Maximizing retirement income, exploring Roth conversions, the lure of Bitcoin, and the explosion of exchange-traded funds.
On this week’s Money Matters, Scott and Pat address common concerns surrounding retirement investments, discussing diversification strategies and the risks of investing too heavily in volatile assets like Bitcoin. Plus, they engage listeners in conversations regarding the complexities of financial products such as annuities and variable contracts. Finally, Allworth's Director of Client Experience, Victoria Bogner, shares a case illustrating the importance of understanding financial agreements, showing how one individual dramatically maximized her benefits through careful reading and strategic planning.
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.
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 H.: Welcome to "Allworth's Money Matters." Scott Hanson.
Pat: Pat McClain. Thanks for joining us. We're here to talk about financial stuff. Do we need to put the intro every time? You know, I figure...
Scott H.: Okay.
Pat: Huh? I'm not gonna...I'm not changing.
Scott H.: We've been doing it this way for 29 years. Doggone it. It was good enough for yesterday.
Pat: I'm not changing.
Scott H.: Yeah. Don't change now.
Pat: Dang it.
Scott H.: Don't change now.
Pat: Oh, I went to the gym this week. Oh, I hate this time of year.
Scott H.: What do you mean?
Pat: The parking lot was packed. There were people everywhere. I'm like, why don't you guys just give up already?
Scott H.: Oh, nice. That's a good way to love your neighbor.
Pat: No, no, no. It just reminded me, like, four years ago, I remember the gym, these two guys I knew from church, they see me in the gym and they're like, "Oh, New Year's resolution, Pat? You know, working out?" And I'm like, "No, you're the new guy here. I've been here. You're the new one. Now, just quit already.
Scott H.: All right. Well, good. We got that out.
Pat: I'm angry.
Scott H.: Anyway, we got a good programmer here. By the way, before we start, we'd looked at some stats. We've been doing this program for almost 30 years on the radio primarily for decades and then now podcasts. And we just last year hit our 3 millionth download.
Pat: Wow. Wake the kids, call the neighbors.
Scott H.: According to Buzzsprout, we are the top 1% of all podcasts for downloads. And according to Listen Notes, we're the top 0.5% for popularity out of 3.5 million.
Pat: And I saw my income go nowhere because of this. I didn't get a raise. How's this benefiting me, Scott?
Scott H.: This is supposed to be for the listeners, the 100,000 engaged listeners.
Pat: I'm relatively coin-fed. Okay? So, I'm going to ask for a raise. Why don't you do that? Ask for a raise.
Scott H.: Who do I ask?
Pat: Who do you ask?
Scott H.: I don't know who I ask.
Pat: I don't know who you could ask. You're the founder of the firm.
Scott H.: I know. It sounded like the right thing to say, but now that I think about it. Okay. Well, that's nice. Half a percent...
Pat: Look. I understand that anybody can start a podcast.
Scott H.: Oh. There's probably millions.
Pat: There's 3.5 million globally, according to Listen Notes.
Scott H.: Globally.
Pat: There's probably more than that, though. They don't even know how to get on the platforms.
Scott H.: Right? It's like...
Pat: Yeah, there are so many podcasts.
Scott H.: There are so many podcasts. Oh, there's so many. But anyway, I'm glad you listen to this podcast.
Pat: And what's your favorite podcast?
Scott H.: Well, let's get to...it doesn't...it's irrelevant.
Pat: No, it's not.
Scott H.: I don't have a favorite. I tend to move...bounce around.
Pat: Okay.
Scott H.: I listen to "Honestly" almost the...typically the same day it comes out.
Pat: Do you?
Scott H.: I like...I like that...
Pat: And that's with?
Scott H.: Bari Weiss, Free Press.
Pat: I've listened to that a couple times.
Scott H.: And I've been listening to "Built to Sell."
Pat: I love that.
Scott H.: About companies that sold...founders that sell the business.
Pat: And it's kind of like how I built that. It's very similar to...
Scott H.: But the opposite. Yeah. How I sold that. Yeah.
Pat: Anyway, let's go.
Scott H.: Yeah.
Pat: And by the way, just remind me. So, I want to come back to this about these. You talk about podcasts in the world, 3.5 million. They're doing the same thing with exchange traded funds. There are so many of them.
Scott H.: There are so many of them. There are so many of them now. Right?
Pat: Five years ago, there were almost none, but now they're like every flavor. One that just tracks... NVIDIA has got one.
Scott H.: And they're not necessarily good or bad. It's dependent on how they're used, like most financial tools.
Pat: That is right. So, I'm going to talk a little bit about the proliferation of exchange traded funds, and it always reminds me of...I met this guy at a conference, God, years ago, this old grizzly veteran of the financial services industry. And he said, "Pat, remember, when the ducks quack, feed them." And I'm like, "What does that mean?" He goes, "If the clients want something, you give it to them, regardless whether it's good for him or not."
Scott H.: Was he serious?
Pat: He was 100% serious. And he sounded just like that. I'm like, "What?" He goes, "When the ducks quack, feed them," which was, if the clients are asking for something, if it's good for them or not, you give it to them because you can make money on it. And when I read this article about exchange, I thought exactly of this grizzly old...
Scott H.: And we'll talk about those...
Pat: And we'll talk, and please don't...
Scott H.: No, we won't forget.
Pat: Don't forget.
Scott H.: All right.
Pat: Please.
Scott H.: I'm looking forward to it now. I don't know if I can concentrate because I can't wait for this conversation.
Pat: Now, you're making fun of me.
Scott H.: All right. Let's take some calls.
Pat: It's not hard.
Scott H.: It is not hard. If you want to be a part of the program, you've got a question for us...and we love taking calls on just about anything financially related, particularly those that have saved well and are looking at how to maximize what they've got, both for themselves and for others. So, you can send us an email at questions@moneymatters.com, and we'll get you scheduled to be on the program, or you can call 833-99-WORTH, and we'll schedule you to get on the program.
We're going to start off here in New Hampshire with George. George, you're with "Allworth's Money Matters."
George: Hey, guys. How you doing?
Scott H.: We're great. Very good. Yeah.
George: Yeah. Good to hear that you guys finally made it to the gym this year.
Pat: You're piling on. I tried yoga, too, by the way. But we're not going to get into my physical.
Scott H.: What can we do for you?
George: Anyway, yes. My question is more for my ex-brother-in-law instead of myself. My ex-brother-in-law, he is 60. He's never married. He has no children. Smart guy, has a really good job in accounting. Ten or so years ago, his parents passed away, and he lives in his parents' house, which he co-owns with his three siblings. He also bought a house of his own about 15 years ago. It's now worth 500,000, and he has 50% equity in it.
Scott H.: Okay.
George: He rents that out for about 2,000 a month.
Scott H.: Okay.
George: And the big question comes is that he would like to take that house that he bought, sell it, and convert it to Bitcoin. And I've kind of talked to him a little bit, you know, because Bitcoin is very volatile, obviously, very speculative. And you know, the thinking being that, you know, as you get older, you probably don't want such a high percentage of your portfolio into something that risky, right? But his side of the story, right, is that Bitcoin has doubled every year for the past four years, which may be true, right? That may be true.
Scott H.: Well, it wasn't a straight line, but keep going.
George: Yes. Yeah, yeah, exactly. Like, if you look back on history, right, there's a lot of things like, you know, Tulips and Beanie Babies had a good couple of years as well back in the day.
Scott H.: That's right. That's exactly right. And I'm sure there's other assets that are up 100x over that period of time as well.
Pat: [crosstalk 00:07:42].
Scott H.: But yes. Okay.
Pat: That's a popular one.
Scott H.: And it's a big one.
Pat: And what did you tell him to do? Well, first of all, did he come to you for advice, or did he just tell you he was doing this?
George: No, no. He didn't come to me for advice. No. It's something I just happened to find out and try to, you know...it's one of those things where try to talk him out of it, but you know, Bitcoin could go up 20x and then I'm on the hot seat.
Pat: I'm asking this seriously. Are there any other, like, mental issues... Truly, what would cause someone to actually act in this manner? No sane 60-year-old...
Scott H.: Is gonna take that big of...I don't know what he has in savings, but does he have a lot in other assets? Like, if you had 10 million bucks sitting in other assets...
Pat: It'd be like, "Yeah, go for it."
Scott H.: Okay.
Pat: Yeah. It's 2.5% of the portfolio.
Scott H.: I'm sick of dealing with this rental. I'm going to take my 250 grand out of that, and I want to buy Bitcoin. Fine, if you had 10 million bucks. If you have $1 million, then it's insane.
George: Yeah. Okay. Yes. That was kind of my point of view. I think you should...I mean, at any age, you should diversify, but especially as you get closer to retirement, right?
Pat: Yeah. And as a percentage of the portfolio. I mean, Scott and I were just talking before this show about bad investments we have made. We were.
Scott H.: Right? We were.
Pat: Yes. That we have made, right? And then...
Scott H.: Yeah. Not everything works out.
Pat: No. And then we reminded ourselves, but many great, great...
Scott H.: Almost all...yes.
Pat: Great, great investments, but...right? Because the fact we're human with our own emotions, we have a tendency to dwell on the losses. What percentage of your portfolio do you think this is? Is it big? Is it little or big to him?
George: I would say it's at...I don't know, but I would say it's at least, I don't know, 20%, 30% if I had to guess, but I don't really know.
Pat: If we gave you the right answer, what would you do with it?
George: Oh. I'm going to, you know, send him this podcast so he can hear it.
Pat: Well, it's crazy. It makes no sense.
Scott H.: It's pure speculation.
Pat: Why Bitcoin? What's wrong with NVIDIA?
Scott H.: What about Doge Coin?
Pat: Oh, yeah, Doge. Why are we stopping at Bitcoin?
George: Yeah, exactly. Like, if you were to take even the volatility of Bitcoin out of it, I think if you were to put...you know, as a 60-year-old, if you were to put a large percentage of your portfolio on any one stock...
Scott H.: That would be foolish, too.
George: ...your retirement quality of life is gonna be completely tethered to that one investment.
Pat: George, if he was my relative and he shared this with me, I would say to him, "You're out of your mind. That's just stupid." And then I would leave the conversation...
Scott H.: And you can't live with me.
Pat: That's fair enough. And I would leave the...
Scott H.: And I'll say, I have had that conversations with many people. They want to do something that's like, look, if it doesn't work out, if that's what you want to do, if you want to follow it, instead of taking my advice, if you want to do that, that's fine. Just remember, you can't live with me.
Pat: We have fired clients over...
Scott H.: Absolutely.
Pat: They're telling us they're going to do something, and I'm like...
Scott H.: Like, what's the point?
Pat: ...well, I'm not going to be party to this.
Scott H.: No, because you know how it's going to end up.
Pat: And maybe it ends up great. Maybe he's 100% right. Maybe he is the most brilliant guy in the room, and it goes up by tenfold. And now his 250 grand would be less than 250 after taxes. It's probably 200,000. It turns into 2 million. Is his life better? Is he happier?
Scott H.: What if it goes to zero?
Pat: But what if it goes to zero? Why don't you tell that story? Tell the story about the guy with the fishing boat. I love that story.
Scott H.: I love it, too. That's why I've told this is... This was in the dot-com era.
Pat: So, '98?
Scott H.: Probably '99, maybe early 2000s. Maybe early 2000s.
Pat: Okay.
Scott H.: And a client called me up and he says, "Scott, I'm thinking about taking half my portfolio and putting it in the cubes." Right? That's Nasdaq.
Pat: Well, that's QQQ.
Scott H.: All tech. This was...they had had a huge run-up just like your ex-brother-in-law saying, "Here's how great. It's gonna last for years." Nasdaq had been on fire, it was up 85% in the year 1999. And so, I said...let's call him Bill. I said, "Bill..." And Bill had a house in Northern California. And he had a house up in...on the coast in Washington.
Pat: I thought it was in Alaska.
Scott H.: I changed this to the...
Pat: It was Alaska. It was Homer.
Scott H.: I'm trying to keep a little anonymity here.
Pat: Okay.
Scott H.: So, let's say it's not Homer. [crosstalk 00:12:22] I'm trying to change a little of the...a little of facts here. I should have changed Bill's name to something different while I was at it. [crosstalk 00:12:33].
Pat: His name was Frederico.
Scott H.: So, he spent the majority of his time in his cabin on the water out in his fishing...he fished all the time. He loved it. He had a fishing boat. And he called and wanted to make this move. And he says, "What do you think about it?" And I said, "Well..."
Pat: Half of his portfolio, all tech.
Scott H.: Half of his portfolio.
Pat: And he was living off...
Scott H.: All tech stocks.
Pat: Yeah. And he was living off the portfolio.
Scott H.: Correct. He was retired. And I said, "Well, here's the thing, Bill." I said, "If you're right, we can trade in that fishing boat for a bigger fishing boat with more electronics and all the goodies on it. But if we're wrong, the fishing boat's gone, and probably the cabin as well."
Pat: All right. So, now you did...
Scott H.: So, I framed it back to what...this is not just numbers on a statement, right?
Pat: This is life.
Scott H.: This is how it translates.
Pat: This is lifestyle.
Scott H.: Yeah. No one's gonna starve in America unless you're mentally ill or have no access to it, but it's lifestyle. What do these dollars actually mean? And so, the concern that you have, George, obviously, that we have with the 60-year-old male that if he probably doesn't have much in savings and he takes his one asset he does have, and puts it in Bitcoin...
Pat: Yes.
Scott H.: I would just tell him, "You can't live with me."
Pat: Yeah. And it's your ex-brother-in-law, which I think is interesting in and of itself. Yeah. I mean, it's asinine.
Scott H.: I think people...
Pat: Am I allowed to say that? Yes. It's crazy.
Scott H.: It's all about probabilities of outcome. And particularly as we get older, we don't have the time to make a backup.
Pat: Yeah, if he was 30, I'd go for it.
Scott H.: Whatever. It's not gonna make it...
Pat: And again, you can't live with me.
Scott H.: But it's coming back to, like, what happens in the best case scenarios, but what are the worst case scenarios here? Like, when we do financial plans with people, we look at what happens if the day after you retire, we go through another financial crisis?
Pat: So, probabilities of success or failure.
Scott H.: Correct. And most people are much more concerned about maintaining their lifestyle than they are about becoming wealthier. And if you do something that's suddenly going to have 60% chance that your lifestyle is going to go backwards, most people are like, "I'm not going to take that."
Pat: That's right.
Scott H.: Unless...right? And it all get sound to what percentage of his portfolio is this. Like, you're right. You know exactly... And you're going to send him this podcast?
George: Oh, yes.
Scott H.: That's all we need, is another negative review. All right. Appreciate the call, George.
George: All right. Thanks, guys.
Scott H.: Yeah.
Pat: So, Scott, you talk about you can't live with me. So, you know, many of the listeners know I have four children. They were home for Christmas. And my wife and my only daughter were going to each one of the kids' bedrooms, and they want to redecorate them for some reason. I'm like...
Scott H.: Redecorate them how?
Pat: That's what I said.
Scott H.: Who wants to redecorate it?
Pat: My wife and my daughter were like, "We're going to move some furniture out of this thing and repaint the walls and the whole bit." I go, "What? The kids have gone. They only come home for, like, a week a year."
Scott H.: But does it still look like they live there?
Pat: Yes.
Scott H.: Oh, come on. I can understand your wife.
Pat: Really?
Scott H.: Yes.
Pat: I just shut the door. I just shut the door. It's fine. It's just the door, it's closed, it doesn't have anything to do with it. So, the end of the story. So, there's this, like, kind of a futon thing in my son's room. It's like this...I don't know what it is. It starts with a P or whatever. So, my wife...
Scott H.: What?
Pat: It's a chair. It's a chair thing, right? So, my wife actually, she says, "Okay. Can you help move this thing out in the garage and then get rid of it?" And so, I said to my daughter, I go, "I'm going to get rid of it." I'm going to put it on Facebook and just send it out like, here, chairs, come into my house and pick it up. So, we took pictures of it and me sitting in it. I was modeling for it, which just created a whole new list of just people making fun of me on the internet. But my son responds, "Oh, this is a great way to find out you're changing my room." He saw that we're giving away his furniture from his bedroom and he responded on Facebook. "What happened? Why are you doing this to me? My room."
Scott H.: How old is your son?
Pat: Twenty-three or 24.
Scott H.: So, I had a good friend of mine. I'm going to give his real name. There's no anonymity in this one. Mark Holloway [SP]. His dad passed away, and I went down to San Diego to go to his funeral. So, I went and I saw the family home.
Pat: Okay.
Scott H.: Mark is...
Pat: Okay. All right. I know where this is going.
Scott H.: The room he shared with his brother had not changed since they went off to college.
Pat: Little league trophies?
Scott H.: I kid you not. The trophies, ribbons from the track. I laughed so hard, I got such a kick out of it. The room, it was like a museum from his teenage years, had not changed.
Pat: What's wrong with that?
Scott H.: Well, I guess his mom didn't have any problem with it. She enjoyed it, apparently. She'd probably go in there from time to time and think about the good old days or something.
Pat: Were they?
Scott H.: I don't know. I guess. If they were bad, she would have...maybe that's why I've changed my kids' rooms since...the day they leave, remodel, repaint.
Pat: Like, they're out, they're in the car driving away, you're waving. You run back in the house, you start stripping the room?
Scott H.: We're going to go back to calls in a minute. I remember when my oldest daughter was in high school.
Pat: Oh. This is a financial show, though, right?
Scott H.: My oldest daughter, when she was in high school, she wanted to paint her bedroom.
Pat: Okay.
Scott H.: She was like 15 or 16.
Pat: The young Jessica.
Scott H.: She was young then. Yeah, she was 15 or 16. So, I thought it'd be a nice thing for father-daughter time together.
Pat: Oh, to paint?
Scott H.: Yes.
Pat: What's wrong with you?
Scott H.: Her ceiling had a little different shape to it than...it wasn't flat. So, the corners and stuff, we spent, like, three days, maybe not full days, but three days painting. When she moved out, I'm like, I got to change this thing because it looked horrible. And I hired a painter. He nailed...blew the thing out in, like, three hours. But I had to hire a painter the first time because I couldn't get the lines good enough. I'd get someone to come make it look decent. Anyway.
Pat: All right, let's go to the calls.
Scott H.: Enough of life stories.
Pat: Oh, my gosh. That actually...well, it's nice seeing you again, Scott. We haven't talked in a couple of weeks. It's really kind of fun. Kind of missed you a little bit. Not enough that we're going to actually start spending time together. So, Scott and I stepped down as CEOs. We don't really interact much.
Scott H.: No, we don't interact much anymore.
Pat: Yeah. We used to talk twice a day.
Scott H.: Oh, oftentimes I'd get a call from Pat at, like, 7:01 in the morning.
Pat: Because you told me not to call before 7.
Scott H.: So, I could tell, "Uh-oh. Pat's been awake since 3:30, mulling on something. There's something in the business that's been bugging him since 3:30 in the morning."
Pat: Oh, my gosh. I don't miss that at all.
Scot: All right, let's go back to calls here.
Pat: I don't miss it even a little.
Scott H.: Now, you're just doing the stuff you like to do.
Pat: That's right, 100%. I go out to lunch with clients now.
Scott H.: I'm good managing people.
Pat: I've never gone out to lunch with clients in my whole career. I go out to lunch with clients. We're not in a hurry to go anywhere. They're retired. I still kinda have a job.
Scott H.: When do you need to be back at the office, Pat? No rush.
Pat: I don't even pretend.
Scott H.: What, you want a dessert?
Pat: I heard the flan's good.
Scott H.: Oh, listen, it's Tuesday. You know, movies are half price. All right. We're going to start. I talked at the beginning of the program, all these engaged listeners, that's all changed now. The numbers are going down. We obviously have decided it's just about us. All right. We're in Ohio talking with Scott. Scott, you're with "Allworth's Money Matters."
Scott: Yeah. Hi, Scott. Hi, Pat.
Scott H.: Hi.
Pat: Hi.
Scott: I want to let you two know that I am an avid listener of your Saturday morning podcast for many years. And during that time, I have managed to pick up a few financial nuggets along the way. So, I thank the two of you for that.
Pat: Thank you.
Scott H.: Well, thank you. Probably a mistake, but...
Scott: No, no, it's been very helpful.
Scott H.: What can we do to help today?
Scott: Okay. So, I'm a firm believer of the Roth IRA...well, the Roth accounts, whether it be through my company initially, Roth 401(k), to now in retirement, my Roth IRA. And during the last few years, I've done Roth conversions, I've contributed to my Roth IRA accounts. And the five-year rule gets thrown in my face all the time. So, what I'm wanting to ask you...
Scott H.: Wait. When you say that it gets thrown in your face, other people tell you about the five-year rule?
Scott: Well, yeah, they tell me about the five-year rule, what that consists of. So, my question does center around the five-year rule item.
Scott H.: Okay. And then I'm going to tell you why it doesn't pertain to you, but go ahead.
Pat: Yes.
Scott: Okay. Well, hopefully not. So, the five-year rule, I know it only pertains to earnings and not what I contribute. So, who keeps track of when the five-year rule...
Scott H.: Nobody.
Pat: That's brilliant. That is the best question we've had in a long time.
Scott H.: Nobody.
Pat: No one.
Scott: Well, I've asked that question of many financial, and I never get a response. I never get an answer.
Scott H.: Look at most...a lot of the tax code is voluntary compliance.
Pat: That's right.
Scott H.: A lot of the tax code...529 plans, right? Have you ever seen anyone audited...
Pat: Never.
Scott H.: ...on a 529 plan? Have you ever seen anyone audited in a Roth five-year rule?
Pat: No. Never.
Scott H.: Never. Well, then it's very rare someone takes money out within that five.
Pat: That's right.
Scott H.: Particularly someone who really loves Roth, a firm believer in the Roth.
Pat: Yeah, which is the last dollar to be spent. But your question is actually...it's a brilliant question.
Scott H.: Because... So, there are some laws that get passed, regulations that require financial companies to do certain things. Reporting of income. Reporting of income, how much dividends and what transactions occurred in your account last year.
Scott: Okay. So...
Scott H.: And required minimum distributions. What is the required minimum distribution? But none that are required on a Roth.
Scott: Really? I thought they required it as going to a financial institution. They are required at the end of the year to provide a form telling you what you have contributed to your Roth IRA.
Scott H.: That's right. That's right.
Scott: Or your traditional IRA.
Scott H.: But there's nothing to say that. When was the first...when was the account, the first account open? When was the first Roth contribution made?
Scott: Yeah.
Scott H.: There's no requirement on that.
Pat: There's no requirement for that to the financial institution to report that.
Scott H.: Otherwise, yours might say, "Oh, first contribution made in 2006."
Scott: Yes. Yes. So, when I convert from a traditional IRA, maybe in stocks, and go over to my Roth IRA, keep it in stock, I sell the stocks, my Roth IRA and do something else, I'd lose track of what I'm doing. So, you're telling me I don't have to worry about the five-year rule?
Pat: Have you taken money out of the Roths?
Scott: I have not. No.
Scott H.: Okay.
Scott: I don't plan on taking money out of the Roth for many, many years.
Scott H.: Okay. So, it'll be more than five years since the time you made your first contribution or the time you made your first rollover...I mean, conversion.
Scott: That is... Well, okay. So, it's really not applicable to me, but it could be applicable to somebody else.
Pat: All right. But the reality is...
Scott: [crosstalk 00:24:19].
Pat: But the reality is, normally, when people use Roths, they use it to feather income...
Scott H.: They're voluntary...
Pat: ...for taxpaying, additional taxes today that they don't have to pay, right? Because they could have made a pre-tax contribution or they didn't have to do the conversion. So, these are people that are planning their finances, stating to the IRS, "Look. I'm going to send you money today in exchange for the promise that Congress made, but let's hope they're going to be good on that promise when I pull my money out 20 or 30 years down the road." Right? So, your point is well taken, but it doesn't happen in reality.
When you see people take money out of a Roth, what they're doing is they're trying to keep...they need X income, and they're trying to keep themselves below a marginal tax bracket.
Scott: Yeah. I agree.
Pat: But the reality is most of the people that have money in Roths also have money in a brokerage account.
Scott: Of course, of course.
Pat: Right?
Scott: Absolutely. Yeah.
Pat: I can't...I'm trying to think of when I've had money come out of a client's Roth account. I cannot... Can you?
Scott H.: Yeah. I had someone do it against my recommendation.
Pat: Oh. I can't...
Scott H.: And by the way, you mentioned sometimes we fire clients. That's when I fired.
Pat: Yeah.
Scott H.: [crosstalk 00:25:36] I think about it. I think I fired three clients in my career. That was one of them.
Pat: Because they're not taking...you know they're doing harmful stuff to themselves.
Scott H.: What's the point? I don't need...I think I...I don't need...I mean...
Pat: Yeah. Oh, don't say that. We like clients.
Scott H.: I love clients.
Pat: Okay.
Scott H.: I don't love clients that don't take my advice, that do things contrary to my advice, and that are...
Pat: That are going to be harmful to themselves. Yeah.
Scott H.: What's the point? Well, why... Don't use me. I mean...
Pat: But yeah. So, your point is well taken. But it doesn't...it's not real. It just doesn't happen. I wouldn't...
Scott H.: You don't have to. Scott, you're...like...
Scott: So, if I were to ask an IRS agent, he'd tell me something differently then. Right?
Pat: Why would you be talking to an IRS agent?
Scott: No, I won't. No. No, I don't. No.
Scott H.: He might not even know what you're talking about.
Pat: Yeah.
Scott: [crosstalk 00:26:21].
Pat: I mean, out of all the things that they look for tax compliance, that's...because it generates... By the way, what's the point of it? I mean...
Scott: Yes.
Scott H.: They would just assume you'd pulled money back out of your Roth and put it in a taxable somewhere else.
Pat: Yeah, but...
Scott: I would think so.
Pat: But what's the point? Think about this, Scott. What's the point of it? What was the five...what's the point of the five-year rule? Think about. I never understood why it matters.
Scott: Yeah. It didn't make...doesn't make any sense to me.
Scott H.: I mean, I understand the 59 and a half.
Pat: Well, I don't understand why it's 59 and a half unless it's a round number.
Scott H.: Yeah. But I understand older age.
Pat: Yes. You have to start withdrawing. And the required minimum distribution is at age, what, 73, 74, 75?
Scott H.: But that doesn't apply to Roth.
Pat: Yeah. Yeah. Anyway, I'm just gonna...Scott, we shouldn't...let's find other things to think about.
Scott H.: Yeah.
Pat: Is that...Scott, I've...you are a blessed man if, in your financial life, this is the one thing that you have to worry about.
Scott: [crosstalk 00:27:20].
Pat: Everything else is so great.
Scott: Okay.
Scott H.: What was that? What did you say?
Scott: I do sleep well at night. So, I'll just put the five-year rule out [crosstalk 00:27:30].
Scott H.: You're never going to have to...it's never going to be an issue for you.
Pat: And do us a favor. Share this podcast with your friends...
Scott: I will.
Pat: ...especially since you are one of the main attractions. You are the star of the show at this point.
Scott H.: That's right.
Pat: So, you could share it with your friend.
Scott: Well, my name is Scott and I...and of course, we got Scott on the podcast, too.
Scott H.: Yeah. We're trying to... If you meet anyone named Scott, it's always someone between age 50 and 68. How old are you, Scott?
Scott: I'm 70.
Scott H.: Oh, I missed about two years.
Scott: But I act like I'm 50, though. I act like I'm 50.
Scott H.: Okay. I got it.
Pat: All right. Appreciate the call.
Scott H.: Yeah. Thanks for calling, Scott.
Scott: Thank you, sir. Ladies and gentlemen, see you.
Scott H.: On the Roth, the majority...well, roughly half Americans pay no income tax. Right? Because you get a standard deduction.
Pat: Yes.
Scott H.: No income tax. So, those people, if they're saving from...money in their 401(k) or IRAs, it should clearly be in the Roth.
Pat: That's correct.
Scott H.: They're either in a 0% tax bracket or a very 10% or 12% tax bracket. It's only, I think, 15% or 18% of taxpayers are in an a tax rate lower...I mean higher than that 12%, that first bracket.
Pat: Say that number again.
Scott H.: It's like 18% of taxpayers.
Pat: Of taxpayers? So...
Scott H.: I mean, half of the revenue comes out from the [crosstalk 00:28:49].
Pat: Yeah. So, that would be 60% of the population is at below that bracket?
Scott H.: No. Like, 80%. Eighty percent of Americans should be using a Roth 401(k).
Pat: Okay. All right.
Scott H.: There's no question to even ask. Like, there should be Roth.
Pat: But the reality is those people...
Scott H.: [crosstalk 00:29:08] calling us.
Pat: And they don't have any money to save. They're living... Like, growing up, my mom used to say, "Oh, we should have bought that. You know, I should have...we should have bought that property down the street, like, 20 years ago." I'm like, "With what?" Where were you going to get this magical money that we were...all of a sudden become a land barons?
Scott H.: A couple of years ago, I was up in Tahoe and there was this one area of Tahoe that...lots were sold there $300 apiece in, like, 1937.
Pat: Okay.
Scott H.: And someone said, [inaudible 00:29:41]. I'm like, "Who had $300 in the 1930s?" [crosstalk 00:29:46].
Pat: They're those rich people. Okay. So, the point being the Roths.
Scott H.: But if you're in a higher tax bracket, then you got to really look at it. Do you want to do a pre-tax or a post-tax? And if you're going to convert, how much do you convert?
Pat: And when?
Scott H.: And so, myself...I mean, it's the beginning of the year. I went onto my own 401(k) because the contribution limits increased this year to increase what's going in. And I am...I do it before tax. And I thought about doing Roth.
Pat: And?
Scott H.: I went before tax.
Pat: Because?
Scott H.: There's a chance federal income tax rates will go higher. Right?
Pat: Okay.
Scott H.: I mean, there's...clearly, that can happen.
Pat: And?
Scott H.: And...
Pat: I'm interested in this. This is...
Scott H.: There's also a chance that maybe there's a complete reform in taxes and there's...we now have a national sales tax with a lower flat tax rate. That's in the realm of possibilities.
Pat: Okay.
Scott H.: There's also a possibility I don't stay in California the rest of my life.
Pat: That's probably the biggest one. Do you really think that we'd go to a flat tax or a VAT tax?
Scott H.: And there's also...I'm probably not going to spend all of the money.
Pat: Some of it is going to go to charity.
Scott H.: Yes.
Pat: Right.
Scott H.: So, with all those factors, I went...and I don't like the way California spends money. So, I just assume, take a pretax.
Pat: Why would you say that? They just laid 22 miles of the high-speed rail.
Scott H.: They've been working on it for...
Pat: Twenty years.
Scott H.: $100 billion, 22 miles.
Pat: Come on, Scott. It's 22 miles. It's a long way, 22 miles.
Scott H.: $26 billion on homelessness.
Pat: Holy smokes. So, back to that, the tax. Do you think that we would ever go to a flat tax? I just can't see it because it's not...
Scott H.: Politically.
Pat: It's not... We have a very progressive tax system.
Scott H.: Right. That's why half of Americans don't pay any income tax.
Pat: Correct.
Scott H.: No. They'll pay payroll tax. They'll pay social security, on which they'll get a benefit from.
Pat: Yeah. So, if you went to a flat tax, would that not be considered a regressive tax?
Scott H.: Oh, it wouldn't be...
Pat: A sales tax.
Scott H.: By very nature, a sales tax would clearly be regressive because higher income people don't consume all their income.
Pat: That's right. Yes.
Scott H.: And to your point, if your mom is saying, "Oh, I wish we would have bought that property," there was nothing...I mean, it was barely...like, which bill do we pay this week?
Pat: Oh, yeah. I always got a kick out of that. Never said anything though because I love my mom dearly. Didn't want to upset her, but I always thought I grew up in this house. I don't think there was money splashing around.
Scott H.: You could...it is clearly possible that tax rates are lower and we have a national sales tax, value added tax. I mean, the EU's got it. What is it, 17%, 22%? Somewhere.
Pat: But they have a progressive tax rate as well.
Scott H.: Yeah, but not...
Pat: Both.
Scott H.: A lot of countries are lower than ours now.
Pat: All right.
Scott H.: I mean, I think part of it, when you're considering things like Roth and it's...
Pat: You've got to take legislation into account. You have to recognize that.
Scott H.: Because what you're betting, you are betting that the tax code is not going to be dramatically different, and that your withdrawals will be tax-free.
Pat: That's correct.
Scott H.: Right? So, it wasn't that...when I started in this industry in 1990, there used to be an excise tax.
Pat: On pensions, wasn't it?
Scott H.: Yeah. And 401(k)s of greater than...was it 750?
Pat: Yeah. There was a name for it.
Scott H.: It was a 15% excise tax.
Pat: Yeah. What was the name for it? There was a name for it.
Scott H.: I don't remember the name.
Pat: It was a tax code.
Scott H.: I remember the number, but I remember names. But there was an excise tax.
Pat: I remember this.
Scott H.: If you had a lump sum larger than...
Pat: Yes.
Scott H.: I think it was 750, wasn't it?
Pat: Yes. Yes. Yes.
Scott H.: There was an excise tax.
Pat: We were retiring...
Scott H.: So, put that in today's dollars, that'd be like two million bucks, two and a half million bucks. There was an excise tax.
Pat: Yeah. So, the money would go into an IRA, but you still had to pay a tax on that transfer.
Scott H.: You paid an extra tax for saving...doing a good job saving.
Pat: Yes. Yes.
Scott H.: So, when you're...even when you're looking at Roth conversion, some of those things, like...
Pat: Yeah, just don't buy in 100%.
Scott H.: That's right. You want to diversify your tax strategy the same way you think about diversifying your investments.
Pat: Yeah. You know, I was talking to a friend the other day. It's like, it just blows my mind that we get people to qualify for the Obamacare insurance that are worth millions and millions of dollars. These clients are worth millions and millions of dollars. And they get this subsidized health insurance because of how we negotiate through the maze.
Scott H.: That's because it's not based upon assets, it's based upon...
Pat: Don't you just find that a little bit crazy?
Scott H.: There's lots of crazy things.
Pat: I don't know. I just always...I just find it just...and I participate in it. I'm helping them.
Scott H.: I had a conversation over the holidays with a family member that was...there was the discussion on lifting the cap for social security taxes on wages.
Pat: Okay.
Scott H.: Right? So, what is it, 170 grand a year, somewhere in there, where you pay social security taxes up to that point of your wages, above that, there's no tax...
Pat: Yeah, and on both sides, and then Medicare goes unlimited [crosstalk 00:35:04].
Scott H.: Medicare goes unlimited, yeah.
Pat: On earned income.
Scott H.: Correct. Yeah. Wage-type income.
Pat: Yes.
Scott H.: Or self-employed income. And so, I was talking to this person that thought, well, it would seem to be fair to...there shouldn't be that cap on there.
Pat: Why? That's what you said.
Scott H.: Right. Well, no. I said...here's the challenge. When we've got the top tax rate at 37%, plus we've got the 3.8% excess tax...
Pat: I don't...whatever that...yeah.
Scott H.: Which is 0.9% above the Medicare tax. So, let's call it 40%. I'm a resident of California. The top rate there is 13.3%. So, now, we're at 53%.
Pat: And you don't get to deduct state against federal anymore.
Scott H.: That's right. And so...and it's...you pay both sides. So, the employer pays half, you pay half. So, now we're...
Pat: So, now, you're at 65%?
Scott H.: Right. So, I said to him, I said, the challenge with this...
Pat: Sixty-five percent at the margin rate.
Scott H.: Yeah. And the people who are having these tax problems are the ones...typically business owners that have been successful, they build businesses and this. I said, if we adopted this, what's going to happen is, a business person will say, "Do I want to take the risk to grow my business?"
Pat: It slows innovation.
Scott H.: Because, like, if I lose, no one's going to bail me out. It's all on me. I can't deduct a capital loss except...
Pat: Against income.
Scott H.: Right. So, I'm stuck. No one's going to bail me out of my capital loss. And if I do extremely well, they're only going to keep 35 cents on the dollar.
Pat: But you could carry that capital loss $3,000 a year forever. You got that going for you. But you can't inherit it. You cannot inherit a capital loss.
Scott H.: Yeah.
Pat: It goes away at death. Right?
Scott H.: Yeah. Yeah.
Pat: It's pretty disappointing.
Scott H.: Well, hopefully, you don't have a lot of losses.
Pat: I don't. It's theoretical.
Scott H.: Yeah. I mean...
Pat: So, how did the argument...
Scott H.: I don't know. That was...
Pat: And that was it? And you're like...
Scott H.: I said, "Get the hell out of my house. Pass me the mashed potatoes."
Pat: And what is that Jell-O thing?
Scott H.: It was a good conversation. It was just...
Pat: Are those marshmallows in the Jell-O?
Scott H.: You have those, too.
Pat: Oh, my God.
Scott H.: I'm kidding.
Pat: All right, let's go. Let's move on.
Scott H.: All right. Yeah. So, right now, we're going to hear a client story from Victoria Bogner. And Victoria is our...what is Victoria? Vicky, welcome to the program.
Pat: Yeah. Vicky...
Vicky: Hi.
Scott H.: Hi. Tell us...
Vicky: I'm the director of client experience. I know.
Scott H.: Yes. Director of client experience. Victoria is highly educated. In addition to being a certified financial planner, she's a chartered financial analyst, which is a very rigorous...
Pat: Oh, it's really hard. Yeah. And you work out of what office?
Vicky: I work out of the Lawrence, Kansas office.
Pat: Which is?
Vicky: Which is just west of Kansas City.
Pat: Thank you.
Vicky: So, it's all about the Chiefs right now.
Scott H.: Of course, it should be. I would let it be that as well?
Pat: And the...what's her name, the singer lady?
Scott H.: The singer lady.
Vicky: And Taylor Swift. The singer lady. The queen of Kansas City, yes.
Scott H.: All right. So, share with us the story.
V: Okay. I had a really interesting...
Scott H.: By the way...and I looked at the notes beforehand of that. Well, this is a good story.
Vicky: Oh, good. Good. Yeah. It's interesting because I think it impacts more people than people realize. So, I had a prospect come in a few years ago. And among other things, she had an old variable annuity. And this variable annuity had a guaranteed income benefit. So, for folks listening, there are products out there that you can purchase. You stick a chunk of money in, and it's invested in the market. It goes up and down, depending on how you invested it. But then you also can have a provision attached called a guaranteed income benefit. And it's a separate number. It goes up by some amount every year, regardless of what your contract value does.
And then later in life, you can draw an income amount off of this guaranteed income benefit number. And the idea is that it's an upgrade from the old idea of annuitizing a contract. You don't really do that anymore. Nowadays, people turn on this income benefit, and it gives them this income for life, even if the contract value goes to zero. But if you pass away and there's anything left in the contract, it goes to your beneficiaries. So, it sounds great...
Scott H.: Yeah. And every contract's a little different, right?
Vicky: [crosstalk 00:39:37].
Scott H.: Even an insurance company might have 20 different flavors of this. As the years go by, they underwrite...it's insurance, right? So, they underwrite it and they're like, "Oh, there's a risk here that we didn't see. Uh-oh, people found this loophole that they're taking advantage of. We didn't calculate this."
Vicky: That's right. So, even if you have a contract that has the same name as your neighbor, but you took it out a year later, it could be totally different.
Scott H.: It could be very different. That's exactly right. And by the way, full disclosure, there were some products in the early 2000s that were just mispriced.
Pat: Oh, my gosh. That was great.
Vicky: Oh. So mispriced.
Pat: They had the 6% guaranteed minimum.
Scott H.: And you had full discretion on how to invest your dollars.
Pat: It was crazy.
Scott H.: So, we utilized them quite a bit then, but they don't do much anymore.
Pat: But they didn't...they actually were...they were mispriced.
Vicky: They wised up.
Pat: Yeah. And they...the insurance companies...
Scott H.: And then, now, they try to buy their way out of the contract.
Pat: They offer more money than their contracts are worth.
Vicky: Exactly. Yeah. You get a letter in the mail, "Hey. Can we buy you out of this contract, please? We're losing money on you."
Pat: Okay. So, continue with your...
Vicky: Right. So, with this particular situation...and by the way, the caveat to these products is they're very expensive, right? They can be upwards of 4% or more when you add up all the fees. And the catch is that fee is assessed on the guaranteed value, and then it's taken out of the contract value. So, if you think about it...
Pat: Which means that the contract is going to collapse quickly.
Vicky: Exactly. So, if you think about it, if your guaranteed value is twice as much as your contract value, that's not a 4% fee, it's an 8% fee. And that's really hard to overcome. So, this prospect, who is now a client, she was just seeing her contract value go down each year. Her contract value was about half a million dollars, her guarantee was $800,000.
Pat: Wow. She's thinking this is...
Scott H.: Did she have it poorly invested in there? How did that happen?
Vicky: Oh, yeah. So, it was a variable annuity, but she had it invested in conservative and fixed inside the annuity with whoever sold her this product.
Pat: Which is exactly the opposite, because if you have those guarantees, you go 100%.
Scott H.: You buy an insurance on your portfolio. Yes.
Vicky: You'd go 100%.
Pat: Yeah. Equity.
Vicky: Yeah. You go as far into equities as you possibly can, right? So, this was just mismanaged from the start.
Pat: So, she brings this to you and says, "This is terrible." And you look at it and you say, "Wow. This is awesome."
Vicky: Well, this is the interesting situation. She didn't need the income. She wanted the flexibility of having control of that money. So, it's an IRA annuity. Her plan was, I'm just going to get rid of this thing, roll the money into my other IRA, and wash my hands of it.
Scott H.: And that's probably why she came in. "Hey, Vicky. I want to get rid of this. Can I transfer this to you?"
Vicky: Correct.
Scott H.: And most advisors...
Vicky: And I said...
Scott H.: Most advisors would say, "Yes, sign here."
Vicky: Yup.
Scott H.: Transfer the account.
Vicky: Yup. Open up a brokerage IRA with me, we'll move it over, I'll manage it, end of story.
Scott H.: Yeah. Let's give them a little back slap on the way out. Yeah.
Vicky: Yeah. Win-win for everybody, right? Well, what I said was, "Okay. Hang on. You've had this contract a long time. Give me the actual contract so I can read through it and just make sure we're not missing anything." So, I got this old, dusty tome of a contract, riveting reading, let me tell you. And inside that contract was one line that made all the difference, and that line was, withdrawals from the contract value decrease the guaranteed benefit dollar for dollar.
Scott H.: Not percentage-wise.
Vicky: Not proportionally, which most contracts are.
Pat: Awesome. Unbelievable.
Vicky: I know.
Pat: And there was no cap on how much you could take out?
Vicky: No. No cap. So, I call the annuity company with the client, verify that this is accurate. So, what we do, instead of her taking half a million and just moving it to an IRA and calling it a day, we moved 475,000, so 95% of the contract, over to her IRA. So, 475,000 goes to the IRA. Her benefit went down from 800,000 to 325,000.
Pat: Holy smokes.
Vicky: She was 65, so 5%. We turned on the income of 5% for life. So, she got over $16,000 a year of income on top of getting to roll out 475,000.
Scott H.: Oh, my gosh.
Pat: Holy smokes.
Vicky: Yes.
Pat: My gosh.
Vicky: So, if she lives another 30 years, that's almost half a million dollars of extra income she would have not had.
Pat: Oh, wow. Look. This is an extreme example.
Scott H.: This is an extreme example.
Vicky: It is.
Scott H.: But I utilize something similar.
Pat: Yeah. But then you have to [crosstalk 00:44:06].
Scott H.: This is an insurance company based out of Los Angeles. It was dollar for dollar, not pro rata.
Pat: Yes.
Vicky: Yeah.
Scott H.: And so...
Vicky: Yeah. Some companies did it like that.
Pat: And life insurance. So, what happens when they...well, you don't have to worry about...
Scott H.: And it only works...it works for those people that invest, and then there's a downturn in the market quickly thereafter or, like this person, it was just horribly invested. I mean, it was just...
Vicky: Yes, exactly. So, she kind of had her cake and ate it, too, because she got the contract value, most of it, and this income stream for the rest of her life.
Scott H.: I mean, life would have been better for her had it been properly allocated from day one, but...
Pat: That's incredible.
Vicky: Correct.
Pat: And I assume that she was happy with this decision.
Vicky: Oh, very happy. Well, and the lesson is twofold. A, if you have one of these products, don't rely on the annuity company to see you through to what your best case scenario is. They are not sitting on your side of the desk. They're not your friend. You call them. They're just going to say, "Turn on the income or move it out. Those are your two options," right? So, you...
Pat: And don't bring it to a...
Vicky: You've got to have a financial advisor.
Pat: Yeah. Well, don't bring it to a financial advisor that just says, "Yes..."
Scott H.: That's going to sell annuity.
Pat: "...we're going to just transfer this."
Vicky: Right. You want to have a fiduciary. Please call Allworth. If you have an old, crusty annuity that you don't know...
Scott H.: Annuity or life insurance product.
Vicky: ...or you don't understand, call us.
Pat: Or life insurance policy.
Vicky: Or life insurance policy.
Scott H.: Because there's some of those old life insurance policies that makes sense to get rid of either.
Pat: Yes.
Vicky: Right. And they can be so complex. And you really got to dig into that contract to understand the ins and outs.
Pat: I just did it with a client. He came to me, $2 million face value, life insurance, and we lowered the face value down.
Scott H.: Universal life?
Pat: Universal life. We lowered...it was variable universal life. We lowered the face value down so to accumulate more. And then we named all his kids the beneficiary and moved his wife off so that...for estate tax purposes.
Scott H.: And there's no premiums payment anymore?
Pat: No, none. And the thing just...yeah. But you see it all the time, right?
Scott H.: It's these old contracts.
Vicky: Yeah.
Scott H.: Vicky, you see it all the time.
Vicky: Normal people don't realize that there are these options out there that they can do with these products. And calling the annuity company, they're not going to tell you. So, you have to have somebody who knows what they're talking about, knows what they're doing, who is sitting on your side of the desk to help you navigate that.
Scott H.: And it's primarily these older contracts, because the insurance company's got wives.
Vicky: They got a wife, too. Yeah.
Scott H.: This is a really stupid mistake on there.
Pat: Yes.
Vicky: Yeah.
Scott H.: Yeah. I remember years ago, a product that we used, you were allowed to manage your funds by yourself. There was, I don't know, 30 different investment options.
Pat: It was crazy.
Scott H.: You could make changes every day. You could make the worst decisions possible. The insurance company was on the hook. There was no restrictions whatsoever.
Pat: It was crazy. We used them back in the day. It didn't last long. That was the insurance company.
Scott H.: No. But I remember, Vicky, we had a call with the chief actuary of this insurance company, I'm not going to say the name, years ago. Because we've looked at this, like, this is too good to be true.
Pat: We said, "This can't happen. This is wrong."
Scott H.: After the call, we looked at each other like, "They don't really understand this, do they?"
Pat: Or they weren't interested in the long-term viability of the company. They understood it.
Vicky: Yes.
Scott H.: Yeah, you got a point.
Vicky: Yeah.
Pat: Right? They understood it.
Vicky: Yeah. Especially those contracts that came out in 2008 after the crash, and everyone was clamoring to get into a guaranteed annuity.
Pat: And then the insurance companies were battling for market share.
Vicky: That's right. Yeah. So, they were saying, "Yeah, we'll give you a guaranteed 7% compounding return on your guaranteed income benefit." [crosstalk 00:47:44].
Pat: Crazy. All right. Before we let you go, Vicky, can you tell us what your...mostly, I understand what...I think I understand what you do. But what does the director of client experience actually do at Allworth? So, we've got how many advisors now?
Vicky: Oh, gosh, 150?
Pat: Okay.
Vicky: Well on our way to 200 probably.
Scott H.: Are you guessing? What's your job? What's your title?
Pat: Director of client experience, what do you do? Like, what...like, if I asked you...
Vicky: Great question. I had to figure that out myself when I joined Allworth. What we focus on, what my team does, is we look at the client experience. Because when you think about it nowadays, what really differentiates firms, one from another, is going to be how they treat their clients. Right? That matters so much. So, looking at that journey that the client takes, as soon as they decide to become a client of Allworth and onward, my job is to make sure that that experience is as amazing as it can possibly be. [crosstalk 00:48:50]...
Scott H.: So, the experience, not just like we return your calls. Experience just like what the scenario you just brought us through.
Vicky: Yes. So, not only does that...
Scott H.: Like, the financial planning software, tax, estate, that sort of thing?
Vicky: Yes. So, making sure that our advisors have all the tools they need to be able to be true fiduciaries and give the best advice, and making sure that we are up to snuff at all times on current policies, what's coming down the pike with markets, and you know, taxes, and wealth planning, and estate planning, and all of those components that are so integral to a financial plan, and then making sure that the client knows that we're on their side. We treat each of our clients like they're family. I mean, I know that our financial...our financial planners here are really top notch. They are cream of the crop, which is why a lot of high net worth clients, a lot of high net worth people are seeking Allworth out specifically.
Pat: Thank you.
Scott H.: Thanks for the commercial.
Pat: That is a great commercial. Vicky, as always, thank you for being on the show, and thank you for being part of the Allworth team. You are a valued and appreciated coworker.
Vicky: Yes. Thank you so much. I appreciate you guys.
Scott H.: Yeah. By the way, on the topic she...that's why a lot of high net worth people seek Allworth out. But let you know about our webinar that we've got coming up on...the topic of our webinar is top investment moves for high net worth planning. So, it's really designed for people with more than $1 million saved in investable assets. Not that we don't value all individuals, just there's some different things that, as your net worth goes up, that you need to start thinking about.
Well, during this webinar, we're going to talk about some Roth conversions and how...pros and cons of those, and how to think about that. Look at unwinding concentrated stock positions. So, perhaps you retired from an employer where you've got a big chunk in one particular company. How do you go about a strategy without incurring big taxes? How to utilize some excess cash and much more. So, Allison Scoggin, one of our great advisors, certified financial planner, is going to be doing the webinar. It's Wednesday, January 22nd at noon Pacific, Thursday, January 23rd at noon Pacific, Saturday, January 25th at 9 a.m. Pacific. So, the 22nd, 23rd, and 25th. To learn more and to register, go to allworthfinancial.com/workshops.
Pat: Before we go, I mentioned these ETFs, and we're not going to have time to talk about it.
Scott H.: Yes, we are.
Pat: Oh, okay.
Scott H.: We'll talk about it.
Pat: So, the U.S.-based electronic exchange traded funds, right? Exchange traded funds, ETFs surpassed $1 trillion dollars in inflows, not...
Scott H.: Yeah, I saw that. Last year, right?
Pat: That means new money coming in at $1 trillion dollars, right? And so, now, they make so many flavors of them. And this...
Scott H.: Well, because it's the modern day mutual fund.
Pat: That's right. And there's some tax strategies...
Scott H.: And by the way, if you own an old mutual fund, particularly if it's outside of a retirement account, you're probably best just keep it in that old mutual fund because there's no sense incurring...
Pat: But not reinvesting dividends.
Scott H.: No.
Pat: Yeah. Many people actually have it automatically triggered to reinvest dividends.
Scott H.: If it's outside of a retirement account, I would not do that.
Pat: Yeah, that is wrong. But so...
Scott H.: Most of the time.
Pat: My favorite was this one called the simplified enhanced income ETF, which should just ring all kinds of bells.
Scott H.: Simplified?
Pat: Enhanced income ETF.
Scott H.: That sounds like people sitting around the conference room in the afternoon coming up with a name.
Pat: Hey. We're going to call it the...
Scott H.: Simplified and enhanced.
Pat: It trades under the ticker HIGH. H-I-G-H. Good for them for getting that ticker. I would have thought that was taken. So, it is a simplified enhanced income. So, basically, what this thing is supposed to do is kind of act like a treasury.
Scott H.: You know, the...here's the problem with this, right? I don't even know what the product is yet. All right? You're going to tell us.
Pat: Yeah.
Scott H.: But here's why...like, if...you mentioned when the ducks quack, feed them. Right?
Pat: Exactly.
Scott H.: Because sometimes you hear callers on this program. Someone's going to retirement. They're looking for a high income strategy because they need income and retirement. They've been investing in their 401(k) for years, but now, it's time for income. They go doing some research. They start Googling around, and they see the bumpiness. Even the ticker symbol is HIGH.
Pat: Yeah. How could you go wrong with a simplified enhanced income portfolio?
Scott H.: It's simplified, just what you were hoping for. You don't want a complex investment strategy. It's enhanced and simple.
Pat: You're like the marketing team. A plus. A plus on the marketing team over there for their simplified enhanced. So, what it's supposed to do is kind of act as a treasury, but a little bit better since the symbol is HIGH. So, in addition to buying short-term paper, high buys and sells, calls and puts, and options to generate income, oftentimes, they use this as kind of a...to make more fluid the volatility. They even traded options on MicroStrategy.
Scott H.: MicroStrategy?
Pat: They were trading...
Scott H.: By the way, if you're not familiar with MicroStrategy, they're...you know their own strategy...
Pat: Leverage Bitcoin.
Scott H.: It's leverage Bitcoin. They own Bitcoin. That's all they do.
Pat: Yes.
Scott H.: And it's worth about double what the underlying assets are.
Pat: Which is...by the way, I have a friend that has been doing put options on it, thinking it's going to fall.
Scott H.: No, no. A bull market can last much longer than your liquid.
Pat: I said to him, I said, it makes sense.
Scott H.: It could be eight years.
Pat: At one point in time...I said, "At one point in time, you will be right."
Scott H.: I had put options on Countrywide.
Pat: I remember that. I lost money on that.
Scott H.: You did, too?
Pat: I was convinced they were going to go out of business.
Scott H.: They did.
Pat: And they did, just not in time.
Scott H.: Just years longer.
Pat: Not in time.
Scott H.: Not in time.
Pat: So, they traded MicroStrategies. They did put options. They tried options on this thing. Right? And this is in an income fund. This is in an income fund that is doing puts and calls.
Scott H.: And you read, and it says the majority of their...is in investment grade securities.
Pat: Yes.
Scott H.: So, how did it do?
Pat: So, their year, they ended up with a return of 1.5%. And the thing that they were trying to do a little bit better from would be like a Bloomberg SPDR, BIL, right, which is a one to three-month treasury, return 5.2.
Scott H.: So, the treasuries were 5%.
Pat: And this thing was supposed to be a little bit better than treasuries. And the return for 2024 was...
Scott H.: How much assets did that find? No. Does the article say that?
Pat: It actually didn't say. But the thing that...the article goes on and continues to talk about...
Scott H.: Just because something's an ETF, doesn't mean it's a good investment.
Pat: Is that they're rolling out these ETFs daily, new ETFs.
Scott H.: Well, because it used to be, when they first came out, they were all passive.
Pat: That's right.
Scott H.: They were all indexed.
Pat: That's right.
Scott H.: They're not any longer.
Pat: Well, because technology allows you to price all day long. Right? And that's really what an ETF did for the mutual fund industry is it allowed you to buy somewhere in the middle of the day rather than at open or close. But it just reminded me, as I said earlier, about when the ducks quack, feed them. And look, these firms, they're designed to sell you stuff. Right? They want...we want coins.
Scott H.: Yeah. So, I mean, Victoria Bogner...
Pat: We want coins. But we want coins. I mean, Victoria said...
Scott H.: She talked about fiduciary. She mentioned that word a few times. A product manufacturer is not a fiduciary.
Pat: That's right. They don't care.
Scott H.: They may care.
Pat: Okay. Fair enough.
Scott H.: But their job is not to do what's in your best interest.
Pat: Well, look at...and the products are not either good or bad.
Scott H.: It depends how they're used.
Pat: It's how they're used, right?
Scott H.: That one might not be too great.
Pat: I'm going to go with that. I'm going to go with that.
Scott H.: When you're buying put options on...I mean, you're taking...
Pat: In MicroStrategies in an income fund, like, if I came to you and said, "Let's create an income fund. Oh, by the way, we're going to do options on MicroStrategies."
Scott H.: Which is essentially on crypto.
Pat: What you're trying to do is enhance your return.
Scott H.: We're going to use crypto to enhance your return.
Pat: Well, not only are we using financial instrument to enhance the return, we're going to do a company that's highly leveraged against a speculative asset to begin with. You're like, "Okay. Where's..." when you go across this tightrope, let's get rid of the net.
Scott H.: All right. Hey. As we as we wrap up this program, if you haven't given us a review or rating, please do. So, if you're listening on your Apple thing or Spotify...where do you listen to your podcasts?
Pat: Spotify.
Scott H.: I do Spotify as well. But I think more people...because I looked and we have a lot of ratings on Apple, but not as many on...I don't care where you...give us a review.
Pat: Wait. Let's stop for a second. Have you read any of the reviews?
Scott H.: No. I don't read them.
Pat: You've never read reviews of the show.
Scott H.: I don't...I may...not that I recall.
Pat: Okay.
Scott H.: I don't spend any time. I have zero interest. I do look at the stars. If we had bad...if it was a bunch of bad ratings, I'd want to know why. But it's good. I think we're 4.9 or something. I don't know.
Pat: Okay. Higher than my Uber rating. Do you ever check your Uber rating?
Scott H.: Let me finish this.
Pat: Okay.
Scott H.: So, before we talk about... Yes, I do, because I don't want to be a jerk.
Pat: Okay.
Scott H.: I want to be perceived...and we Uber quite a bit because we travel for work, and it's actually a very efficient way to get around town when you...instead of going to rent a car.
Pat: I'm going to tell a story about getting into the wrong Uber.
Scott H.: Okay. Real quick, though. Give us a rating. There we go.
Pat: I got in an Uber, and I'm almost at the destination, and then the guy realizes. I didn't realize.
Scott H.: You're kidding.
Pat: No.
Scott H.: Don't you check the license plate?
Pat: I didn't that time.
Scott H.: In some states, you're not required to have a front license plate. And I'm thinking if you're an Uber driver, you should have a front license plate because you're sitting there, here comes this car. And there's...like, there's no license plate.
Pat: It was, like...and the difference of the car was that they were both Toyotas on the thing, and yeah, it was dark out. And I get in the car, and we're almost to the destination. We both realize we're...and the guy said, "I'm turning around." I said, "No, we're less than three minutes away. You're not bringing me back 15 minutes." He said, "Well, you're in the wrong Uber." I said, "I know I am. And it's bad for you, too. And it's bad for me. But it makes no sense for you to turn around. And he said, "How am I going to get paid?" And I said, "I will pay you some cash. Here's some cash, but we're not turning around now." And now, I check.
Scott H.: That's interesting. Like, what if he had insisted on you turn around? I imagine he has to let a passenger out or she has to let a passenger out if you want out of the car.
Pat: I was not getting out of that car. I mean, we're...I would have...no. It's a business.
Scott H.: You couldn't force the person to go where you wanted to go.
Pat: Okay. Fair enough. I would have had to go back.
Scott H.: You throw a little cash, and they go where you want them to go. It is their business.
Pat: Yeah. That's what he's there for.
Scott H.: A couple dollars are going to drive you there.
Pat: I said, "I'll take care of you." And he said, "How much?" I'm like, "Good for you."
Scott H.: Good for him. Yeah. All right. We'll see you guys again next week. This has been Scott Hanson and Pat McClain of "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 a state planning attorney to conduct your own due diligence.
Scott H.: Welcome to "Allworth's Money Matters." Scott Hanson.
Pat: Pat McClain. Thanks for joining us. We're here to talk about financial stuff. Do we need to put the intro every time? You know, I figure...
Scott H.: Okay.
Pat: Huh? I'm not gonna...I'm not changing.
Scott H.: We've been doing it this way for 29 years. Doggone it. It was good enough for yesterday.
Pat: I'm not changing.
Scott H.: Yeah. Don't change now.
Pat: Dang it.
Scott H.: Don't change now.
Pat: Oh, I went to the gym this week. Oh, I hate this time of year.
Scott H.: What do you mean?
Pat: The parking lot was packed. There were people everywhere. I'm like, why don't you guys just give up already?
Scott H.: Oh, nice. That's a good way to love your neighbor.
Pat: No, no, no. It just reminded me, like, four years ago, I remember the gym, these two guys I knew from church, they see me in the gym and they're like, "Oh, New Year's resolution, Pat? You know, working out?" And I'm like, "No, you're the new guy here. I've been here. You're the new one. Now, just quit already.
Scott H.: All right. Well, good. We got that out.
Pat: I'm angry.
Scott H.: Anyway, we got a good programmer here. By the way, before we start, we'd looked at some stats. We've been doing this program for almost 30 years on the radio primarily for decades and then now podcasts. And we just last year hit our 3 millionth download.
Pat: Wow. Wake the kids, call the neighbors.
Scott H.: According to Buzzsprout, we are the top 1% of all podcasts for downloads. And according to Listen Notes, we're the top 0.5% for popularity out of 3.5 million.
Pat: And I saw my income go nowhere because of this. I didn't get a raise. How's this benefiting me, Scott?
Scott H.: This is supposed to be for the listeners, the 100,000 engaged listeners.
Pat: I'm relatively coin-fed. Okay? So, I'm going to ask for a raise. Why don't you do that? Ask for a raise.
Scott H.: Who do I ask?
Pat: Who do you ask?
Scott H.: I don't know who I ask.
Pat: I don't know who you could ask. You're the founder of the firm.
Scott H.: I know. It sounded like the right thing to say, but now that I think about it. Okay. Well, that's nice. Half a percent...
Pat: Look. I understand that anybody can start a podcast.
Scott H.: Oh. There's probably millions.
Pat: There's 3.5 million globally, according to Listen Notes.
Scott H.: Globally.
Pat: There's probably more than that, though. They don't even know how to get on the platforms.
Scott H.: Right? It's like...
Pat: Yeah, there are so many podcasts.
Scott H.: There are so many podcasts. Oh, there's so many. But anyway, I'm glad you listen to this podcast.
Pat: And what's your favorite podcast?
Scott H.: Well, let's get to...it doesn't...it's irrelevant.
Pat: No, it's not.
Scott H.: I don't have a favorite. I tend to move...bounce around.
Pat: Okay.
Scott H.: I listen to "Honestly" almost the...typically the same day it comes out.
Pat: Do you?
Scott H.: I like...I like that...
Pat: And that's with?
Scott H.: Bari Weiss, Free Press.
Pat: I've listened to that a couple times.
Scott H.: And I've been listening to "Built to Sell."
Pat: I love that.
Scott H.: About companies that sold...founders that sell the business.
Pat: And it's kind of like how I built that. It's very similar to...
Scott H.: But the opposite. Yeah. How I sold that. Yeah.
Pat: Anyway, let's go.
Scott H.: Yeah.
Pat: And by the way, just remind me. So, I want to come back to this about these. You talk about podcasts in the world, 3.5 million. They're doing the same thing with exchange traded funds. There are so many of them.
Scott H.: There are so many of them. There are so many of them now. Right?
Pat: Five years ago, there were almost none, but now they're like every flavor. One that just tracks... NVIDIA has got one.
Scott H.: And they're not necessarily good or bad. It's dependent on how they're used, like most financial tools.
Pat: That is right. So, I'm going to talk a little bit about the proliferation of exchange traded funds, and it always reminds me of...I met this guy at a conference, God, years ago, this old grizzly veteran of the financial services industry. And he said, "Pat, remember, when the ducks quack, feed them." And I'm like, "What does that mean?" He goes, "If the clients want something, you give it to them, regardless whether it's good for him or not."
Scott H.: Was he serious?
Pat: He was 100% serious. And he sounded just like that. I'm like, "What?" He goes, "When the ducks quack, feed them," which was, if the clients are asking for something, if it's good for them or not, you give it to them because you can make money on it. And when I read this article about exchange, I thought exactly of this grizzly old...
Scott H.: And we'll talk about those...
Pat: And we'll talk, and please don't...
Scott H.: No, we won't forget.
Pat: Don't forget.
Scott H.: All right.
Pat: Please.
Scott H.: I'm looking forward to it now. I don't know if I can concentrate because I can't wait for this conversation.
Pat: Now, you're making fun of me.
Scott H.: All right. Let's take some calls.
Pat: It's not hard.
Scott H.: It is not hard. If you want to be a part of the program, you've got a question for us...and we love taking calls on just about anything financially related, particularly those that have saved well and are looking at how to maximize what they've got, both for themselves and for others. So, you can send us an email at questions@moneymatters.com, and we'll get you scheduled to be on the program, or you can call 833-99-WORTH, and we'll schedule you to get on the program.
We're going to start off here in New Hampshire with George. George, you're with "Allworth's Money Matters."
George: Hey, guys. How you doing?
Scott H.: We're great. Very good. Yeah.
George: Yeah. Good to hear that you guys finally made it to the gym this year.
Pat: You're piling on. I tried yoga, too, by the way. But we're not going to get into my physical.
Scott H.: What can we do for you?
George: Anyway, yes. My question is more for my ex-brother-in-law instead of myself. My ex-brother-in-law, he is 60. He's never married. He has no children. Smart guy, has a really good job in accounting. Ten or so years ago, his parents passed away, and he lives in his parents' house, which he co-owns with his three siblings. He also bought a house of his own about 15 years ago. It's now worth 500,000, and he has 50% equity in it.
Scott H.: Okay.
George: He rents that out for about 2,000 a month.
Scott H.: Okay.
George: And the big question comes is that he would like to take that house that he bought, sell it, and convert it to Bitcoin. And I've kind of talked to him a little bit, you know, because Bitcoin is very volatile, obviously, very speculative. And you know, the thinking being that, you know, as you get older, you probably don't want such a high percentage of your portfolio into something that risky, right? But his side of the story, right, is that Bitcoin has doubled every year for the past four years, which may be true, right? That may be true.
Scott H.: Well, it wasn't a straight line, but keep going.
George: Yes. Yeah, yeah, exactly. Like, if you look back on history, right, there's a lot of things like, you know, Tulips and Beanie Babies had a good couple of years as well back in the day.
Scott H.: That's right. That's exactly right. And I'm sure there's other assets that are up 100x over that period of time as well.
Pat: [crosstalk 00:07:42].
Scott H.: But yes. Okay.
Pat: That's a popular one.
Scott H.: And it's a big one.
Pat: And what did you tell him to do? Well, first of all, did he come to you for advice, or did he just tell you he was doing this?
George: No, no. He didn't come to me for advice. No. It's something I just happened to find out and try to, you know...it's one of those things where try to talk him out of it, but you know, Bitcoin could go up 20x and then I'm on the hot seat.
Pat: I'm asking this seriously. Are there any other, like, mental issues... Truly, what would cause someone to actually act in this manner? No sane 60-year-old...
Scott H.: Is gonna take that big of...I don't know what he has in savings, but does he have a lot in other assets? Like, if you had 10 million bucks sitting in other assets...
Pat: It'd be like, "Yeah, go for it."
Scott H.: Okay.
Pat: Yeah. It's 2.5% of the portfolio.
Scott H.: I'm sick of dealing with this rental. I'm going to take my 250 grand out of that, and I want to buy Bitcoin. Fine, if you had 10 million bucks. If you have $1 million, then it's insane.
George: Yeah. Okay. Yes. That was kind of my point of view. I think you should...I mean, at any age, you should diversify, but especially as you get closer to retirement, right?
Pat: Yeah. And as a percentage of the portfolio. I mean, Scott and I were just talking before this show about bad investments we have made. We were.
Scott H.: Right? We were.
Pat: Yes. That we have made, right? And then...
Scott H.: Yeah. Not everything works out.
Pat: No. And then we reminded ourselves, but many great, great...
Scott H.: Almost all...yes.
Pat: Great, great investments, but...right? Because the fact we're human with our own emotions, we have a tendency to dwell on the losses. What percentage of your portfolio do you think this is? Is it big? Is it little or big to him?
George: I would say it's at...I don't know, but I would say it's at least, I don't know, 20%, 30% if I had to guess, but I don't really know.
Pat: If we gave you the right answer, what would you do with it?
George: Oh. I'm going to, you know, send him this podcast so he can hear it.
Pat: Well, it's crazy. It makes no sense.
Scott H.: It's pure speculation.
Pat: Why Bitcoin? What's wrong with NVIDIA?
Scott H.: What about Doge Coin?
Pat: Oh, yeah, Doge. Why are we stopping at Bitcoin?
George: Yeah, exactly. Like, if you were to take even the volatility of Bitcoin out of it, I think if you were to put...you know, as a 60-year-old, if you were to put a large percentage of your portfolio on any one stock...
Scott H.: That would be foolish, too.
George: ...your retirement quality of life is gonna be completely tethered to that one investment.
Pat: George, if he was my relative and he shared this with me, I would say to him, "You're out of your mind. That's just stupid." And then I would leave the conversation...
Scott H.: And you can't live with me.
Pat: That's fair enough. And I would leave the...
Scott H.: And I'll say, I have had that conversations with many people. They want to do something that's like, look, if it doesn't work out, if that's what you want to do, if you want to follow it, instead of taking my advice, if you want to do that, that's fine. Just remember, you can't live with me.
Pat: We have fired clients over...
Scott H.: Absolutely.
Pat: They're telling us they're going to do something, and I'm like...
Scott H.: Like, what's the point?
Pat: ...well, I'm not going to be party to this.
Scott H.: No, because you know how it's going to end up.
Pat: And maybe it ends up great. Maybe he's 100% right. Maybe he is the most brilliant guy in the room, and it goes up by tenfold. And now his 250 grand would be less than 250 after taxes. It's probably 200,000. It turns into 2 million. Is his life better? Is he happier?
Scott H.: What if it goes to zero?
Pat: But what if it goes to zero? Why don't you tell that story? Tell the story about the guy with the fishing boat. I love that story.
Scott H.: I love it, too. That's why I've told this is... This was in the dot-com era.
Pat: So, '98?
Scott H.: Probably '99, maybe early 2000s. Maybe early 2000s.
Pat: Okay.
Scott H.: And a client called me up and he says, "Scott, I'm thinking about taking half my portfolio and putting it in the cubes." Right? That's Nasdaq.
Pat: Well, that's QQQ.
Scott H.: All tech. This was...they had had a huge run-up just like your ex-brother-in-law saying, "Here's how great. It's gonna last for years." Nasdaq had been on fire, it was up 85% in the year 1999. And so, I said...let's call him Bill. I said, "Bill..." And Bill had a house in Northern California. And he had a house up in...on the coast in Washington.
Pat: I thought it was in Alaska.
Scott H.: I changed this to the...
Pat: It was Alaska. It was Homer.
Scott H.: I'm trying to keep a little anonymity here.
Pat: Okay.
Scott H.: So, let's say it's not Homer. [crosstalk 00:12:22] I'm trying to change a little of the...a little of facts here. I should have changed Bill's name to something different while I was at it. [crosstalk 00:12:33].
Pat: His name was Frederico.
Scott H.: So, he spent the majority of his time in his cabin on the water out in his fishing...he fished all the time. He loved it. He had a fishing boat. And he called and wanted to make this move. And he says, "What do you think about it?" And I said, "Well..."
Pat: Half of his portfolio, all tech.
Scott H.: Half of his portfolio.
Pat: And he was living off...
Scott H.: All tech stocks.
Pat: Yeah. And he was living off the portfolio.
Scott H.: Correct. He was retired. And I said, "Well, here's the thing, Bill." I said, "If you're right, we can trade in that fishing boat for a bigger fishing boat with more electronics and all the goodies on it. But if we're wrong, the fishing boat's gone, and probably the cabin as well."
Pat: All right. So, now you did...
Scott H.: So, I framed it back to what...this is not just numbers on a statement, right?
Pat: This is life.
Scott H.: This is how it translates.
Pat: This is lifestyle.
Scott H.: Yeah. No one's gonna starve in America unless you're mentally ill or have no access to it, but it's lifestyle. What do these dollars actually mean? And so, the concern that you have, George, obviously, that we have with the 60-year-old male that if he probably doesn't have much in savings and he takes his one asset he does have, and puts it in Bitcoin...
Pat: Yes.
Scott H.: I would just tell him, "You can't live with me."
Pat: Yeah. And it's your ex-brother-in-law, which I think is interesting in and of itself. Yeah. I mean, it's asinine.
Scott H.: I think people...
Pat: Am I allowed to say that? Yes. It's crazy.
Scott H.: It's all about probabilities of outcome. And particularly as we get older, we don't have the time to make a backup.
Pat: Yeah, if he was 30, I'd go for it.
Scott H.: Whatever. It's not gonna make it...
Pat: And again, you can't live with me.
Scott H.: But it's coming back to, like, what happens in the best case scenarios, but what are the worst case scenarios here? Like, when we do financial plans with people, we look at what happens if the day after you retire, we go through another financial crisis?
Pat: So, probabilities of success or failure.
Scott H.: Correct. And most people are much more concerned about maintaining their lifestyle than they are about becoming wealthier. And if you do something that's suddenly going to have 60% chance that your lifestyle is going to go backwards, most people are like, "I'm not going to take that."
Pat: That's right.
Scott H.: Unless...right? And it all get sound to what percentage of his portfolio is this. Like, you're right. You know exactly... And you're going to send him this podcast?
George: Oh, yes.
Scott H.: That's all we need, is another negative review. All right. Appreciate the call, George.
George: All right. Thanks, guys.
Scott H.: Yeah.
Pat: So, Scott, you talk about you can't live with me. So, you know, many of the listeners know I have four children. They were home for Christmas. And my wife and my only daughter were going to each one of the kids' bedrooms, and they want to redecorate them for some reason. I'm like...
Scott H.: Redecorate them how?
Pat: That's what I said.
Scott H.: Who wants to redecorate it?
Pat: My wife and my daughter were like, "We're going to move some furniture out of this thing and repaint the walls and the whole bit." I go, "What? The kids have gone. They only come home for, like, a week a year."
Scott H.: But does it still look like they live there?
Pat: Yes.
Scott H.: Oh, come on. I can understand your wife.
Pat: Really?
Scott H.: Yes.
Pat: I just shut the door. I just shut the door. It's fine. It's just the door, it's closed, it doesn't have anything to do with it. So, the end of the story. So, there's this, like, kind of a futon thing in my son's room. It's like this...I don't know what it is. It starts with a P or whatever. So, my wife...
Scott H.: What?
Pat: It's a chair. It's a chair thing, right? So, my wife actually, she says, "Okay. Can you help move this thing out in the garage and then get rid of it?" And so, I said to my daughter, I go, "I'm going to get rid of it." I'm going to put it on Facebook and just send it out like, here, chairs, come into my house and pick it up. So, we took pictures of it and me sitting in it. I was modeling for it, which just created a whole new list of just people making fun of me on the internet. But my son responds, "Oh, this is a great way to find out you're changing my room." He saw that we're giving away his furniture from his bedroom and he responded on Facebook. "What happened? Why are you doing this to me? My room."
Scott H.: How old is your son?
Pat: Twenty-three or 24.
Scott H.: So, I had a good friend of mine. I'm going to give his real name. There's no anonymity in this one. Mark Holloway [SP]. His dad passed away, and I went down to San Diego to go to his funeral. So, I went and I saw the family home.
Pat: Okay.
Scott H.: Mark is...
Pat: Okay. All right. I know where this is going.
Scott H.: The room he shared with his brother had not changed since they went off to college.
Pat: Little league trophies?
Scott H.: I kid you not. The trophies, ribbons from the track. I laughed so hard, I got such a kick out of it. The room, it was like a museum from his teenage years, had not changed.
Pat: What's wrong with that?
Scott H.: Well, I guess his mom didn't have any problem with it. She enjoyed it, apparently. She'd probably go in there from time to time and think about the good old days or something.
Pat: Were they?
Scott H.: I don't know. I guess. If they were bad, she would have...maybe that's why I've changed my kids' rooms since...the day they leave, remodel, repaint.
Pat: Like, they're out, they're in the car driving away, you're waving. You run back in the house, you start stripping the room?
Scott H.: We're going to go back to calls in a minute. I remember when my oldest daughter was in high school.
Pat: Oh. This is a financial show, though, right?
Scott H.: My oldest daughter, when she was in high school, she wanted to paint her bedroom.
Pat: Okay.
Scott H.: She was like 15 or 16.
Pat: The young Jessica.
Scott H.: She was young then. Yeah, she was 15 or 16. So, I thought it'd be a nice thing for father-daughter time together.
Pat: Oh, to paint?
Scott H.: Yes.
Pat: What's wrong with you?
Scott H.: Her ceiling had a little different shape to it than...it wasn't flat. So, the corners and stuff, we spent, like, three days, maybe not full days, but three days painting. When she moved out, I'm like, I got to change this thing because it looked horrible. And I hired a painter. He nailed...blew the thing out in, like, three hours. But I had to hire a painter the first time because I couldn't get the lines good enough. I'd get someone to come make it look decent. Anyway.
Pat: All right, let's go to the calls.
Scott H.: Enough of life stories.
Pat: Oh, my gosh. That actually...well, it's nice seeing you again, Scott. We haven't talked in a couple of weeks. It's really kind of fun. Kind of missed you a little bit. Not enough that we're going to actually start spending time together. So, Scott and I stepped down as CEOs. We don't really interact much.
Scott H.: No, we don't interact much anymore.
Pat: Yeah. We used to talk twice a day.
Scott H.: Oh, oftentimes I'd get a call from Pat at, like, 7:01 in the morning.
Pat: Because you told me not to call before 7.
Scott H.: So, I could tell, "Uh-oh. Pat's been awake since 3:30, mulling on something. There's something in the business that's been bugging him since 3:30 in the morning."
Pat: Oh, my gosh. I don't miss that at all.
Scot: All right, let's go back to calls here.
Pat: I don't miss it even a little.
Scott H.: Now, you're just doing the stuff you like to do.
Pat: That's right, 100%. I go out to lunch with clients now.
Scott H.: I'm good managing people.
Pat: I've never gone out to lunch with clients in my whole career. I go out to lunch with clients. We're not in a hurry to go anywhere. They're retired. I still kinda have a job.
Scott H.: When do you need to be back at the office, Pat? No rush.
Pat: I don't even pretend.
Scott H.: What, you want a dessert?
Pat: I heard the flan's good.
Scott H.: Oh, listen, it's Tuesday. You know, movies are half price. All right. We're going to start. I talked at the beginning of the program, all these engaged listeners, that's all changed now. The numbers are going down. We obviously have decided it's just about us. All right. We're in Ohio talking with Scott. Scott, you're with "Allworth's Money Matters."
Scott: Yeah. Hi, Scott. Hi, Pat.
Scott H.: Hi.
Pat: Hi.
Scott: I want to let you two know that I am an avid listener of your Saturday morning podcast for many years. And during that time, I have managed to pick up a few financial nuggets along the way. So, I thank the two of you for that.
Pat: Thank you.
Scott H.: Well, thank you. Probably a mistake, but...
Scott: No, no, it's been very helpful.
Scott H.: What can we do to help today?
Scott: Okay. So, I'm a firm believer of the Roth IRA...well, the Roth accounts, whether it be through my company initially, Roth 401(k), to now in retirement, my Roth IRA. And during the last few years, I've done Roth conversions, I've contributed to my Roth IRA accounts. And the five-year rule gets thrown in my face all the time. So, what I'm wanting to ask you...
Scott H.: Wait. When you say that it gets thrown in your face, other people tell you about the five-year rule?
Scott: Well, yeah, they tell me about the five-year rule, what that consists of. So, my question does center around the five-year rule item.
Scott H.: Okay. And then I'm going to tell you why it doesn't pertain to you, but go ahead.
Pat: Yes.
Scott: Okay. Well, hopefully not. So, the five-year rule, I know it only pertains to earnings and not what I contribute. So, who keeps track of when the five-year rule...
Scott H.: Nobody.
Pat: That's brilliant. That is the best question we've had in a long time.
Scott H.: Nobody.
Pat: No one.
Scott: Well, I've asked that question of many financial, and I never get a response. I never get an answer.
Scott H.: Look at most...a lot of the tax code is voluntary compliance.
Pat: That's right.
Scott H.: A lot of the tax code...529 plans, right? Have you ever seen anyone audited...
Pat: Never.
Scott H.: ...on a 529 plan? Have you ever seen anyone audited in a Roth five-year rule?
Pat: No. Never.
Scott H.: Never. Well, then it's very rare someone takes money out within that five.
Pat: That's right.
Scott H.: Particularly someone who really loves Roth, a firm believer in the Roth.
Pat: Yeah, which is the last dollar to be spent. But your question is actually...it's a brilliant question.
Scott H.: Because... So, there are some laws that get passed, regulations that require financial companies to do certain things. Reporting of income. Reporting of income, how much dividends and what transactions occurred in your account last year.
Scott: Okay. So...
Scott H.: And required minimum distributions. What is the required minimum distribution? But none that are required on a Roth.
Scott: Really? I thought they required it as going to a financial institution. They are required at the end of the year to provide a form telling you what you have contributed to your Roth IRA.
Scott H.: That's right. That's right.
Scott: Or your traditional IRA.
Scott H.: But there's nothing to say that. When was the first...when was the account, the first account open? When was the first Roth contribution made?
Scott: Yeah.
Scott H.: There's no requirement on that.
Pat: There's no requirement for that to the financial institution to report that.
Scott H.: Otherwise, yours might say, "Oh, first contribution made in 2006."
Scott: Yes. Yes. So, when I convert from a traditional IRA, maybe in stocks, and go over to my Roth IRA, keep it in stock, I sell the stocks, my Roth IRA and do something else, I'd lose track of what I'm doing. So, you're telling me I don't have to worry about the five-year rule?
Pat: Have you taken money out of the Roths?
Scott: I have not. No.
Scott H.: Okay.
Scott: I don't plan on taking money out of the Roth for many, many years.
Scott H.: Okay. So, it'll be more than five years since the time you made your first contribution or the time you made your first rollover...I mean, conversion.
Scott: That is... Well, okay. So, it's really not applicable to me, but it could be applicable to somebody else.
Pat: All right. But the reality is...
Scott: [crosstalk 00:24:19].
Pat: But the reality is, normally, when people use Roths, they use it to feather income...
Scott H.: They're voluntary...
Pat: ...for taxpaying, additional taxes today that they don't have to pay, right? Because they could have made a pre-tax contribution or they didn't have to do the conversion. So, these are people that are planning their finances, stating to the IRS, "Look. I'm going to send you money today in exchange for the promise that Congress made, but let's hope they're going to be good on that promise when I pull my money out 20 or 30 years down the road." Right? So, your point is well taken, but it doesn't happen in reality.
When you see people take money out of a Roth, what they're doing is they're trying to keep...they need X income, and they're trying to keep themselves below a marginal tax bracket.
Scott: Yeah. I agree.
Pat: But the reality is most of the people that have money in Roths also have money in a brokerage account.
Scott: Of course, of course.
Pat: Right?
Scott: Absolutely. Yeah.
Pat: I can't...I'm trying to think of when I've had money come out of a client's Roth account. I cannot... Can you?
Scott H.: Yeah. I had someone do it against my recommendation.
Pat: Oh. I can't...
Scott H.: And by the way, you mentioned sometimes we fire clients. That's when I fired.
Pat: Yeah.
Scott H.: [crosstalk 00:25:36] I think about it. I think I fired three clients in my career. That was one of them.
Pat: Because they're not taking...you know they're doing harmful stuff to themselves.
Scott H.: What's the point? I don't need...I think I...I don't need...I mean...
Pat: Yeah. Oh, don't say that. We like clients.
Scott H.: I love clients.
Pat: Okay.
Scott H.: I don't love clients that don't take my advice, that do things contrary to my advice, and that are...
Pat: That are going to be harmful to themselves. Yeah.
Scott H.: What's the point? Well, why... Don't use me. I mean...
Pat: But yeah. So, your point is well taken. But it doesn't...it's not real. It just doesn't happen. I wouldn't...
Scott H.: You don't have to. Scott, you're...like...
Scott: So, if I were to ask an IRS agent, he'd tell me something differently then. Right?
Pat: Why would you be talking to an IRS agent?
Scott: No, I won't. No. No, I don't. No.
Scott H.: He might not even know what you're talking about.
Pat: Yeah.
Scott: [crosstalk 00:26:21].
Pat: I mean, out of all the things that they look for tax compliance, that's...because it generates... By the way, what's the point of it? I mean...
Scott: Yes.
Scott H.: They would just assume you'd pulled money back out of your Roth and put it in a taxable somewhere else.
Pat: Yeah, but...
Scott: I would think so.
Pat: But what's the point? Think about this, Scott. What's the point of it? What was the five...what's the point of the five-year rule? Think about. I never understood why it matters.
Scott: Yeah. It didn't make...doesn't make any sense to me.
Scott H.: I mean, I understand the 59 and a half.
Pat: Well, I don't understand why it's 59 and a half unless it's a round number.
Scott H.: Yeah. But I understand older age.
Pat: Yes. You have to start withdrawing. And the required minimum distribution is at age, what, 73, 74, 75?
Scott H.: But that doesn't apply to Roth.
Pat: Yeah. Yeah. Anyway, I'm just gonna...Scott, we shouldn't...let's find other things to think about.
Scott H.: Yeah.
Pat: Is that...Scott, I've...you are a blessed man if, in your financial life, this is the one thing that you have to worry about.
Scott: [crosstalk 00:27:20].
Pat: Everything else is so great.
Scott: Okay.
Scott H.: What was that? What did you say?
Scott: I do sleep well at night. So, I'll just put the five-year rule out [crosstalk 00:27:30].
Scott H.: You're never going to have to...it's never going to be an issue for you.
Pat: And do us a favor. Share this podcast with your friends...
Scott: I will.
Pat: ...especially since you are one of the main attractions. You are the star of the show at this point.
Scott H.: That's right.
Pat: So, you could share it with your friend.
Scott: Well, my name is Scott and I...and of course, we got Scott on the podcast, too.
Scott H.: Yeah. We're trying to... If you meet anyone named Scott, it's always someone between age 50 and 68. How old are you, Scott?
Scott: I'm 70.
Scott H.: Oh, I missed about two years.
Scott: But I act like I'm 50, though. I act like I'm 50.
Scott H.: Okay. I got it.
Pat: All right. Appreciate the call.
Scott H.: Yeah. Thanks for calling, Scott.
Scott: Thank you, sir. Ladies and gentlemen, see you.
Scott H.: On the Roth, the majority...well, roughly half Americans pay no income tax. Right? Because you get a standard deduction.
Pat: Yes.
Scott H.: No income tax. So, those people, if they're saving from...money in their 401(k) or IRAs, it should clearly be in the Roth.
Pat: That's correct.
Scott H.: They're either in a 0% tax bracket or a very 10% or 12% tax bracket. It's only, I think, 15% or 18% of taxpayers are in an a tax rate lower...I mean higher than that 12%, that first bracket.
Pat: Say that number again.
Scott H.: It's like 18% of taxpayers.
Pat: Of taxpayers? So...
Scott H.: I mean, half of the revenue comes out from the [crosstalk 00:28:49].
Pat: Yeah. So, that would be 60% of the population is at below that bracket?
Scott H.: No. Like, 80%. Eighty percent of Americans should be using a Roth 401(k).
Pat: Okay. All right.
Scott H.: There's no question to even ask. Like, there should be Roth.
Pat: But the reality is those people...
Scott H.: [crosstalk 00:29:08] calling us.
Pat: And they don't have any money to save. They're living... Like, growing up, my mom used to say, "Oh, we should have bought that. You know, I should have...we should have bought that property down the street, like, 20 years ago." I'm like, "With what?" Where were you going to get this magical money that we were...all of a sudden become a land barons?
Scott H.: A couple of years ago, I was up in Tahoe and there was this one area of Tahoe that...lots were sold there $300 apiece in, like, 1937.
Pat: Okay.
Scott H.: And someone said, [inaudible 00:29:41]. I'm like, "Who had $300 in the 1930s?" [crosstalk 00:29:46].
Pat: They're those rich people. Okay. So, the point being the Roths.
Scott H.: But if you're in a higher tax bracket, then you got to really look at it. Do you want to do a pre-tax or a post-tax? And if you're going to convert, how much do you convert?
Pat: And when?
Scott H.: And so, myself...I mean, it's the beginning of the year. I went onto my own 401(k) because the contribution limits increased this year to increase what's going in. And I am...I do it before tax. And I thought about doing Roth.
Pat: And?
Scott H.: I went before tax.
Pat: Because?
Scott H.: There's a chance federal income tax rates will go higher. Right?
Pat: Okay.
Scott H.: I mean, there's...clearly, that can happen.
Pat: And?
Scott H.: And...
Pat: I'm interested in this. This is...
Scott H.: There's also a chance that maybe there's a complete reform in taxes and there's...we now have a national sales tax with a lower flat tax rate. That's in the realm of possibilities.
Pat: Okay.
Scott H.: There's also a possibility I don't stay in California the rest of my life.
Pat: That's probably the biggest one. Do you really think that we'd go to a flat tax or a VAT tax?
Scott H.: And there's also...I'm probably not going to spend all of the money.
Pat: Some of it is going to go to charity.
Scott H.: Yes.
Pat: Right.
Scott H.: So, with all those factors, I went...and I don't like the way California spends money. So, I just assume, take a pretax.
Pat: Why would you say that? They just laid 22 miles of the high-speed rail.
Scott H.: They've been working on it for...
Pat: Twenty years.
Scott H.: $100 billion, 22 miles.
Pat: Come on, Scott. It's 22 miles. It's a long way, 22 miles.
Scott H.: $26 billion on homelessness.
Pat: Holy smokes. So, back to that, the tax. Do you think that we would ever go to a flat tax? I just can't see it because it's not...
Scott H.: Politically.
Pat: It's not... We have a very progressive tax system.
Scott H.: Right. That's why half of Americans don't pay any income tax.
Pat: Correct.
Scott H.: No. They'll pay payroll tax. They'll pay social security, on which they'll get a benefit from.
Pat: Yeah. So, if you went to a flat tax, would that not be considered a regressive tax?
Scott H.: Oh, it wouldn't be...
Pat: A sales tax.
Scott H.: By very nature, a sales tax would clearly be regressive because higher income people don't consume all their income.
Pat: That's right. Yes.
Scott H.: And to your point, if your mom is saying, "Oh, I wish we would have bought that property," there was nothing...I mean, it was barely...like, which bill do we pay this week?
Pat: Oh, yeah. I always got a kick out of that. Never said anything though because I love my mom dearly. Didn't want to upset her, but I always thought I grew up in this house. I don't think there was money splashing around.
Scott H.: You could...it is clearly possible that tax rates are lower and we have a national sales tax, value added tax. I mean, the EU's got it. What is it, 17%, 22%? Somewhere.
Pat: But they have a progressive tax rate as well.
Scott H.: Yeah, but not...
Pat: Both.
Scott H.: A lot of countries are lower than ours now.
Pat: All right.
Scott H.: I mean, I think part of it, when you're considering things like Roth and it's...
Pat: You've got to take legislation into account. You have to recognize that.
Scott H.: Because what you're betting, you are betting that the tax code is not going to be dramatically different, and that your withdrawals will be tax-free.
Pat: That's correct.
Scott H.: Right? So, it wasn't that...when I started in this industry in 1990, there used to be an excise tax.
Pat: On pensions, wasn't it?
Scott H.: Yeah. And 401(k)s of greater than...was it 750?
Pat: Yeah. There was a name for it.
Scott H.: It was a 15% excise tax.
Pat: Yeah. What was the name for it? There was a name for it.
Scott H.: I don't remember the name.
Pat: It was a tax code.
Scott H.: I remember the number, but I remember names. But there was an excise tax.
Pat: I remember this.
Scott H.: If you had a lump sum larger than...
Pat: Yes.
Scott H.: I think it was 750, wasn't it?
Pat: Yes. Yes. Yes.
Scott H.: There was an excise tax.
Pat: We were retiring...
Scott H.: So, put that in today's dollars, that'd be like two million bucks, two and a half million bucks. There was an excise tax.
Pat: Yeah. So, the money would go into an IRA, but you still had to pay a tax on that transfer.
Scott H.: You paid an extra tax for saving...doing a good job saving.
Pat: Yes. Yes.
Scott H.: So, when you're...even when you're looking at Roth conversion, some of those things, like...
Pat: Yeah, just don't buy in 100%.
Scott H.: That's right. You want to diversify your tax strategy the same way you think about diversifying your investments.
Pat: Yeah. You know, I was talking to a friend the other day. It's like, it just blows my mind that we get people to qualify for the Obamacare insurance that are worth millions and millions of dollars. These clients are worth millions and millions of dollars. And they get this subsidized health insurance because of how we negotiate through the maze.
Scott H.: That's because it's not based upon assets, it's based upon...
Pat: Don't you just find that a little bit crazy?
Scott H.: There's lots of crazy things.
Pat: I don't know. I just always...I just find it just...and I participate in it. I'm helping them.
Scott H.: I had a conversation over the holidays with a family member that was...there was the discussion on lifting the cap for social security taxes on wages.
Pat: Okay.
Scott H.: Right? So, what is it, 170 grand a year, somewhere in there, where you pay social security taxes up to that point of your wages, above that, there's no tax...
Pat: Yeah, and on both sides, and then Medicare goes unlimited [crosstalk 00:35:04].
Scott H.: Medicare goes unlimited, yeah.
Pat: On earned income.
Scott H.: Correct. Yeah. Wage-type income.
Pat: Yes.
Scott H.: Or self-employed income. And so, I was talking to this person that thought, well, it would seem to be fair to...there shouldn't be that cap on there.
Pat: Why? That's what you said.
Scott H.: Right. Well, no. I said...here's the challenge. When we've got the top tax rate at 37%, plus we've got the 3.8% excess tax...
Pat: I don't...whatever that...yeah.
Scott H.: Which is 0.9% above the Medicare tax. So, let's call it 40%. I'm a resident of California. The top rate there is 13.3%. So, now, we're at 53%.
Pat: And you don't get to deduct state against federal anymore.
Scott H.: That's right. And so...and it's...you pay both sides. So, the employer pays half, you pay half. So, now we're...
Pat: So, now, you're at 65%?
Scott H.: Right. So, I said to him, I said, the challenge with this...
Pat: Sixty-five percent at the margin rate.
Scott H.: Yeah. And the people who are having these tax problems are the ones...typically business owners that have been successful, they build businesses and this. I said, if we adopted this, what's going to happen is, a business person will say, "Do I want to take the risk to grow my business?"
Pat: It slows innovation.
Scott H.: Because, like, if I lose, no one's going to bail me out. It's all on me. I can't deduct a capital loss except...
Pat: Against income.
Scott H.: Right. So, I'm stuck. No one's going to bail me out of my capital loss. And if I do extremely well, they're only going to keep 35 cents on the dollar.
Pat: But you could carry that capital loss $3,000 a year forever. You got that going for you. But you can't inherit it. You cannot inherit a capital loss.
Scott H.: Yeah.
Pat: It goes away at death. Right?
Scott H.: Yeah. Yeah.
Pat: It's pretty disappointing.
Scott H.: Well, hopefully, you don't have a lot of losses.
Pat: I don't. It's theoretical.
Scott H.: Yeah. I mean...
Pat: So, how did the argument...
Scott H.: I don't know. That was...
Pat: And that was it? And you're like...
Scott H.: I said, "Get the hell out of my house. Pass me the mashed potatoes."
Pat: And what is that Jell-O thing?
Scott H.: It was a good conversation. It was just...
Pat: Are those marshmallows in the Jell-O?
Scott H.: You have those, too.
Pat: Oh, my God.
Scott H.: I'm kidding.
Pat: All right, let's go. Let's move on.
Scott H.: All right. Yeah. So, right now, we're going to hear a client story from Victoria Bogner. And Victoria is our...what is Victoria? Vicky, welcome to the program.
Pat: Yeah. Vicky...
Vicky: Hi.
Scott H.: Hi. Tell us...
Vicky: I'm the director of client experience. I know.
Scott H.: Yes. Director of client experience. Victoria is highly educated. In addition to being a certified financial planner, she's a chartered financial analyst, which is a very rigorous...
Pat: Oh, it's really hard. Yeah. And you work out of what office?
Vicky: I work out of the Lawrence, Kansas office.
Pat: Which is?
Vicky: Which is just west of Kansas City.
Pat: Thank you.
Vicky: So, it's all about the Chiefs right now.
Scott H.: Of course, it should be. I would let it be that as well?
Pat: And the...what's her name, the singer lady?
Scott H.: The singer lady.
Vicky: And Taylor Swift. The singer lady. The queen of Kansas City, yes.
Scott H.: All right. So, share with us the story.
V: Okay. I had a really interesting...
Scott H.: By the way...and I looked at the notes beforehand of that. Well, this is a good story.
Vicky: Oh, good. Good. Yeah. It's interesting because I think it impacts more people than people realize. So, I had a prospect come in a few years ago. And among other things, she had an old variable annuity. And this variable annuity had a guaranteed income benefit. So, for folks listening, there are products out there that you can purchase. You stick a chunk of money in, and it's invested in the market. It goes up and down, depending on how you invested it. But then you also can have a provision attached called a guaranteed income benefit. And it's a separate number. It goes up by some amount every year, regardless of what your contract value does.
And then later in life, you can draw an income amount off of this guaranteed income benefit number. And the idea is that it's an upgrade from the old idea of annuitizing a contract. You don't really do that anymore. Nowadays, people turn on this income benefit, and it gives them this income for life, even if the contract value goes to zero. But if you pass away and there's anything left in the contract, it goes to your beneficiaries. So, it sounds great...
Scott H.: Yeah. And every contract's a little different, right?
Vicky: [crosstalk 00:39:37].
Scott H.: Even an insurance company might have 20 different flavors of this. As the years go by, they underwrite...it's insurance, right? So, they underwrite it and they're like, "Oh, there's a risk here that we didn't see. Uh-oh, people found this loophole that they're taking advantage of. We didn't calculate this."
Vicky: That's right. So, even if you have a contract that has the same name as your neighbor, but you took it out a year later, it could be totally different.
Scott H.: It could be very different. That's exactly right. And by the way, full disclosure, there were some products in the early 2000s that were just mispriced.
Pat: Oh, my gosh. That was great.
Vicky: Oh. So mispriced.
Pat: They had the 6% guaranteed minimum.
Scott H.: And you had full discretion on how to invest your dollars.
Pat: It was crazy.
Scott H.: So, we utilized them quite a bit then, but they don't do much anymore.
Pat: But they didn't...they actually were...they were mispriced.
Vicky: They wised up.
Pat: Yeah. And they...the insurance companies...
Scott H.: And then, now, they try to buy their way out of the contract.
Pat: They offer more money than their contracts are worth.
Vicky: Exactly. Yeah. You get a letter in the mail, "Hey. Can we buy you out of this contract, please? We're losing money on you."
Pat: Okay. So, continue with your...
Vicky: Right. So, with this particular situation...and by the way, the caveat to these products is they're very expensive, right? They can be upwards of 4% or more when you add up all the fees. And the catch is that fee is assessed on the guaranteed value, and then it's taken out of the contract value. So, if you think about it...
Pat: Which means that the contract is going to collapse quickly.
Vicky: Exactly. So, if you think about it, if your guaranteed value is twice as much as your contract value, that's not a 4% fee, it's an 8% fee. And that's really hard to overcome. So, this prospect, who is now a client, she was just seeing her contract value go down each year. Her contract value was about half a million dollars, her guarantee was $800,000.
Pat: Wow. She's thinking this is...
Scott H.: Did she have it poorly invested in there? How did that happen?
Vicky: Oh, yeah. So, it was a variable annuity, but she had it invested in conservative and fixed inside the annuity with whoever sold her this product.
Pat: Which is exactly the opposite, because if you have those guarantees, you go 100%.
Scott H.: You buy an insurance on your portfolio. Yes.
Vicky: You'd go 100%.
Pat: Yeah. Equity.
Vicky: Yeah. You go as far into equities as you possibly can, right? So, this was just mismanaged from the start.
Pat: So, she brings this to you and says, "This is terrible." And you look at it and you say, "Wow. This is awesome."
Vicky: Well, this is the interesting situation. She didn't need the income. She wanted the flexibility of having control of that money. So, it's an IRA annuity. Her plan was, I'm just going to get rid of this thing, roll the money into my other IRA, and wash my hands of it.
Scott H.: And that's probably why she came in. "Hey, Vicky. I want to get rid of this. Can I transfer this to you?"
Vicky: Correct.
Scott H.: And most advisors...
Vicky: And I said...
Scott H.: Most advisors would say, "Yes, sign here."
Vicky: Yup.
Scott H.: Transfer the account.
Vicky: Yup. Open up a brokerage IRA with me, we'll move it over, I'll manage it, end of story.
Scott H.: Yeah. Let's give them a little back slap on the way out. Yeah.
Vicky: Yeah. Win-win for everybody, right? Well, what I said was, "Okay. Hang on. You've had this contract a long time. Give me the actual contract so I can read through it and just make sure we're not missing anything." So, I got this old, dusty tome of a contract, riveting reading, let me tell you. And inside that contract was one line that made all the difference, and that line was, withdrawals from the contract value decrease the guaranteed benefit dollar for dollar.
Scott H.: Not percentage-wise.
Vicky: Not proportionally, which most contracts are.
Pat: Awesome. Unbelievable.
Vicky: I know.
Pat: And there was no cap on how much you could take out?
Vicky: No. No cap. So, I call the annuity company with the client, verify that this is accurate. So, what we do, instead of her taking half a million and just moving it to an IRA and calling it a day, we moved 475,000, so 95% of the contract, over to her IRA. So, 475,000 goes to the IRA. Her benefit went down from 800,000 to 325,000.
Pat: Holy smokes.
Vicky: She was 65, so 5%. We turned on the income of 5% for life. So, she got over $16,000 a year of income on top of getting to roll out 475,000.
Scott H.: Oh, my gosh.
Pat: Holy smokes.
Vicky: Yes.
Pat: My gosh.
Vicky: So, if she lives another 30 years, that's almost half a million dollars of extra income she would have not had.
Pat: Oh, wow. Look. This is an extreme example.
Scott H.: This is an extreme example.
Vicky: It is.
Scott H.: But I utilize something similar.
Pat: Yeah. But then you have to [crosstalk 00:44:06].
Scott H.: This is an insurance company based out of Los Angeles. It was dollar for dollar, not pro rata.
Pat: Yes.
Vicky: Yeah.
Scott H.: And so...
Vicky: Yeah. Some companies did it like that.
Pat: And life insurance. So, what happens when they...well, you don't have to worry about...
Scott H.: And it only works...it works for those people that invest, and then there's a downturn in the market quickly thereafter or, like this person, it was just horribly invested. I mean, it was just...
Vicky: Yes, exactly. So, she kind of had her cake and ate it, too, because she got the contract value, most of it, and this income stream for the rest of her life.
Scott H.: I mean, life would have been better for her had it been properly allocated from day one, but...
Pat: That's incredible.
Vicky: Correct.
Pat: And I assume that she was happy with this decision.
Vicky: Oh, very happy. Well, and the lesson is twofold. A, if you have one of these products, don't rely on the annuity company to see you through to what your best case scenario is. They are not sitting on your side of the desk. They're not your friend. You call them. They're just going to say, "Turn on the income or move it out. Those are your two options," right? So, you...
Pat: And don't bring it to a...
Vicky: You've got to have a financial advisor.
Pat: Yeah. Well, don't bring it to a financial advisor that just says, "Yes..."
Scott H.: That's going to sell annuity.
Pat: "...we're going to just transfer this."
Vicky: Right. You want to have a fiduciary. Please call Allworth. If you have an old, crusty annuity that you don't know...
Scott H.: Annuity or life insurance product.
Vicky: ...or you don't understand, call us.
Pat: Or life insurance policy.
Vicky: Or life insurance policy.
Scott H.: Because there's some of those old life insurance policies that makes sense to get rid of either.
Pat: Yes.
Vicky: Right. And they can be so complex. And you really got to dig into that contract to understand the ins and outs.
Pat: I just did it with a client. He came to me, $2 million face value, life insurance, and we lowered the face value down.
Scott H.: Universal life?
Pat: Universal life. We lowered...it was variable universal life. We lowered the face value down so to accumulate more. And then we named all his kids the beneficiary and moved his wife off so that...for estate tax purposes.
Scott H.: And there's no premiums payment anymore?
Pat: No, none. And the thing just...yeah. But you see it all the time, right?
Scott H.: It's these old contracts.
Vicky: Yeah.
Scott H.: Vicky, you see it all the time.
Vicky: Normal people don't realize that there are these options out there that they can do with these products. And calling the annuity company, they're not going to tell you. So, you have to have somebody who knows what they're talking about, knows what they're doing, who is sitting on your side of the desk to help you navigate that.
Scott H.: And it's primarily these older contracts, because the insurance company's got wives.
Vicky: They got a wife, too. Yeah.
Scott H.: This is a really stupid mistake on there.
Pat: Yes.
Vicky: Yeah.
Scott H.: Yeah. I remember years ago, a product that we used, you were allowed to manage your funds by yourself. There was, I don't know, 30 different investment options.
Pat: It was crazy.
Scott H.: You could make changes every day. You could make the worst decisions possible. The insurance company was on the hook. There was no restrictions whatsoever.
Pat: It was crazy. We used them back in the day. It didn't last long. That was the insurance company.
Scott H.: No. But I remember, Vicky, we had a call with the chief actuary of this insurance company, I'm not going to say the name, years ago. Because we've looked at this, like, this is too good to be true.
Pat: We said, "This can't happen. This is wrong."
Scott H.: After the call, we looked at each other like, "They don't really understand this, do they?"
Pat: Or they weren't interested in the long-term viability of the company. They understood it.
Vicky: Yes.
Scott H.: Yeah, you got a point.
Vicky: Yeah.
Pat: Right? They understood it.
Vicky: Yeah. Especially those contracts that came out in 2008 after the crash, and everyone was clamoring to get into a guaranteed annuity.
Pat: And then the insurance companies were battling for market share.
Vicky: That's right. Yeah. So, they were saying, "Yeah, we'll give you a guaranteed 7% compounding return on your guaranteed income benefit." [crosstalk 00:47:44].
Pat: Crazy. All right. Before we let you go, Vicky, can you tell us what your...mostly, I understand what...I think I understand what you do. But what does the director of client experience actually do at Allworth? So, we've got how many advisors now?
Vicky: Oh, gosh, 150?
Pat: Okay.
Vicky: Well on our way to 200 probably.
Scott H.: Are you guessing? What's your job? What's your title?
Pat: Director of client experience, what do you do? Like, what...like, if I asked you...
Vicky: Great question. I had to figure that out myself when I joined Allworth. What we focus on, what my team does, is we look at the client experience. Because when you think about it nowadays, what really differentiates firms, one from another, is going to be how they treat their clients. Right? That matters so much. So, looking at that journey that the client takes, as soon as they decide to become a client of Allworth and onward, my job is to make sure that that experience is as amazing as it can possibly be. [crosstalk 00:48:50]...
Scott H.: So, the experience, not just like we return your calls. Experience just like what the scenario you just brought us through.
Vicky: Yes. So, not only does that...
Scott H.: Like, the financial planning software, tax, estate, that sort of thing?
Vicky: Yes. So, making sure that our advisors have all the tools they need to be able to be true fiduciaries and give the best advice, and making sure that we are up to snuff at all times on current policies, what's coming down the pike with markets, and you know, taxes, and wealth planning, and estate planning, and all of those components that are so integral to a financial plan, and then making sure that the client knows that we're on their side. We treat each of our clients like they're family. I mean, I know that our financial...our financial planners here are really top notch. They are cream of the crop, which is why a lot of high net worth clients, a lot of high net worth people are seeking Allworth out specifically.
Pat: Thank you.
Scott H.: Thanks for the commercial.
Pat: That is a great commercial. Vicky, as always, thank you for being on the show, and thank you for being part of the Allworth team. You are a valued and appreciated coworker.
Vicky: Yes. Thank you so much. I appreciate you guys.
Scott H.: Yeah. By the way, on the topic she...that's why a lot of high net worth people seek Allworth out. But let you know about our webinar that we've got coming up on...the topic of our webinar is top investment moves for high net worth planning. So, it's really designed for people with more than $1 million saved in investable assets. Not that we don't value all individuals, just there's some different things that, as your net worth goes up, that you need to start thinking about.
Well, during this webinar, we're going to talk about some Roth conversions and how...pros and cons of those, and how to think about that. Look at unwinding concentrated stock positions. So, perhaps you retired from an employer where you've got a big chunk in one particular company. How do you go about a strategy without incurring big taxes? How to utilize some excess cash and much more. So, Allison Scoggin, one of our great advisors, certified financial planner, is going to be doing the webinar. It's Wednesday, January 22nd at noon Pacific, Thursday, January 23rd at noon Pacific, Saturday, January 25th at 9 a.m. Pacific. So, the 22nd, 23rd, and 25th. To learn more and to register, go to allworthfinancial.com/workshops.
Pat: Before we go, I mentioned these ETFs, and we're not going to have time to talk about it.
Scott H.: Yes, we are.
Pat: Oh, okay.
Scott H.: We'll talk about it.
Pat: So, the U.S.-based electronic exchange traded funds, right? Exchange traded funds, ETFs surpassed $1 trillion dollars in inflows, not...
Scott H.: Yeah, I saw that. Last year, right?
Pat: That means new money coming in at $1 trillion dollars, right? And so, now, they make so many flavors of them. And this...
Scott H.: Well, because it's the modern day mutual fund.
Pat: That's right. And there's some tax strategies...
Scott H.: And by the way, if you own an old mutual fund, particularly if it's outside of a retirement account, you're probably best just keep it in that old mutual fund because there's no sense incurring...
Pat: But not reinvesting dividends.
Scott H.: No.
Pat: Yeah. Many people actually have it automatically triggered to reinvest dividends.
Scott H.: If it's outside of a retirement account, I would not do that.
Pat: Yeah, that is wrong. But so...
Scott H.: Most of the time.
Pat: My favorite was this one called the simplified enhanced income ETF, which should just ring all kinds of bells.
Scott H.: Simplified?
Pat: Enhanced income ETF.
Scott H.: That sounds like people sitting around the conference room in the afternoon coming up with a name.
Pat: Hey. We're going to call it the...
Scott H.: Simplified and enhanced.
Pat: It trades under the ticker HIGH. H-I-G-H. Good for them for getting that ticker. I would have thought that was taken. So, it is a simplified enhanced income. So, basically, what this thing is supposed to do is kind of act like a treasury.
Scott H.: You know, the...here's the problem with this, right? I don't even know what the product is yet. All right? You're going to tell us.
Pat: Yeah.
Scott H.: But here's why...like, if...you mentioned when the ducks quack, feed them. Right?
Pat: Exactly.
Scott H.: Because sometimes you hear callers on this program. Someone's going to retirement. They're looking for a high income strategy because they need income and retirement. They've been investing in their 401(k) for years, but now, it's time for income. They go doing some research. They start Googling around, and they see the bumpiness. Even the ticker symbol is HIGH.
Pat: Yeah. How could you go wrong with a simplified enhanced income portfolio?
Scott H.: It's simplified, just what you were hoping for. You don't want a complex investment strategy. It's enhanced and simple.
Pat: You're like the marketing team. A plus. A plus on the marketing team over there for their simplified enhanced. So, what it's supposed to do is kind of act as a treasury, but a little bit better since the symbol is HIGH. So, in addition to buying short-term paper, high buys and sells, calls and puts, and options to generate income, oftentimes, they use this as kind of a...to make more fluid the volatility. They even traded options on MicroStrategy.
Scott H.: MicroStrategy?
Pat: They were trading...
Scott H.: By the way, if you're not familiar with MicroStrategy, they're...you know their own strategy...
Pat: Leverage Bitcoin.
Scott H.: It's leverage Bitcoin. They own Bitcoin. That's all they do.
Pat: Yes.
Scott H.: And it's worth about double what the underlying assets are.
Pat: Which is...by the way, I have a friend that has been doing put options on it, thinking it's going to fall.
Scott H.: No, no. A bull market can last much longer than your liquid.
Pat: I said to him, I said, it makes sense.
Scott H.: It could be eight years.
Pat: At one point in time...I said, "At one point in time, you will be right."
Scott H.: I had put options on Countrywide.
Pat: I remember that. I lost money on that.
Scott H.: You did, too?
Pat: I was convinced they were going to go out of business.
Scott H.: They did.
Pat: And they did, just not in time.
Scott H.: Just years longer.
Pat: Not in time.
Scott H.: Not in time.
Pat: So, they traded MicroStrategies. They did put options. They tried options on this thing. Right? And this is in an income fund. This is in an income fund that is doing puts and calls.
Scott H.: And you read, and it says the majority of their...is in investment grade securities.
Pat: Yes.
Scott H.: So, how did it do?
Pat: So, their year, they ended up with a return of 1.5%. And the thing that they were trying to do a little bit better from would be like a Bloomberg SPDR, BIL, right, which is a one to three-month treasury, return 5.2.
Scott H.: So, the treasuries were 5%.
Pat: And this thing was supposed to be a little bit better than treasuries. And the return for 2024 was...
Scott H.: How much assets did that find? No. Does the article say that?
Pat: It actually didn't say. But the thing that...the article goes on and continues to talk about...
Scott H.: Just because something's an ETF, doesn't mean it's a good investment.
Pat: Is that they're rolling out these ETFs daily, new ETFs.
Scott H.: Well, because it used to be, when they first came out, they were all passive.
Pat: That's right.
Scott H.: They were all indexed.
Pat: That's right.
Scott H.: They're not any longer.
Pat: Well, because technology allows you to price all day long. Right? And that's really what an ETF did for the mutual fund industry is it allowed you to buy somewhere in the middle of the day rather than at open or close. But it just reminded me, as I said earlier, about when the ducks quack, feed them. And look, these firms, they're designed to sell you stuff. Right? They want...we want coins.
Scott H.: Yeah. So, I mean, Victoria Bogner...
Pat: We want coins. But we want coins. I mean, Victoria said...
Scott H.: She talked about fiduciary. She mentioned that word a few times. A product manufacturer is not a fiduciary.
Pat: That's right. They don't care.
Scott H.: They may care.
Pat: Okay. Fair enough.
Scott H.: But their job is not to do what's in your best interest.
Pat: Well, look at...and the products are not either good or bad.
Scott H.: It depends how they're used.
Pat: It's how they're used, right?
Scott H.: That one might not be too great.
Pat: I'm going to go with that. I'm going to go with that.
Scott H.: When you're buying put options on...I mean, you're taking...
Pat: In MicroStrategies in an income fund, like, if I came to you and said, "Let's create an income fund. Oh, by the way, we're going to do options on MicroStrategies."
Scott H.: Which is essentially on crypto.
Pat: What you're trying to do is enhance your return.
Scott H.: We're going to use crypto to enhance your return.
Pat: Well, not only are we using financial instrument to enhance the return, we're going to do a company that's highly leveraged against a speculative asset to begin with. You're like, "Okay. Where's..." when you go across this tightrope, let's get rid of the net.
Scott H.: All right. Hey. As we as we wrap up this program, if you haven't given us a review or rating, please do. So, if you're listening on your Apple thing or Spotify...where do you listen to your podcasts?
Pat: Spotify.
Scott H.: I do Spotify as well. But I think more people...because I looked and we have a lot of ratings on Apple, but not as many on...I don't care where you...give us a review.
Pat: Wait. Let's stop for a second. Have you read any of the reviews?
Scott H.: No. I don't read them.
Pat: You've never read reviews of the show.
Scott H.: I don't...I may...not that I recall.
Pat: Okay.
Scott H.: I don't spend any time. I have zero interest. I do look at the stars. If we had bad...if it was a bunch of bad ratings, I'd want to know why. But it's good. I think we're 4.9 or something. I don't know.
Pat: Okay. Higher than my Uber rating. Do you ever check your Uber rating?
Scott H.: Let me finish this.
Pat: Okay.
Scott H.: So, before we talk about... Yes, I do, because I don't want to be a jerk.
Pat: Okay.
Scott H.: I want to be perceived...and we Uber quite a bit because we travel for work, and it's actually a very efficient way to get around town when you...instead of going to rent a car.
Pat: I'm going to tell a story about getting into the wrong Uber.
Scott H.: Okay. Real quick, though. Give us a rating. There we go.
Pat: I got in an Uber, and I'm almost at the destination, and then the guy realizes. I didn't realize.
Scott H.: You're kidding.
Pat: No.
Scott H.: Don't you check the license plate?
Pat: I didn't that time.
Scott H.: In some states, you're not required to have a front license plate. And I'm thinking if you're an Uber driver, you should have a front license plate because you're sitting there, here comes this car. And there's...like, there's no license plate.
Pat: It was, like...and the difference of the car was that they were both Toyotas on the thing, and yeah, it was dark out. And I get in the car, and we're almost to the destination. We both realize we're...and the guy said, "I'm turning around." I said, "No, we're less than three minutes away. You're not bringing me back 15 minutes." He said, "Well, you're in the wrong Uber." I said, "I know I am. And it's bad for you, too. And it's bad for me. But it makes no sense for you to turn around. And he said, "How am I going to get paid?" And I said, "I will pay you some cash. Here's some cash, but we're not turning around now." And now, I check.
Scott H.: That's interesting. Like, what if he had insisted on you turn around? I imagine he has to let a passenger out or she has to let a passenger out if you want out of the car.
Pat: I was not getting out of that car. I mean, we're...I would have...no. It's a business.
Scott H.: You couldn't force the person to go where you wanted to go.
Pat: Okay. Fair enough. I would have had to go back.
Scott H.: You throw a little cash, and they go where you want them to go. It is their business.
Pat: Yeah. That's what he's there for.
Scott H.: A couple dollars are going to drive you there.
Pat: I said, "I'll take care of you." And he said, "How much?" I'm like, "Good for you."
Scott H.: Good for him. Yeah. All right. We'll see you guys again next week. This has been Scott Hanson and Pat McClain of "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 a state planning attorney to conduct your own due diligence.