Man: 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-WORTH.

Scott: Welcome to Allworth's "Money Matters." Scott Hanson here.

Pat: Pat McClain. Glad you were with us. Both myself and my co-host, we're both financial advisors, certified financial planner, certified financial consultant. We help people throughout the week with their finances and broadcast this program on the weekends.

Scott: Actually, I think we're only on one terrestrial radio station. No, we're on a couple, I think still. But most of it's podcast listeners. I think we dropped this Saturday mornings, this podcast. I don't know. We don't know. I'm pretty sure.

Pat: [crosstalk 00:01:08]

Scott: It's something along those lines. Someone does it. Anyway, so glad you're taking some time with us and we've got a good program lined up with some good calls and...But before, Pat, we were just talking off-mic about car shopping. We both bought cars in the last couple months.

Pat: Yes.

Scott: And my car was 5 years old, starting to get some miles and...

Pat: Mine was 9-and-a-half years old and I liked the car fine. It had 120,000 miles on it, but the back hatch broke and I brought it to the shop, an independent shop, and the guy's like, "It's 1200 bucks," and I'm like, "Well, the car's worth $7,000, maybe $7,500.

Scott: You hit that point where...

Pat: It's like...

Scott: ...you're gonna hit the cash register a lot to keep it going.

Pat: Yeah. So I'm like, "Okay, just..." I didn't fix it, by the way. I just turned it in.

Scott: When you say broken, would it not close?

Pat: It would latch, but it wouldn't seal. And so what happened is when you drove...

Scott: You get the nice fumes would come in the car.

Pat: Was coming in. So it wasn't...

Scott: [crosstalk 00:02:21]

Pat: It wasn't gonna fly open, but it wasn't technically sealed. So the way...

Scott: A couple years ago, cars were selling for above sticker. And if you remember, if you had to buy a car, the lots were...

Pat: Empty.

Scott: ...empty. And they're like, "Well, if you want this car, it's gonna cost you $5 grand, $10 grand more above the sticker price."

Pat: Yeah, supply and demand. It's like, interest rates were low. I remember talking to a guy who owned a car dealership during that time, and I said, "Man, business must be really tough where you have no inventory." He's like, "What are you talking about, business has never been better," because the kind of profits they made on each car.

Scott: Less cars but more profit, which all...

Pat: Because they can charge pretty much whatever they want.

Scott: Tables have turned significantly, significantly.

Pat: And remember we saw used car prices going up. I think the bottom's gonna fall out.

Scott: It's amazing that...What's the one where they have the stack? Carvana is still in business where they have the big towers where they park the cars in, like I've seen 'em in Dallas and Chicago and on the sides of the road, Carvana, where they buy used cars.

Pat: It's like, it's so easy it's this vending machine, right? [crosstalk 00:03:40]

Scott: That's what the whole concept was. It's amazing that they're still in business also with their debt load. But I went to buy a car this last week, and by the way, one of the...I'm not a car guy. I mean, I don't...

Pat: That's why you had the same car for nine-and-a-half years.

Scott: Correct. And I would've driven it for 20 years if I could have, if the economics were there. It doesn't matter to me. I don't care. By the way, mostly I like the old cars because there's not a lot of technology and you don't have to learn anything new. But I go into this dealership and the guy gives me the sticker price and then marks it up by $5 grand. He said, "Well, because this car's in such great demand...

Pat: You're like, "I see 30 of them."

Scott: Then I look at 10. And then he said, "But, you know, we're gonna give you a $5,000 discount. So I'm like, "Okay, so you're trying to sell this thing at sticker?" He's like, "Well, no, no, no, no, no, it's $5,000 more because it's, you know, in demand and we're giving you a $5,000 discount."

Pat: That way they can say, "No, we've been charging premium on these for years...

Scott: Years.

Pat: ...and that's not going away."

Scott: That's what he said to me. He said, look, "These things go over." I said, "They used to go over. They don't go over anymore." And he said, "Well, how do you know that," and I'm like, "Because [inaudible 00:05:12]...

Pat: Well, I'm not paying more. That's how I know.

Scott: So...

Pat: That's right.

Scott: So I left and I went to another dealership and a different car, but they're all basically the same to me, a small SUV. And so this guy, go in there and I said, "This is what I'm gonna pay," and he said, "There's no way we can do that." And he said, "This is what we'll sell to you." And we met in the middle.

Pat: It was just like the old days.

Scott: Just like the old days.

Pat: I always hate buying cars because I hate that experience because you know you're getting screwed, you just don't know how bad. That's what it feels like.

Scott: And so as we're leaving and he's showing me how the car works after we do the transaction...And by the way, I was trading in another car, so I went and had it priced at CarMax. And then I said to these guys, "Look, do you want this," and they said, "Yeah." And I said, "Okay, well this is what you're gonna pay." And they said, "Well, where'd you get that number?" I said, "Well, CarMax is gonna pay this and I want a little bit more." And they said, "Okay, we can do it." But when I was leaving and we were going through the car, he told me, he said, "You know, six weeks ago, these things were going above sticker.

Together: Six weeks.

Pat: This is why I want push to discuss this today.

Scott: He said, "Six weeks ago they were going above sticker." He said, "You got a really good deal on this car," which obviously made me feel well, but I'm thinking, "No, I don't know. I don't know, no." And I said to him, "Yeah, sure, whatever." And he goes, "No, I'm telling you." He said, "This market has changed." And part of it is interest rates, for sure. And I was talking to a contractor. He said his phone quit ringing six weeks ago, contractor. He does, you know, repairs on houses and he's got two or three employees. He said, "Completely dead," just, like, one day...

Pat: Yeah, Home Depot had a report last...

Scott: They did.

Pat: ...week or so about...a couple weeks ago about the reduced demand.

Scott: But I was also thinking, I mean, we did a lot of stuff during the lockdown. We completely remodeled our house during the lockdown, got new furniture, but after a while, then there's nothing else to do. We were in our house 17 years...

Pat: It's times up.

Scott: ...or 18 years. It was time, remodeled it.

Pat: What was the point of this? The point is that the market's different. If you're in need to buy a car, now's a good time. And it may even be better. I don't know.

Scott: It could get better, yes. It's much more expensive. Even if they lower the price, it's gonna cost you more if you lease the car because the change in the...

Pat: I don't do the lease thing. I just don't.

Scott: I used to. You know what, I don't like...

Pat: I don't like the fact that...

Scott: I don't like buying cars, I don't like having to turn the cars in. I hate trading it in. What are you gonna get for, and then...Like, you to drive to CarMax, what are you gonna get me for my car? Anyway, I did drive a car to CarMax once and it was breaking on the way over there. I had quite a bit of problems. I was amazed they still wanted it.

Pat: So Scott...

Scott: It had 150,000 miles or whatever.

Pat: We had a car, an old Toyota Land Cruiser, right, that my wife drove. And then I had four children.

Scott: Each drove it?

Pat: Each drove it for...

Scott: I'm sure it looked really good.

Pat: ...about two years. This thing didn't have...Any part of it had a dent in it. And you could tell which kid did it, right? So we're selling it to CarMax. So I said to my wife, "I'm coming from a different direction. I'll meet you at CarMax. Drive it down." She gets halfway there. She said, "I'm in a parking lot at the side of the road. The brakes quit working. Will you come and drive it over?" And I'm like, "The brakes quit working?" She said, "Yeah, I was coming to a stop sign, a light, and I had to pull the emergency." I said, "How close are you to the CarMax?" She said, "About a mile."

Scott: I just felt flashbacks to being 17 driving a Volkswagen with no brake using the parking brake.

Pat: The parking brake. So I go over there and I said, "Okay, just leave it there. I'll come and get it." So I drive it using...

Scott: Is that that prominent financial advisor Pat McClain driving down the road using the emergency brake?

Pat: So I drive in there and the guy says, "Okay, we're gonna take it for test drive." And I said...

Scott: I wouldn't.

Pat: ...I wouldn't do that, I wouldn't...

Scott: They just take it to auction or something, don't they?

Pat: Yeah. And I said, "I wouldn't do that." And he said, "Why?" And I said, "The brakes don't work." He said, "How'd you get it here?" I said, "With the E-brake." And he said, "You know, we'll give you much more money if we can drive it and see what condition it's in." And I said, "I'd feel terrible if someone got killed." Anyway, let's [crosstalk 00:10:04]...

Scott: They paid you something for it.

Pat: Yeah, it was...

Scott: All right. Let's take some calls. 833-99-WORTH is the way to connect with us and schedule a time to join us for a call, 833-99-WORTH, or questions@moneymatters.com. We're in Connecticut talking with Ed. Ed, you're with Allworth's "Money Matters."

Ed: Gentlemen, I think it's good morning where you folks are. Good afternoon here on the East Coast.

Scott: Thank you, sir.

Ed: But hope you guys like compliments. I could use my entire segment singing your praises, but I think I would embarrass you if I did.

Scott: Thank you.

Ed: But thank you for all your help over the years.

Scott: Thank you, sir.

Pat: Well, go ahead.

Scott: Go ahead. We got time. It's a podcast, we're gonna...

Pat: Listen, you're gonna talk about me?

Ed: It's not just your financial knowledge, it's your ability to understand people. But anyhow, I like you guys.

Scott: Well, you know what, so I'm gonna on that note, like, a good financial advisor is not someone who's just good with numbers, it's someone who can relate well with people, be able to kinda read people, and to be able to navigate and nudge a client in the right kind of direction and get 'em to stick with a financial plan. It's a really interesting combination, which is why I love the industry. But anyway.

Pat: Okay, Ed.

Ed: But anyhow. So anyhow, just retired this week.

Scott: Congrats.

Ed: Sixty-five years old. I know, it feels great, let me tell you. We got about $1.2 million in pre-tax, we got about $250,000 in a Roth, about $180,000 in a brokerage, and about 70/30, you know, so we got, you know, $450,000 whatever sitting there in CDs and treasuries. So I think we could handle any...

Scott: Wait.

Ed: ...downturn, so to speak.

Pat: Slow down, $1.2 million in IRAs, $250,000 in Roth $180,000 in brokerage?

Ed: Yes, sir.

Pat: Okay.

Scott: And $450,000? And where's the $450,000 come from?

Ed: I'm saying the 70/30 breakdown.

Scott: Okay. Got that.

Ed: That gives us about $450,000.

Pat: Got it.

Ed: So we got a nice cash cushion. And when all is said and done, our pensions will be about $60,000. Social Security, you know, will get us over $100,000. So, you know, we're gonna have more than enough money in retirement.

Pat: And what was your family income last year?

Ed: Maybe $170,000 something around that...something like $170,000, $175,000. You know, house is paid for. Can only spend so much on the grandkids, although we're gonna work on that. But I'm at the point now where we've done well in the market, but the one thing we're worried about, like everybody else is, we don't wanna take a massive loss at any point. And lately I've been reading about, what are they called, buffered ETFs. And it seems like they offer you a way to get some of the upside and you need some upside because you've gotta guard against inflation, but it also gives you some downside protection. And they...

Pat: Some.

Ed: ...kind of work...

Pat: Some.

Ed: Right. Right. And this is kind of what the promise of annuities are, but everything I hear about annuities are, they just seem too complicated for me to understand. But, you know, these seem like they're reasonably easy to understand, you know, you pay about 75 basis points and you can sort of choose how much upside you want to give up versus how much downside protection you want. So, you know, I only heard about 'em within the last month or so, and from what I understand, you know, they haven't been around that long, so I don't know how many people know what these products are or how they work.

Pat: And I don't know if we've ever talked about them in the show. Have we?

Scott: No, I don't...

Ed: And I listen to you guys all the time and I've never heard you mention it. And I said, well, before I go put any money in a buffered EFT want to get your take on it.

Pat: Thank you. Thank you. I don't know why we've never talked about buffered ETFs, but let's...

Scott: Well, I'll just say personally, I don't own one, personally, I'm not a big fan. Having said that, we do have some portfolios at Allworth that have some buffered ETFs in 'em, and we've got a couple big champions of them within the firm that really like them a lot. I don't know.

Pat: Explain what a buffered ETF is.

Scott: So essentially it's a basket of stocks, typically stocks, where the manager will go and use options in the futures markets...

Pat: Puts and calls.

Scott: ...to provide some downside protection in exchange for limiting on the upside.

Pat: Which is the puts and calls.

Scott: Yes. And oftentimes they'll work...say they'll give you a protection on maybe the first 10% of downturn or 15% of downturn, but you're still subject to the downturn when it goes below that. So maybe it gives you, let's say the market...you got a million bucks, it falls to $850,000, they're still protecting your million bucks, but then after that, if it drops another 20%, you eat that other 20% decline from there. So it doesn't give you 100% protection.

Pat: So other words, if I start witha million dollars in an equity-buffered ETF, and it drops by 15%, that $150,000 is protected?

Scott: Yeah, so you still have the million bucks.

Pat: But if it drops by another 15%...

Scott: You are gonna participate in that further decline.

Pat: If there's a 30% market decline, my portfolio is down 15% or...

Scott: In that example, yes. And there's different products and they could be combined differently. And I think...

Pat: And let's talk about the upside then. What are you giving away on the upside?

Scott: Well, there's gonna be some cap, and you're not gonna participate above that cap.

Pat: So who...

Scott: There's no such thing as a free lunch.

Pat: So who owns that? Who gets the cap? Someone else gets it.

Scott: Someone's buying that risk.

Pat: Someone's buying that risk, right? So you're insuring against a downside and you're selling off an upside. That's what you're doing.

Scott: So the cost is actually, I would say, greater than 75 basis points. That's the investment management fee. The cost is...

Ed: Okay.

Scott: The cost is what are you gonna lose out going forward? Now, if you said, "I'm gonna use a portion of these instead of fixed income," maybe one can make the argument.

Pat: What essentially you're doing is that paying the premium in order to get insurance on a percentage of the portfolio.

Scott: So the question I would have is why?

Ed: Well, being the age that I am, it seems like I've seen it all over the last 40 years and what happened to bonds in 2022, have some balance in your portfolio by putting a nice chunk in bonds. And what happened in 2022? Bonds got destroyed. And, you know, I'm just sitting there shaking my head like, "How did this happen?" And, you know, I'm just looking for another way to protect against downside and it seems like bonds really let me down in 2022 and who's to say bonds wouldn't let me down again? So, you know, maybe I'm looking for a unicorn product. But I'm just trying to take part of my portfolio and, you know, eat some on the way up and keep [crosstalk 00:17:32]...

Scott: I mean, I think...

Ed: ...on the way down as best I can.

Scott: One of the challenges a couple years ago, interest rates were so low, you know, they were zero on short-term money and a little bit more than zero on longer-term money. And a lot of people invested in longer-term bonds for that extra yield and I don't think paid enough attention to duration, what the overall duration was of their portfolio. And when interest rates flipped, that's where they really got hammered. And for those that had a more diversified approach in their fixed income, it really wasn't that bad, it wasn't great, but it wasn't a bloodbath by any means.

Pat: Not like...

Ed: What do you mean?

Pat: ...was it '94?

Scott: It was the worst year in bonds in like a hundred years. I mean, it was a bad year for bonds, for sure.

Ed: And by diversified do you mean...

Scott: Short-term

Ed: ...they were more short-term?

Scott: Short-term, floating rate, things like that.

Ed: I mean, that's kinda what I'm doing now. I'm just, you know, six months, a year, two years...

Scott: Yeah, because you're not getting any additional premium by having long-term bonds. Matter of fact, it's lower interest rates.

Pat: So back to the buffered, right.

Scott: Here's how I view the equity...

Pat: I could make an argument for both sides of it though. But the reality is, you are only 65. You're married?

Ed: Yes, 63.

Pat: Look, the actuary tables tell us that one of you is going to be alive 25 years from now.

Scott: That's right.

Pat: One of you is going to be alive 25 years from now. And so what you're trying to do is to get rid of risk...

Scott: You've got time.

Pat: ...and time is on your side, right? Look, you've never thought about buffered ETFs up until this point in time.

Ed: No, never heard of them.

Pat: Now you're retired like, "Oh crap, I'm not contributing anymore," you know, a different position. Now you have time on your hands too, "Holy crap, look at the market today."

Ed: And I'm happy with what I've made. I just don't wanna see it go up in smoke.

Scott: It's not gonna go up in smoke, but it is gonna go down.

Pat: It will go down.

Scott: And it is gonna go up.

Pat: It'll go up more than it goes down.

Scott: Exactly, 53% of the time the market goes up. Now, in bonds, look, over the long-term, it will work itself out. But you do need to pay attention to duration.

Pat: So it's funny, I was at the gym yesterday and there was Jeremy Siegel, who's an old economist. Was he at University of Chicago? He's quite up there in age now, but he's been one of these big historian on the markets and that sort of thing, and a good way of explaining things. And I was reflected...I saw him speak at a dinner a year or two ago, and supposedly he's got data back to the early 1800s.

Scott: Supposedly.

Pat: And we actually have pretty good data back to the early 1900s. Regardless, if you look over long periods of times, stocks have done 7 percentage points above that of the rate of inflation. Now, with that, we know that roughly 1 out of 2 days is going to be down, we know that 1 out of 3 years is going to be down, there's gonna be some downtime as 1 out of 7 we're gonna have a decline of more than 25%. But the markets have always recovered. And the only ones that get really hurt during those times are the ones that either, A, aren't diversified and so they're over-weighted in one or two companies that want bust and they're in trouble, or the ones that are forced to sell, or sell out of an emotional reason. The ones that hang on, it always goes higher. And by the way, if at some point in time in the future it doesn't, our world as we know it has changed dramatically.

Ed: Right. If I am hearing you correctly, I think the way I hear it is it seems like you are giving up too much of the potential upside, which, you know, you need...

Pat: That's right.

Ed: ...upside if you're gonna live for whatever many years.

Pat: That's right.

Ed: And that's just kind of your sense that you're giving up too much of the upside, that it's probably a price that's a little too high.

Pat: Well, and also looking at your situation...

Scott: You're not spending any of the money.

Pat: And so you've got pension and Social Security's gonna make up...Because my guess is last year you were at $170,000, you were putting the maximum into your 401(k)...

Ed: Yep.

Pat: You're paying...

Ed: [crosstalk 00:21:56]

Pat: ...FICA taxes. So your take-home pay is gonna be about the same on pension and Social Security, right?

Scott: If you were sitting in an office with myself or one of our advisors, we would say, "Let's address that buffered ETF thing in a minute, but let's go for the easy stuff first, which is we should be looking at those Roth conversions and using some of that brokerage to pay the taxes on it."

Ed: The whole distribution part of this life process is really, really complicated. You know, the acquisition is just kind of put your head down...

Scott: No, I know.

Ed: ...you know, save, invest...

Pat: That's right.

Ed: ...you know, and look up in 30 years. Now you look up in 30 years, it's like, "Oh." It's a quite daunting thing, but I don't wanna take up your entire hour, I would, but the distribution strategy is a whole nother issue.

Scott: That's right. And you're not going to take any distributions from this. You don't need it. It sounds, like, you might wanna take a couple percent if you wanna spend it, but converting the IRA to Roth IRA, using some of the brokerage, and then making the brokerage account as tax efficient as I possibly could, which is, look, maybe the ETFs should be in the brokerage account, more of the bonds should be in the IRAs.

Ed: That sounds like a very straightforward, sensible suggestion. I'm sure the details will be quite interesting.

Pat: But I think one way to also remember, Ed, is most of us look at our portfolio as a whole portfolio, and we can go online and look at our account, what's our account balance of that day, but the reality is $450,000 of your savings is not tied to the stock market, right? So even if you said, "I'm gonna pull $50 grand a year off this so I can spoil my grandkids a little bit more," you've got 9 years to weather market conditions.

Ed: I know. I know. I know. I have no right to be nervous, but...

Pat: No, but that's normal. You're asking yourself all the right questions. But I think sometimes it's important to try to, like, reframe because from a...intellectually, you know the right answer, right?

Ed: Yeah.

Pat: But we're all human beings, right? So there are certain things, personal hacks, call 'em whatever you want, but just to structure things to give yourself that peace of mind because at some point in time, we're gonna have a nasty bear market again in your lifetime, and it's gonna look bad.

Scott: Probably two or maybe even three.

Pat: And you turn on CNBC and they're gonna be the people, "Get out now, you know, it's different this time."

Ed: I know.

Pat: All that, you've seen it before. It'll happen again.

Ed: Seen it all. I remember 17% inflation and 12% interest rates and I remember it all. You know, I sort of lived through it all. My parents lived through the depression, and I heard all their stories so all these possibilities are out there, we can't...

Scott: And they're all short term.

Ed: And we can't plan for everything. All we can do is the best we can, but...

Scott: And they're all short term.

Pat: Short term.

Ed: Well, you give me some excellent perspective here.

Scott: Well, think about it as, you know, do you have a low deductible on your auto insurance or a high deductible?

Ed: High.

Scott: Okay.

Pat: Of course you do.

Scott: There you go. Why?

Pat: You ask a question, you already knew the answer.

Scott: Why?

Ed: Because...

Scott: It's self-insured.

Ed: I self-insure, I can cover $5,000 or whatever, but...

Scott: Think about buffered ETFs in the same way.

Pat: It's a low deductible.

Scott: It's a low deductible.

Pat: I think it's probably a good point.

Ed: You know what, I did want to get your perspective on these products because like I said, they're fairly new, I've been doing some research on 'em and, you know, they're not the worst products in the world, I don't think, but like anything else...

Pat: Out of the $22 billion we manage, what do we think is in buffered ETFs? A couple hundred million?

Scott: Maybe.

Ed: Interesting.

Scott: You know, the advisors have the ability...We have portfolios that are built with those in. This is...

Pat: It's usually someone doesn't have a pension.

Scott: That's right.

Ed: Right. Okay. Well, that makes sense.

Scott: So appreciate the call.

Ed: Gentlemen, thank you.

Scott: Thanks.

Pat: Thanks, Ed. Appreciate it.

Ed: All right.

Pat: [inaudible 00:26:08]

Scott: It's the people that make this business so interesting.

Pat: Everything works perfectly until you involve people.

Scott: We're all people. I have my own issues with money.

Pat: The business plan was perfect until we tried to execute it.

Scott: I have my own fears and concerns and all that stuff, just like everybody else and it's trying to put boundaries along.

Pat: Not too emotionally caught up in it.

Scott: Which is easy when the markets are...It's a relatively calm period of time.

Pat: You know, it's funny, I was thinking the other day about the great meltdown in 2008. I don't know why I was thinking about it. I just remember, like, one night just watching the TV for, like, three hours, the financial crisis, when the credit markets were locking down. And it was the first time in my whole career...

Scott: You were actually nervous?

Pat: I was nervous. I'm like, "If these credit markets, like, lock up, there won't be any food in the grocery stores."

Scott: Well, we were at that point. By the way, if you weren't nervous during that time, you were either ignorant or you didn't have any money. You were ignorant.

Pat: And then I was thinking, how many years ago was that? So that was 16 years ago. But just remember, like, I started watching something at, like, 9:00 at night and at 1:00 in the morning I finally went to bed doing research and I'm like, "If these credit markets lock up, it will be so hard to get them unlocked," right?

Scott: But I also remember, Pat, I remember a time during that, like, our focus was getting people not to throw in the towel on their financial plan.

Scott: That's right.

Scott: And I remember I had a good friend who was being deployed for Iraq, he was a reservist. And we had a day scheduled, we were gonna go up to town called Downieville and go mountain biking together. And I got up early in the morning. It was one of those bad days and I called them and I said, "I can't, I gotta get in the office and make calls." And I remember just getting in the office, calling as many clients that day, like...

Pat: Just to hang in there.

Scott: ...and being there to make sure you answer the call because, like, it's temporary. They're always temporary.

Pat: You had to get through it.

Scott: It's temporary and you don't wanna sell when everyone's in fear. That's when prices are so low.

Pat: And look, I gotta tell you, we don't get too political on this show, but the idea that the Federal Reserve should be actually run by the administration scares the daylights...

Scott: Welll, of course.

Pat: ...out of me, just absolutely scares the daylights out of me because at that point in time decisions will be made for political...

Scott: Political.

Pat: ...gain and not for long term.

Scott: You mean you think there are some things in that have been happening in the world that are for political reasons and not just...?

Pat: The whole idea just frightens me that the Federal Reserve...

Scott: The Federal Reserve's existence alone frightens me. Whether or not it actually adds any value over long term, I question.

Pat: But you've gotta admit that they brought stability to the banking crisis in 2008. Can you not? You don't think that the Federal Reserve had anything with stabilizing the economy? The Federal Reserve is the one that went to Bank of America and said, "You are going to take Merrill Lynch. We cannot have this failure. Bank of America, you're taking it."

Scott: Boy, it's a long time ago. I'm trying to remember the details. It was February or March of '08, there was a...I know Congress had the big spend out thing.

Pat: I think it was the Fed that made the...

Scott: It's...

Pat: And I'm trying to remember the change [crosstalk 00:30:04]...

Scott: And the fed pushed it. I mean the fed pushed it through. But the Fed said to Bank of America, "You're taking Countrywide."

Pat: Had the government not been involved in the mortgage business to begin with, we wouldn't have had that issue.

Scott: Okay. As I was making my argument, I was actually coming up with my own rebuttal.

Pat: I mean...

Scott: I was coming up with my own rebuttal.

Pat: I understand the world is a complicated place, like...If it was a simple place, I would love just free markets, let's agree upon what the rules are of the game, agree upon honesty.

Scott: It doesn't really work that way.

Pat: But it doesn't really work that way. And then the free markets...prices will take care of themselves over the time.

Scott: Yeah, ask the Sackler family about fentanyl and just, you know, we'll go there. The free market, the FDA allowed the fentanyl crisis to happen through the...

Pat: Opioid.

Scott: ...Sackler family.

Pat: The opioid crisis.

Scott: I'm sorry, not fentanyl, opioid.

Pat: Your point, fentanyl is a derivative. It's there because people don't get enough opioids.

Scott: Because they weren't getting enough opioids.

Pat: I don't want talk about...

Scott: All right. Let's go.

Pat: ...the Sackler family.

Scott: I'm glad my name's not Sackler. Can you imagine? I don't think they're very well liked. All right. Let's talk with Chris. Chris, you're with Allworth's "Money Matters."

Chris: Hey, good morning, gentlemen.

Pat: Hi, Chris.

Chris: First-time caller, longtime listener. You're my Saturday morning walk/yard work podcast to listen to and I really enjoy the diversity of callers. I mean, you really have people that have a tremendous amount of assets, some that don't have a tremendous amount of assets, and I think you guide them in very good directions. And so I have a couple questions for you.

Pat: Yes, sir.

Scott: Sure.

Chris: [crosstalk 00:31:45]

Scott: Chris, we all start somewhere.

Chris: Yes.

Pat: We all start somewhere.

Scott: I moved to Sacramento and rented a bedroom out of a house. It was $300 bucks a month, and there was some months I didn't have the $300 bucks and using the credit card to get a cash advance to pay my rent.

Pat: So the respect to those that have and those that don't should be equal. Anyway, your question for us.

Chris: I agree with you 100%. That was me. So, you know, college graduate, had nothing, and just worked my way up. And that's the beauty of this country, really.

Pat: It is.

Scott: It is.

Chris: You don't have that in a lot of...

Scott: Are you kidding?

Chris: ...countries.

Pat: It is.

Chris: I mean...

Scott: It's amazing.

Chris: ...a lot of places just don't have that. You know, I always go by the adage, the harder you work, the luckier you get, and so I really believe that, but...

Scott: And unfortunately, a lot of people don't have that mindset. You know, you had a mindset...

Chris: You know...

Scott: ...Chris, and it's a...

Chris: ...I agree. I agree. I think the handouts in life, you know, and I think that kind of drives...I'm not gonna get really political here, but a lot of political anger because people feel, like, the government needs to take care of them a lot of times and really, a lot of times you can solve a lot of problems by just hard work.

Pat: Whether I agree with you or not, I will not comment. So what's your question?

Scott: Of course you agree 100%, but anyway.

Chris: Yeah, of course you do. So I think I'm not in a unique situation, but over the last...since 2017, me and my wife have inherited a couple sizable inheritances from relatives and they came in a couple different forms. The majority of it basically broke down after everything was settled into cash. And so over the last...since basically 2017, really starting in 2019, we've moved a lot of that into the market. But then over the last year and a half or so, we kinda put a pause on it and didn't move as much as we had been just because interest rates had climbed so high. And we basically started a CD ladder over that time. And so in anticipation of rates falling, I was kinda going over what the next steps are because we're still sitting on about $1.65 million of CD ladders and essentially, like, treasury money market funds.

Scott: Okay.

Chris: And then I have a second question for you too about an inherited IRA because you guys touched on that last week, but...

Pat: Chris, how old are you?

Scott: How old are you?

Chris: I'm 54 years old. My wife is 57.

Pat: And do you have kids?

Chris: I do. Two grown kids, both college grads.

Pat: Okay.

Chris: One's still partially in the nest being partially subsidized, but well on her way of getting out of the house.

Scott: So one's a self-feeder and one is not.

Chris: Yeah, exactly.

Scott: What's your overall net worth? So you still have $1.65 million in...

Chris: Yeah, so we just had our checkup with our advisor/broker last week and it's a little over $8 million, $8.175 million. And that's just investible assets. That doesn't include our house. And all we have is our primary residence.

Pat: And was most of that inherited?

Chris: About half of it was...

Pat: Got it.

Chris: ...inherited. The other half we earned.

Pat: Saved.

Chris: And I have, like, even a little caveat to that. I had a little bit of a lottery winning back in 2019. That's part of that as well.

Scott: Good for you. The kids win too.

Chris: Yes.

Scott: What's your income, family income?

Chris: So the family income, my wife doesn't work outside the home. She hasn't really, since our second child was born, but anywhere from $300,000 to $500,000 a year.

Scott: Okay.

Pat: How much longer do you plan on working?

Chris: That's a good question. I've felt like over the last couple years I'm kind of losing my steam, but I'm kind of at the point where if they leave me alone, I think I'll just keep doing what I'm doing for while but...

Scott: You're pretty young to retire at 54.

Chris: Yeah, for sure. And I mean, that's my biggest fear, right? My biggest fear is what do I fill my days with?

Scott: That's right.

Chris: I mean, I have some ideas, but, you know, it's like anything, after six months you probably go, "Okay, I'm ready to go back to work." And so I really don't want to do that because I'm in the type of industry where once you leave, you basically gotta come back and start from scratch. And it's that clawing and digging, like what we were talking about the start of our call.

Pat: So when you...

Scott: What's your question for us?

Chris: Okay. So my question is, so my advisor/broker, he's one of the larger Wall Street firms and we've been with him for years and years and years. I thought he'd done me right in a lot of ways. There's some gaps in, I think, the services that he provides. But we had a conversation during our quarterly review and he pitched SMAs. And he said that they are separately managed accounts. And I don't understand them. But, you know, I'm always looking at is this a better option than what we have? And so I figured calling you guys you might be able to explain this.

Scott: And there are times when a separately managed account makes sense.

Pat: Out of the $8 million, how much is in qualified IRA money and how much is in cash or investible brokerage accounts?

Chris: Okay. So right now in, like, 401(k)s and IRAs, and part of that, for whatever reason, so my 401(k) is with Vanguard and I've been contributing to the Roth portion of that. We max it out every year. I've been doing 50% traditional and 50% Roth, but I couldn't find on their website where they break that down separately. So I'm gonna throw that in there. But it's between that and IRAs, this doesn't include the inherited IRA I wanna talk to you about later, but it's just under $3 million.

Scott: Okay. So you've got about $5 million then in outside investments.

Pat: Yeah, I think the SMAs make sense...

Scott: Well, I...

Pat: ...depending upon what they are because that's a big, big world.

Chris: So I mean...

Scott: So let's kind of...

Chris: ...I can break it down further.

Scott: Let's...

Chris: I can break it down further [crosstalk 00:37:41]...

Scott: Let's explain what a separately managed account is. So...

Chris: Okay.

Scott: ...I think most of us have somewhat understanding how a mutual fund works or an ETF, it's a basket of stocks. And let's think for a minute of, let's say, an actively-managed mutual fund where there's a team that figures out which securities to own in the fund, and which one's not to. And a separately managed account is essentially where that manager was gonna manage the money just like he or she's been managing the money for the mutual fund, but they open up an account directly for Chris, and Chris owns those securities directly as opposed to owning 'em in a basket of mutual funds.

Pat: Now let's just make something clear. These have become much easier to manage and much less expensive over the last couple years...

Scott: Because there's no trading costs.

Pat: ...because there's no trading costs, so there's no friction, right? But the idea is why are we owning the SMA versus an ETF or a mutual fund? What is the benefit?

Scott: Yeah, that's a good question for you.

Pat: Right? He talked about an SMA, but did he...

Scott: [crosstalk 00:38:39]

Pat: ...tell you why, to what purpose?

Scott: Well, so the way it was pitched to me was more to offset taxes, because that's one of the things that's really creeping up on us, and especially, you know, and I know you guys hate this, but we had all this cash sitting in basically, you know, brokerage accounts versus in, like, tax-sheltered accounts [crosstalk 00:38:59]...

Pat: Did he talk about a direct index instead?

Scott: So I personally...I don't own a SMA.

Chris: Okay.

Scott: My individual securities I own through direct index.

Pat: I'd make the argument that you could call a direct index an SMA, Scott.

Scott: Well, because they're managed...

Pat: That's right.

Scott: ...and index is blind...

Pat: No...

Scott: ...index is mirroring the index.

Pat: ...that's not true because you decide what you wanna take out of it for charitable...

Scott: You can have a...

Pat: ...purposes.

Scott: How aggressive you wanna be in tax-loss harvesting.

Pat: That's right. And what ends up happening, whether this is done through an SMA or a direct index, I would argue that a direct index would be much less expensive and probably get greater benefits to you, but what all ends up happening, whether it's a technology doing it or a manager doing it, look at those areas that those stocks that have had losses...and if you look at, say, the S&P 500 at any particular time, you're gonna have, maybe the majority of the stocks are down, right? So when you invest, the manager looks, all right, what opportunities can we take to sell something for the sole purpose of locking in a tax loss?

Scott: And that happens in an S&P 500 fund, but not as efficiently as a direct index.

Pat: And so with a direct index, that's exactly for you. So let's say you put a million bucks in it, you might end up with a capital loss, long-term loss of $100 grand, $200 grand, $300 grand.

Scott: While the account is up.

Pat: While the account is up.

Scott: So...

Pat: And they'll sell those stocks and buy something very similar or wait 30 days to buy the same stock. This is an ideal situation for a direct index.

Scott: Correct.

Pat: Ideal.

Scott: That's exactly right.

Pat: Ideal. It's fresh money.

Scott: Exactly right.

Pat: When I get fresh money, I put it into direct index. I haven't been able to do it with my older portfolio because I have all these embedded gains, right?

Scott: Yeah, it doesn't make sense for you to sell out some total stock market ETF...

Pat: Then I have [crosstalk 00:41:00]...

Scott: [crosstalk 00:41:00] gained, but yeah.

Pat: So I would not do an SMA.

Chris: Direct index, huh?

Pat: Yeah.

Chris: That's what I would do.

Pat: I'd do a direct index.

Chris: That's what I've done.

Pat: And you could do it against the S&P 500 or the total market. There's lots of different indexes you could peg it to. And what they're doing is...

Scott: You could have it all U.S., you could have it global.

Pat: ...they're replicating the S&P 500.

Scott: You couldn't have done this even five years ago. The technology's come a long...

Pat: It's technology and...

Scott: And the cost of...

Pat: ...and the cost...

Scott: That's right.

Pat: ...of the friction. So this is poster child, like, this is exciting because it doesn't happen very often. So when the broker talked about SMAs, is he talking about direct indexing or is he talking about, you know, you have an American funds in the portfolio and you're hiring the same manager to manage this unbundled SMA?

Scott: Which is better from a tax point as well, because you're not...If you buy in a mutual fund, you're buying someone else's cost basis. They bought that stock years ago and they might sell it the day after you bought it and you incur capital gain even though you didn't own it.

Pat: That's right.

Scott: That's what you avoid with an SMA.

Pat: So in order, SMA are good for you, direct indexing is better.

Scott: Yeah, I would say 100%.

Pat: Okay.

Chris: So now the direct indexing, could I do that just...I mean, is that, like, a fund at, like, Vanguard or one of those places that has really low-cost [crosstalk 00:42:24]?

Pat: I'm sure Vanguard has a direct index. I'm sure the brokerage firm your friend works with has direct index.

Scott: He might even been talking about direct index and we don't know. We weren't in the conversation.

Chris: And I gotta be honest with you, I just didn't know what questions to ask. I mean, it was literally introduced to me and...I mean this is a relationship I've had. I mean, this guy, I mean, it's with one of the firms you guys know probably well. [crosstalk 00:42:47]

Scott: I mean the big firms...Look, there's some great advisors, big firms. I think the business model's outdated and they really can't do the same kind of tax planning and tax modeling that...

Pat: This guy sounds like he's trying. So yeah, direct indexing is fine. And I think you should do that.

Scott: What about...?

Chris: That was one of the questions I had for him because, you know, my concern is exactly what you said. If I come to a firm like in Allworth, that's all part of the whole strategy, right? And I feel like that's kind of what I'm missing right now in the relationship that I have and, you know, I basically expressed that to him. So, I mean, like you said, maybe this is his answer. I just didn't know what questions to ask [crosstalk 00:43:23]...

Scott: Chris...

Chris: ...because it was the first time.

Scot: ...small firms, big firms, medium-sized firms, we all have access to the same tools.

Pat: But the big firms can't...they state, "We do not do tax planning."

Scott: But they have access to the same tools.

Pat: Yeah, they do. They all have access to the same tools. That's right.

Scott: Right?

Pat: He could use this.

Scott: He's trying to do a form of tax planning. Anyway, you had a question about a beneficiary IRA.

Chris: Yeah. So as part of one of the inheritances, this is back in 2021, I inherited an IRA that was worth like $475,000 and I know that that time there was the 10-year rule, and you guys talked about it last week, it was kind of, like, needing clarification from the IRS. And I know I've done some reading and it was clarified, but then when I talked to my advisor/broker, he said, "Well, they clarified it, but they didn't lay out the terms clearly." So we're still in a holding pattern on what we do with that. So now it's up to...because that we did get into the market and it's up to like $530,000. And so I guess my question is, is at some point now this...we got it in 2021, it's now 2024, you know, the clock is, I think [crosstalk 00:44:38]...

Pat: Have you taken distributions?

Chris: I've taken zero out of it. It's just been sitting in mutual funds, some actual stocks. And then I think a little bit of it is in CD laddering. But I haven't taken any distributions. And I guess in my mind I was thinking, well, if I quit working...

Scott: I mean, it's...

Chris: ...[crosstalk 00:44:58] Roth conversions?

Scott: I mean, I read some of the changes, but it is complex and I don't recall it off the top of my head, this sort of thing that needs a little more research. But Pat, wasn't it something if you don't take a distribution by December 31st of the following year, it has to be distributed in five years?

Pat: That was my understanding, but I just pulled up an email from our tax department that actually...

Chris: [crosstalk 00:44:58]

Scott: ...has a flow chart.

Chris: I had that same question when this all happened, you know, and they said...

Scott: So, if the descendant died prior to the RBD required a beneficiary...

Pat: Required beginning date. How old was that person who passed?

Chris: He was 76.

Pat: Okay. Then it was after the required beginning date.

Scott: Okay. And the descendant died on or after the required beginning date, the 10-year rule and stretch over long or beneficiary life descendant. So according to this...

Pat: That's a qualified beneficiary.

Scott: No, this is a non-eligible designated beneficiary.

Chris: It was my father's, so yeah.

Scott: So I would check with the accountant but...So did you see this flow chart?

Pat: Yeah. It's so complicated, I don't remember the top of my head anymore.

Scott: That's right. I actually had to look it out. You may be eligible for the descendant's...

Pat: But this is...

Scott: ...life...

Pat: There's some serious planning needs to happen here.

Chris: No, no, for sure. And that's what I'm concerned with because I don't want the government to get all the money. So now let me ask you...

Pat: And the direct index is only gonna be a capital loss, it's not gonna give you ordinary...you can only offset other capital gains, the...

Chris: [crosstalk 00:46:27]

Pat: ...benefits we were just talking about.

Scott: You may be eligible for a minimum 10 years. We know that. And the stretch over longer the beneficiary's descendant's life. So you may be eligible for a lifetime distribution. But don't quote me on it.

Chris: Yeah, that'd be ideal. I just didn't wanna get [crosstalk 00:46:46]...

Pat: No. It's gotta be out in 10 years. My only concern is that you haven't taken any up until now, but I don't recall off the top.

Chris: Yeah, and everyone's told me I don't have to, it just has to be depleted by year 10, but I don't wanna get to year...

Pat: There was something to do with the...

Scott: I'd go back to the accountant.

Pat: Look, if you came into my office, I'd go to my accounting department right now and say...

Scott: That's right.

Pat: "...Get in the room with me."

Scott: That's right. Let's figure...

Pat: Like, that's what I would do. That's what our advisors do.

Scott: Or get on a Zoom call with...

Pat: With the accountant and like, "This is the whole story," and the accountant says, "This is what you do." So we're not qualified to answer the question, so appreciate the call.

Chris: Yeah. No, I hear you. Okay.

Scott: Thanks, Chris. Hey, man, wish you well. Thanks for the call. Let's go to New York. We're talking with Sandy. Sandy, you're with Allworth's "Money Matters."

Sandy: Hi.

Pat: Hi, Sandy.

Sandy: Yeah, I'm listening to your previous conversations and they're so much more knowledgeable than I am about any of my accounts.

Scott: That's all right.

Sandy: I had a situation where I have a judiciary financial advisor.

Pat: A fiduciary?

Sandy: Fiduciary, yes.

Pat: Okay.

Sandy: And he had me go into an annuity about 15 years ago and I'm now 66, so it's time to withdraw...

Scott: Why is it time...

Sandy: ...for income.

Scott: ...to withdraw?

Sandy: For income, because I'm not working...

Scott: Okay. And is this...

Sandy: ...and I need income.

Scott: Is this annuity inside of an IRA or outside of an IRA?

Sandy: I'm not positive, but I'm thinking it's outside of an...

Pat: Where'd money come from to buy this?

Sandy: From my savings and from inherited money.

Scott: Okay.

Pat: Okay. It's an non-qualified. It's outside of an IRA.

Sandy: Okay. And we invested about $100,000, but it was supposed to be that in 15 years it was supposed to double into...triple in...This is how he sold it to me, double into, triple in...I'm sorry, double in 10 years, triple in 15. And then I would get $15,000 a year income for the rest of my life. And I was also able, whatever money that I didn't spend would go to my beneficiary.

Pat: Okay.

Sandy: Well, when it came time to withdraw, or just a couple years before that maybe, they found out no, that's not what they got me into. What I got into was it somewhat doubled in the 15 years and that it didn't do what it was supposed to do, and I would only have gotten $10,000 a year instead of the $15,000.

Pat: Okay.

Sandy: So he totally messed [crosstalk 00:49:42]...

Pat: What's the account balance today?

Sandy: The account balance is...Let's see. The last quarterly report, which came out in June, it has it at $192,000. So it didn't even double.

Pat: In 15 years?

Scott: So you did about 4.5%. How's it invested? Is it in a fixed account or is it in sub-account...?

Pat: Does it go up and down in value a lot?

Sandy: Within it, yes. It did go up and down within the account but I was guaranteed the triple in the 15.

Pat: Do you have that written somewhere?

Sandy: Well, that's what I don't have because...

Scott: Yeah, he wouldn't write that down.

Sandy: He doesn't give me the documents. I just...

Scott: He wouldn't write that down.

Sandy: ...talk to him, you know?

Scott: He wouldn't write that down. Are you still using the same advisor?

Sandy: I am.

Scott: Go get a new advisor. Go get a new advisor. And what you're probably gonna wanna do is annuitize this over a 3, 5, 10-year period. I wouldn't take a life annuity on it, but you need to find an advisor. This person made promises that...Look...

Pat: Unrealistic.

Scott: ...the returns that he was promising were completely...

Pat: He can't guarantee you that.

Scott: Yeah, completely unrealistic, right?

Sandy: Well, this is the whole thing though, you know, I'm in New York and my friend did get one that had that same kind of benefit, so they were giving [crosstalk 00:51:04]...

Pat: I didn't say they don't exist. You just didn't own it.

Sandy: [crosstalk 00:51:08]

Scott: There was no product guaranteeing you a 7%-plus rate of return.

Pat: That's what it was.

Scott: But you certainly could have earned that by being in the equities markets over that period of time.

Pat: No question.

Scott: You certainly could have...

Sandy: [crosstalk 00:51:22]

Scott: ...tripled.

Pat: So you need to go...

Sandy: What I mean is that her accountant in New York had gotten her an annuity into an annuity [crosstalk 00:51:33]...

Pat: Right. It might have been...

Scott: There's so many different types of...You have the problem of not having a good advisor.

Pat: My recommendation is you find somebody who can help understand what this product is today, what options you have today. You're not 59-and-a-half, so what options you have today and whatever may or may not have been said 15 years ago at this point's irrelevant. And it's...

Scott: It's what it is. But you can't continue to work with that advisor.

Pat: No, I would totally agree with that.

Scott: Unfortunately, we are out of time and...

Pat: Appreciate the call.

Scott: ...been great being here with you. You've been listening to Scott Hanson and Pat McClain with Allworth's "Money Matters."

Man: 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.