, "Oh, yeah. That was me." But ABC Company, basically his whole career. I mean, he's one of those people that got a job at 22, and worked there for 40 years. But in that time, he participated in the employee stock purchase plan. And then he was also purchasing company stock inside his 401(k). So, they come to us. They now have a net worth of $7 million. Three million of it is an ABC stock.
Scott: Wow.
Pat: Wow.
Victoria: Yeah.
Pat: And an ESOP, and a 401(k).
Victoria: In his employee stock purchase plan, so, ESPP. So that means that he was purchasing this stock at a 15% discount. It's in a taxable...
Scott: And never sold it?
Victoria: Never sold it.
Scott: Because [crosstalk 00:40:09] you can sell it every six months or whatever [crosstalk 00:40:11]
Victoria: Never sold it. No. So he's got a lot of stock...
Scott: Wow.
Victoria: ...with a little bit of cost basis but not [crosstalk 00:40:17]
Scott: By the way, how had that stock done the last 10 years versus the broad market?
Victoria: It's not Apple, okay. I'll tell you that. But it's a good blue chip stock.
Scott: So it's done...
Victoria: So it's done pretty well.
Pat: So, total...
Scott: Has it outperformed the market?
Victoria: It's performed pretty much in line with the market, but still.
Scott: So, just the only reason I ask.
Victoria: Yeah.
Scott: It's an example of taking on more risk without being compensated for it.
Victoria: Correct. Absolutely. Because, inside of his 401(k), he's got, you know, $1.5 million of it. And then, in the employee stock purchase plan, he's got another $1.5 million of it.
Pat: Were they matching with the company stock, or was he purchasing it?
Victoria: Inside the 401(k), it was part of his contribution. So, they were matching his contribution into the 401(k). He was just choosing to allocate some of that to company stock.
Pat: Got it. Got it, got it, got it.
Victoria: Right.
Pat: Okay. And so, $7 dollars.
Victoria: Seven million dollars...
Pat: And what kind of income did this family make?
Victoria: He made about $250,000 a year, [crosstalk 00:41:13]
Pat: Wow. Easily gonna be able to replace...
Victoria: Yes.
Pat: Standard living would...
Victoria: Easily.
Pat: ...go up significantly.
Victoria: Right. So they can absolutely retire, but of course, the number one question is, and this is very common... You know, "I have so much of my net worth, 3/7 of it, in this company stock, but it's a ticking tax time bomb. Right? I can't just sell it, and then pay..."
Scott: But what about the 401(k)? Just, I mean, that's an easy one, right?
Victoria: Well, there's something special that you can do with the 401(k), if it makes sense, and in his case, it did. He had both preferred shares and common shares inside the 401(k). With the preferred shares, that's where the bulk of this was, he only had a cost basis, meaning that he actually put money in the 401(k), his own money, purchased $100,000 worth of this stock, and the preferred shares were worth about a million dollars.
Scott: Oh.
Pat: All right. So, he had $900,000...
Victoria: Of [crosstalk 00:42:09]
Scott: [crosstalk 00:42:10]
Pat: And I assume we're gonna get to what we call NUA here?
Victoria: Correct. So, what we recommended is for those preferred shares, the common shares, he had, you know, very high cost basis, so this doesn't make sense for that. But it made sense for the preferred shares. What you do is you take that million dollars, you move it into a taxable brokerage account, you move the rest of the 401(k) [crosstalk 00:42:31]
Pat: In shares.
Victoria: In shares. Yes.
Scott: And this only works if the company...actual, actual shares in the 401(k), not some sort of fund that mirrors the preferred...
Pat: Or units.
Victoria: Correct. It's gotta be the actual...
Scott: Yeah.
Pat: Or units.
Victoria: Correct.
Scott: Because you might... Others, listen, you might work for a company that you have money in the company's 401(k), in the, your company stock, but it's, you don't technically own the shares. You own some sort of [crosstalk 00:42:52]
Victoria: Right. So this is if you own the shares. So, you move those shares, in kind, to a taxable brokerage. You move the rest to an IRA. You gotta do it all in one year. You gotta empty the 401(k) in one year. You can't stagger it, but... So, you take that million dollars, you move it to a taxable brokerage, in those shares, in kind. Then what happens is, you're only taxed on the $100,000 of basis. That's ordinary income. On day one, that $900,000 of gain is long-term capital gain. Then, any growth beyond that million, that's short-term capital gain until you hit the 12-month mark. So, you've got three kinda tax buckets going on in that account at the same time.
Scott: And I...
Pat: Why wouldn't you just... I'm sorry, Scott.
Scott: I knew this at one point in time, but do you still get a full step-up basis upon death, too, with that? Is it [crosstalk 00:43:42]
Victoria: Yes, you do.
Scott: Okay.
Victoria: Yes, you do.
Pat: And, would you just hold for 12 months, and then put collars around it, use options in order to get some downside protection?
Victoria: Well, here's what we were able to do, so, to see the story through a little bit further [crosstalk 00:43:53]
Pat: Are we getting ahead of ourselves?
Victoria: You're getting a little ahead of yourself [crosstalk 00:43:55]
Pat: A little excited about this?
Scott: Well, and, net unrealized appreciation, an example like that, he doesn't have to worry about requirement of distributions anymore.
Victoria: No. That's exactly right.
Scott: He's taking something that went from ordinary income when he withdrew, to now he's got dividends taxed at favorable event, capital gains taxed at favorable event. [crosstalk 00:44:11]
Victoria: Exactly. On day one, that $900 grand's long-term capital gains, which, the top bracket for that's 20%.
Scott: Yeah.
Victoria: Ordinary income tax top bracket is 37%, as of today. So, by doing that, and, since he's retiring this year, that that will factor in in a second, we moved the IRA, or the 401(k) money, the bulk that was left, into an IRA. And then he's also got this employee stock purchase plan, with a bunch of this company stock in it, with a very low basis, right? So, what we're able to do, then, is say, all right, we wanna go ahead and minimize the amount of time you have to be glued to the earnings report of this company, because if something happens to it, you're gonna be sunk, right?
Scott: Oh. Yeah. [crosstalk 00:44:56] same thing [crosstalk 00:44:57] retire from GE.
Pat: [crosstalk 00:44:58] Enron, WorldCom, GE.
Scott: Or just Intel.
Pat: Intel.
Victoria: Yep, yep. So many different things that could happen. So, there are actually a few different strategies that we could employ, depending on how much liquidity he needs, but this is the direction we decided to go for him, because he wanted the most amount of flexibility and liquidity. So, for the money that was originally in the ESPP, okay, we put...that's in a taxable brokerage. We wanna go ahead and minimize the risk of that, right away, without having to sell it. So, how do you do that? Well, one way to do it is you can collar it. So, what that means is you're basically saying that, "I'm willing...I can participate in the gain of this stock, up to, say, a 15% cap. And after that, I'm willing to sell the future annual gains, beyond 15%, to buy some downside protection." So, let's say my comfort level is...
Scott: So, essentially, you're gonna buy some insurance on it, and the way...
Victoria: You're right.
Scott: ...the way to pay for it, you say, "Eh, if the stock just takes off like bananas, I'll forego some of that upside."
Victoria: Right. And we're not doing it with all of it. We're doing with 30% of it, right, just to take down some of the risk. So, you're basically pre-selling future growth, in order to fund downside protection. In this case...
Pat: But you could just fund downside protection, and keep all future growth.
Victoria: You could, if you want to. If you want to pay out of pocket for that downside protection.
Pat: That's right. That's right.
Victoria: A lot of folks decide, hey, let's make this a cash-neutral event, okay. So, "I don't wanna have to pay out of pocket for the protection. Let's go ahead and sell some future gain, and then we can fund the downside protection," so...
Pat: And you start the downside protection at 10% negative, 15% negative?
Victoria: Yeah. It depends on their comfort level. So, for them, it was, we'll participate in the first 10% of loss. And then after that, we're gonna be fine.
Pat: Okay.
Victoria: And the more loss you're willing to take, then the higher that upside cap is, right. So, for them, they were able to participate in the first 15% of gain every year. So, this is annually. And then, if it went gangbusters and went up 30%, okay, well, on that piece, we protected, I guess we missed out on some upside. But, for that, we're able to protect them.
Scott: You're able to pay for the capital gain, because you just had the big [inaudible 00:47:10]
Victoria: That's right. So that's another perk, is that we don't then actually sell the stock if it gets called, and this is getting a little advanced, but then we just pay for another stock option to cover that call. It's a loss. Then we get to use that loss to sell some of the stock, and write off the gain. So, it's really a great strategy. Then in the meantime, we were able to sell enough of the stock that he was still in a 0% capital gains bracket, okay?
Scott: Okay.
Victoria: So, there are lots of different income tax brackets. There's not just your income tax. There's also capital gains tax bracket. There's your IRMAA tax bracket. Social Security tax bracket, right? So you wanna make sure that all of these are working in tandem. So, especially in 2026, we can sell a lot of that stock in the 0% capital gains bracket. So, then we can take that money and kickstart what's called a direct indexing account. So, how that works is, instead of going out and buying the S&P 500 ETF, instead you put it in a direct indexing account, where you're buying all 500 individual stocks. [crosstalk 00:48:15] It's a beautiful strategy. And then...
Scott: [crosstalk 00:48:18] in this situation, right?
Victoria: Yeah.
Scott: Every situation's unique, but I know where this is going.
Victoria: But in this situation, it works.
Pat: Yeah.
Victoria: So, over the course of 2026, some of those stocks are gonna do great. Some of them are gonna be stinkers. If you hold just an index fund, then you're just along for the ride. But owning 500 individual stocks of the S&P, well then you can sell the stinkers, to realize loss, and offset the capital gain from selling some of that stock.
Scott: [crosstalk 00:48:46] the ABC stock.
Pat: And Victoria, did you carve out any part of that direct index from the industry, since he's already had a... Because you only did a collar on one-third of the portfolio in the ESPP.
Scott: Yeah, you could say I don't...
Victoria: Yeah.
Scott: ...wanna own that particular company, or I don't even want [crosstalk 00:49:02]
Pat: [crosstalk 00:40:03] whole industry.
Victoria: Correct. Yes. So...
Pat: So, you [crosstalk 00:49:05] beyond a regular direct index, you actually excluded, let's just say that it was manufacturing, you excluded that sector of manufacturing out of the index.
Victoria: Right. So, what we were able to do is say, okay, in the S&P, we obviously don't wanna own more of this particular sector, so let's carve that out, because we already are over-weighted in that. And we have that flexibility to do that. So, spot-on. Yes, that's absolutely what we did. So, then, we have this engine now, that's producing these capital losses, while you're still making the returns of the S&P 500, because you're invested in the entirety of the S&P 500. You're just manufacturing these capital losses, so you can sell this over-weighted stock.
Pat: How much more expensive is a portfolio like this versus a regular ETF?
Scott: And what's the direct indexing cost nowadays?
Victoria: So, to add this strategy is a whopping 0.4%. But the amount of tax alpha...
Scott: Just on the direct index. Yeah.
Victoria: Yeah, just on the direct index. But you're owning individual stocks, so there's no cost to that.
Pat: Yeah, correct. So that the alpha is incredible.
Victoria: Yeah. The alpha is amazing, especially in this particular situation, where, if you sell all the stock outright, then you're paying 20% capital gains tax on most of it.
Scott: That's right.
Pat: I'm trying to think of how many different techniques you used in this one client. Right? And by the way, if you retired 10 or 15 years ago, and you're like, "My advisor never talked about this," or they don't talk about it today, the reason... This is really, really advanced, and what has brought the cost down significantly is the use of technology in the portfolios.
Victoria: You're spot-on, because 10, 15 years ago, you had to be an institutional investor, or somebody with $10 million plus in net worth, to even touch some of these strategies.
Pat: And it wouldn't have been this inexpensive. It'd be much, much more expensive.
Victoria: Much more expensive.
Pat: And this is all run by algorithms.
Victoria: Mm-hmm. Yeah. That's right. Which is a lot more reliable than a human being.
Pat: And, the cost will continue to fall.
Victoria: Yeah. Yeah, so, these are strategies that are available to the everyday investor, but you need to have an advisor that knows how to put the pieces together, to maximize that tax outcome.
Scott: And understand that those pieces even exist.
Victoria: Yeah, [crosstalk 00:51:15]
Pat: So, in our firm, we have different level of advisors where they... You specialize in really complex things, right? So, they actually refer business up to you and you work in tandem with the advisor. How's it work?
Victoria: That's right. So, the advisor is still the head of the relationship. We're basically their team, right? So, they are the coach on that relationship. We are on the advisor's team. So, they can bring us in whenever they have the need to have a complex situation evaluated. Then we can do the planning. We can even present the plan to the client. But the advisor is always the head of that relationship.
Scott: Yeah. I always love hearing stuff like this. I mean, Pat, we built this company 37 years ago, and the stuff that we can do now for average investors...
Pat: It's crazy.
Scott: ...like this is so great, so...
Pat: Crazy.
Scott: Vicki, thanks for taking some time to join us.
Victoria: Absolutely.
Scott: This is all the time we've got. We'll see you again next week. Scott Hanson and Pat McClain, Allworth Financial.
Announcer: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or estate planning attorney to conduct your own due diligence.