Announcer: Would you like an opinion on a financial matter you're dealing with? Whether it's about retirement, investments, taxes, or 401(k)s, Scott Hanson and Pat McClain would like to help you by answering your call. To join "Allworth's Money Matters," call now at 833-99-WORTH. That's 833-99-W-O-R-T-H.

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

Pat: And Pat McClain. Thanks for joining us.

Scott: That's right. Glad you are here with us as we talk about financial matters. And last week, Pat, we said we were gonna talk about SPACs and we didn't talk about it. We failed.

Pat: We did not talk about SPACs. So, if you're new to this show, it's a financial show.

Scott: Welcome.

Pat: Thank you for joining us. And we talk about money.

Scott: We've been doing this 28 years.

Pat: We take phone calls and answer questions and rant about things that may or may not be of interest to you. But this SPAC thing, I remember when it...

Scott: If you've listened to the show for a while, you remember us talking about when these things were hot. Everyone was coming out with a special-purpose acquisition company.

Pat: Which is?

Scott: It's a way to skirt typical IPO rules. So, you wanna raise money from the public, raise capital from the general public. Instead of going public, which is very cumbersome and expensive, you create this special-purpose acquisition company.

Pat: Which is a blind pool you put your money in.

Scott: And then later after you put your money in, the management decides what company they're gonna buy.

Pat: And/or what companies and/or what industry. By the way, typically when they start the SPAC, the management knows exactly what company that they had their eye on. So, as we're not always right, but when these came out, I thought, "Would you really invest in something that you can't see or know just based on a wink and a nod like this is gonna be okay?" And this is a sign of the frothy markets back there where, you know, who can make a mistake? So, these raise billions and billions of dollars, these special-purpose acquisition companies and we had said, "Do not touch these. Don't. Please stay away from them."

So, the one that came to my attention...

Scott: They've lost more than $100 billion in market value. Billions. Billions.

Pat: So, I started looking up some of these the other day just for kicks. And the one that I came across that was just really mind-numbing was Wheels Up. So, what is Wheels Up? So, if you are wealthy and want to fly private, right, you can sign up for many, many companies out there. So, the old one in the industry is a Berkshire Hathaway company, which is, you know, a respected company and that's NetJets. And a lot of...and that's been around for a long, long time.

Scott: What's the difference between a Wheels Up and a...

Pat: It's how they charge in the subscription.

Scott: Yeah, whatever. [crosstalk 00:03:31]

Pat: So, Wheels Up, not that I have a great understanding of this, but I did some research after... I watched Wheels Up at 28 cents a share. This came out about two years ago at $10 a share.

Scott: What could go wrong? What could go wrong? Private travel, that's a boom?

Pat: Rich people.

Scott: COVID, I could...people wanna be...

Pat: Twenty-eight cents a share. What is that, 97%?

Scott: It's not good. That's what it is. It's not good.

Pat: It's not good. So, this is just a reminder.

Scott: And there were some high-profile ones like Richard Branson's, that Intergalactic Star Wars thing, whatever they called that thing.

Pat: Yes. So, even the sponsors of it, regardless of who they are, don't protect you from bad investments because the sponsor typically makes money on this whether you make money or not. But what it reminded me is the old saying...

Scott: Virgin Galactic Holdings, the shares are down about 60%.

Pat: Well, most of them are down at least 30%. But what it reminded me was, as an investor, don't get enamored with the flashy new things. It's okay to be conservative, old-school, fuddy-duddy, basic allocation in your portfolio.

Scott: The thing about this, Pat, and sometimes it was just betting on the celebrity that was raising the cash, Shaquille O'Neill had a SPAC. I mean, it was, like, a lot of people suddenly put their name behind this SPAC. So, it's one thing to say, "Well, this company has a really interesting product or a really interesting service, they've got a great management team. I think I'm going to invest in that company." Right? That's one thing.

The other is, "Well, here's this person who did something interesting in the past, maybe it's not even related to business. Who knows what they're gonna invest in? But I just like that person, so I'm gonna send a bunch of cash because what can go wrong?"

Pat: You mean like cryptocurrencies with these celebrities being sued by the Securities Exchange Commission for promoting an unregistered security? You mean that?

Scott: Unregistered security. Yeah.

Pat: That. Exactly that.

Scott: Exactly what they did.

Pat: Yes.

Scott: They were unregistered securities.

Pat: They were unregistered.

Scott: That's what the...

Pat: These SPACs were actually registered, but kind of the same principle. You're buying, as my grandfather used to say, a pig in a poke.

Scott: What does that mean?

Pat: Well, I actually looked it up a while ago.

Scott: Between looking at various companies that went public via SPAC.

Pat: Now you know what I do when I can't sleep in the middle of the night other than send you emails at 3:30 in the morning.

Scott: Pig in a poke. I do get those sometimes.

Pat: A pig of poke is in a crate that you can't see the whole pig. That was my understanding of what a pig in a poke is.

Scott: Okay. By the way, if you have a different understanding, probably not gonna take your call.

Pat: Okay.

Scott: Just to be clear. All right. Let's have some of our callers, our guests join us here. If you'd like to be part of our program, you can send us an email, questions@moneymatters.com. We'll set up a time to record your call, questions@moneymatters.com. And we're talking with Tim. Tim, you're with "Allworth's Money Matters."

Tim: Hi, guys. How are you?

Scott: Wonderful.

Pat: What can we do to help?

Tim: Good. Good. Well, I've got a question on student loans.

Scott: Don't get them.

Tim: And then these are actually for my kids.

Pat: Okay.

Tim: Not for me. So, I have three kids, who two of them are now out of school. One graduated in 2020, one graduated in '22, and one is gonna graduate in '24. And they took out the loans, you know, knowing full well that they were gonna have to pay them back. Well, when they got out in 2020, the one that got out in 2020, he had about $13,000 in loans.

And when we heard that they were put on hold and, you know, $10,000 might be paid off, we said...or I said to him, I suggested to him, "Let's just hold off on paying that off and we'll see if we get the $10,000 done."

Scott: Yeah, see what happens.

Tim: Well, now that we know that the $10,000 is probably not going to be forgiven, the question comes down to... And by the way, the other one has about...she'll have about $13,000, and the other one also, by the way, [crosstalk 00:08:11] how we planned it.

Scott: Fortunately, they're not big amounts.

Pat: Tim, did you or your spouse personally sign on any of these loans?

Tim: No. No. And we purposely didn't.

Pat: It's all in the kids' name?

Tim: Correct. Correct.

Pat: Okay, perfect.

Tim: And we did that on purpose.

Pat: As you should have.

Tim: Yeah, yeah. That way...

Scott: What's the rush to pay them off now? I think isn't this...we're waiting for the Supreme Court to rule on this.

Pat: Well, let's... So, what's your question though, before we get dig into that, Scott?

Tim: Well, I guess it's more of a financial planning question because the two of them have graduated and have pretty decent jobs. Actually, the one who graduated in 2020, he's had the money to pay this off since about the second...well, after the first year of getting out and getting the job, he's had the $10,000. Or he, actually, had $13,000. He's ready to pay it off.

Pat: What's the interest rate on the loans?

Tim: And the question is, I mean, ethically, you feel like you should because you took it out knowing that you had to pay it back. But as a financial planner, do you think, well, you know, the tax rules change so you count the student loan rules changing. Do you wait to see if that really happens? You know, it's kind of almost an ethical or a moral question.

Pat: That's right.

Tim: And then it's also a waiting to see, you know, what the rules are gonna be. And so I'm just kind of...we're just trying to figure out, how do you plan for it.

Pat: What's the interest rate on the loans?

Tim: Well, nothing right now because the interest is a, you know, nothing [crosstalk 00:09:41]

Scott: It's been deferred.

Pat: And what will it be?

Tim: Yeah. I don't know. Do we know?

Scott: Look, so when I was younger, I would play Monopoly, right? I'm sure we've all played Monopoly.

Tim: Yeah.

Scott: And with Monopoly, you read through the rules. What are the rules of the game? Now, everyone wanted to get Boardwalk and Park Place because you knew that if you can get those two and get a couple of hotels, you're gonna bankrupt anyone who's coming by.

Pat: I liked the railroads and the utilities.

Scott: The railroads and utilities were always good as well. Like, here's my point. Like, Hasbro designed the game. They set the rules. I'm playing the game, I'm gonna play by whatever those rules are. I view tax law, government-funded whatever, like I'm gonna play by the rules that are provided to me. I'm gonna pay the taxes that I owe, I'm not gonna pay a penny more. I'm gonna take any itemized deduction I can. If the government wants to give me a free handout for whatever because I'm a short bald guy, I'll take that, right?

Tim: Right.

Pat: It's just a matter of time, by the way, Scott.

Scott: And so I think it's abhorrent, frankly. I think it's... The fact that we have these young people take out these large loans that the government...it's the government. The government runs the whole education system.

Pat: They didn't underwrite them.

Scott: There's no underwriting. They encourage these kids to take out these big loans and go to these universities that a lot of them now have more administrators than they have students.

Tim: Oh, right.

Scott: It's all bloated because of the government. So, I think the whole system is disgusting, but I don't think the government should be in the business of just going and forgiving these loans carte blanche. I think that's disgusting. But having said that, if I owned...if I had a student loan and the government said, "By the way, that $13,000, you now owe only $3,000." I'd say, "Thank you very much. Here's my $3,000."

Pat: That's how you view the world.

Scott: Yeah, that's my opinion. That's what he was calling about.

Tim: Yeah. But the question...okay. And I agree, but I don't think they're gonna forgive these, even the $10,000.

Pat: What's the harm in waiting?

Scott: It's only a couple of more months, isn't it?

Pat: I mean, what's the harm in waiting two or three years? The carry cost is almost nothing.

Tim: Right. Right. So, no. But I guess... Okay, so here's the financial planning question. So, I think I heard you guys say this months ago, where then they're gonna come up with some crazy formula that says if you have...if you make X amount of money over the poverty line.

Scott: It's already there. Yeah.

Tim: And then you spend X amount of money, your discretionary comes after that [crosstalk 00:12:24].

Pat: That's right.

Scott: That's right.

Pat: That's right.

Scott: That's how they determine your payment.

Pat: Yes.

Scott: But there's still interest accruing.

Tim: So, how do...I mean, I tried to look that up, you know, and I was able to find out what it was, but then you're thinking, "Well, does it just make more sense just to pay the darn thing off?"

Pat: It may. It may make sense to pay it off, but not now. I would just wait.

Scott: I would just wait because the Supreme Court, I believe, they already heard arguments a couple of months ago, and they're supposed to rule on this in June. Is that not right? June or July.

Scott: I would wait. I mean, I would wait.

Tim: Right. And they will wait because you're right. If they do forgive it, it's gonna be a down payment on a car for them, would be my guess. But I'm guessing it's gonna come through in say whatever it is, three months, six months.

Scott: And by the way, I'm with you. I don't think it's gonna...I don't think the president has the power to spend a $1 million.

Pat: When we get to the end of this and you believe that there will not be any forgiveness, then have them pay off the loan.

Scott: Then I'd pay it off immediately.

Tim: Okay. And that's what I was gonna say. Do you pay it off in a big chunk or do you wait to see if, well, what's the poverty line? How much do you pay?

Scott: No.

Tim: Do you wait for 10 years to let it go, or do you just say, "The heck, well, let's just pay it"?

Pat: You could do that. I mean, well, the thing that...

Scott: If this was $130,000, it'd be a different story.

Pat: And then at that point in time, like, I was talking to a young person who was going to nursing school and I said, "Load up on the student loans because you might find that you find yourself going to a small community hospital where they're subsidizing nurses because they need them and they're gonna subsidize it through the repayment of student loans." Right?

Tim: Right.

Pat: We have no idea where it's going. It's $13,000. The interest rate...

Scott: It sounds like your oldest has saved enough money to pay it off. [inaudible 00:14:10] be great.

Pat: And how much does your oldest make?

Tim: He probably makes right now about $75,000.

Scott: All right. So, he...

Pat: Yeah. And look, if you don't know what to do, then split the difference and pay it off over three years.

Scott: No, I'd pay it off.

Pat: But I'd probably just pay it off. I wouldn't be in a hurry though, until I actually waited to see where this legislation... Actually, it wasn't legislation at all. That was the problem.

Tim: Yeah. That's what we're gonna go with that.

Scott: That's why it's...yeah.

Pat: Well, congratulations on...

Scott: No kidding.

Pat: My youngest out of my four just graduated two weekends ago.

Scott: Your youngest is out of college now?

Pat: Yeah.

Scott: We are getting old.

Pat: Oh, I know.

Tim: Yeah. Well, yeah, they worked...

Pat: What's that?

Tim: They worked hard at... You know, they worked through college, you know, and they took out the loans, but they had to, but they also paid it off. So yeah, we're real proud of them for doing that.

Scott: These are not big student loan balances. They're very manageable.

Pat: Yeah. They're very... And it didn't hurt them. All of my children worked through college, and I think it actually helped them.

Tim: Oh, I agree. Yeah.

Pat: But I gotta tell you though, you know, what I learned? So, at the graduation, I was with my son and five of his friends, and I called one of them buddy. "Hey, buddy." And they're, like, "You can't call people buddy."

Scott: Why?

Pat: It is not a term of endearment. They said that it is now considered an insult, kind of, in your face, when you call someone buddy. And I'm like, "I had no idea."

Scott: There were lots of other terms back in high school days that were very common calling your friends that you would never say today.

Pat: I know, but 60 years of age I'm like, "Buddy is wrong?" And he's like, "Yeah. Don't. Dad, if they weren't my friends and you just ran into them in the street, it wouldn't have ended the same way, they would've come back at you."

Scott: Well, thanks for sharing this useful information.

Pat: I'm just trying to save people from the embarrassment that I went through.

Scott: Because the majority of our listeners are not 22 years old.

Pat: No, but...

Scott: They're closer to Tim's age.

Pat: I know, but it would...you can't call someone a...

Scott: Tim, do you ever call someone buddy, "Hey, buddy"?

Tim: I actually have a friend whose name is Buddy.

Scott: Okay. Poor guy.

Tim: So, now what do I do?

Pat: I don't know.

Scott: There's your next...

Tim: I think we're going to have to rename him.

Scott: You've dealt with this issue. That's your next issue to be focused on.

Pat: Well, appreciate the call, Tim.

Scott: Thanks, Tim.

Tim: All right. Thank you, guys. Appreciate it.

Pat: It's just a...I recognize I am getting old.

Scott: Right.

Pat: But I don't...

Scott: Lots of things have aged and I really enjoy.

Pat: I don't wanna be that grumpy old guy that's completely out of touch and then I realized when I called someone buddy that I was out of touch.

Scott: You're an old man to them, regardless.

Pat: Okay.

Scott: You can wear the latest jeans, wear the coolest clothes, your language is still gonna be way off. You're always gonna be a couple of seasons behind the slang.

Pat: Okay. Thank you. All right. Let's...

Scott: And I don't know why that's not...why is that not...there's nothing wrong with that either.

Pat: No.

Scott: No. All right. We're in North Carolina talking with Joe. Joe, you're with "Allworth's Money Matters."

Joe: Hi, buddies. [crosstalk 00:17:30]

Scott: Okay, here we go.

Pat: All right. That's it. That's it, Joe. Off the phone.

Scott: What can we do for you?

Joe: So guys, back in 2020, my meager money was at a large bank and I didn't like what was going on. Ultimately, I had them sell everything and started managing my money myself. And at that time...

Scott: So, when you say was that a large bank, you were using some brokerage account or something there and owned investments.

Joe: Yes.

Pat: You were like at a Merrill Lynch, which is a division of Bank of America, something along those lines.

Joe: Something along those lines. Yes.

Pat: Okay.

Joe: But in the end, we didn't have enough money to be of interest to them, and essentially, it looked to me like it was basically, you know, a mutual fund at a high grade. So, I had them sell everything. My objective at that point because we are, my wife and I are at that time in our late 60s, now our early 70s, was to take our funds and, A, preserve capital, B, maximize income.

Pat: Okay.

Joe: So, I bought mostly with what we had aristocrats, kings, companies that were paying good in...paying good yields, good dividends, but we're at the press prices because of the COVID activity. And now some of them are looking like maybe they're running out of steam, but they're such good companies. My real question is, should I hold them or... Because they did fit my criteria back when I bought them, and they still do. But are they... You know, now where I've made some good money on them, should I take some money and look for better investments?

Pat: Is this inside of an IRA or outside of an IRA?

Joe: Most everything is in IRA accounts, my wife and I. But companies like...

Pat: How many...give me an example.

Joe: Okay. Exxon. I own that at 39 and the yield on it is over 9%.

Pat: Yeah. They've got tons of cash.

Joe: Procter & Gamble, AbbVie. I mean, I've got several that are paying in the 7%, 8%, 9% yield, but also you're seeing or hearing, for example, with Exxon, that maybe the oil industry is running out of steam a little bit and, you know, I've made almost triple my money on that one.

Pat: So, how many individual stocks are in the portfolio?

Joe: I have about 35 positions.

Pat: Okay. And how much money is this?

Joe: A little...around $800,000, $700,000, actually.

Pat: Any bond in there at all?

Joe: Yeah. I have about 140 in short-term, six and 12 in two-year T-bills. And I should preface with.

Scott: Here's the... Okay. You should preface with?

Joe: With the income we get from a small pension, social security, and the interest off of the stocks, we could survive. However, a couple of grand more a month would make it more pleasant.

Scott: Here's why I'm challenged to answer your question. Ninety-three percent of actively managed mutual funds have failed to outperform the index that they are closely associated with over the last decade.

Joe: Okay.

Scott: So, less than one out of 10 professional stock pickers have done better than if they just bought the basket of stocks and went on vacation for the last decade.

Joe: Like, okay. So, like an S&P ETF or something?

Scott: Yeah.

Pat: Yes. But you've taken it one step further, which is your portfolio is what's highly diversified in value stocks, right? So, you don't...it doesn't sound like you have any growth spots in...

Scott: And large-cap.

Pat: And large-cap value. So, out of...if I took the sectors of the...and broke them into nine basic cubes, there's large-cap growth, large-cap blend between growth and value and large-cap value, mid-cap, small-cap across these nine sectors. It sounds like you're all up at the top-right, which by the way, hasn't been bad since you started investing.

Joe: And for our age, it may make the most sense.

Pat: Well...

Scott: But what happens...but markets go through cycles. So, what you're doing now is some pieces of your portfolio are not in favor right now. They're out of favor. And so now you're questioning whether you should own these or not.

Joe: Well, maybe that's the way to position it. The more I'm looking at it and saying, for example... And we do own, all right, you know, Microsoft, IBM, Cisco and Cloud.com.

Pat: Okay. Okay. Okay.

Joe: So, those are...about 18% of the portfolio is in tech.

Pat: Okay. All right. Well, I take that back. It's not all large-cap value, but you've got no mid-cap or small-cap in there.

Joe: Maybe a little bit. Not a hell of a lot. A fair amount in banking, a fair amount in energy.

Scott: So, the bigger...so the real issue is, though, that the majority, the vast majority of individual investors do themselves harm by picking individual securities, not help. Even with all the research they put in, the vast majority of professional stock pickers with their teams of analysts do themselves harm. So, with that knowledge, like, it's hard for me to say, "Well, gee, Joe, based upon your stock picking, you should do this and this or that." I don't think that's a way to build or preserve wealth.

Pat: You would move back to...

Scott: And I don't own 35 securities.

Pat: I don't either.

Scott: Actually, I take that back. I've got a direct index, which I own lots more than that. But it's all part of an index strategy.

Pat: You're mimicking an index. You're not actually picking the individual stocks yourself.

Scott: I don't pick. I don't even pay attention to the individual stocks. It's all to track an index.

Pat: Yeah.

Scott: No one's deciding, making a decision, "Should I have...?" I probably have a couple hundred individual securities. No one's make a decision, let's have...this company is not doing well. The profits are...

Pat: You're trying to the mimic S&P 500.

Scott: The index, yes.

Pat: Why did you go that direction? Because of the income side of it?

Joe: Yeah, exactly.

Pat: Okay.

Joe: I mean, yeah.

Pat: So I would ask you to reframe that thought because it's an IRA. And the IRA doesn't differentiate between capital gains, interest income, dividend income, qualified.

Scott: Dividends.

Pat: It doesn't...

Scott: The tax is already [crosstalk 00:24:24].

Pat: It's all taxed as ordinary income. And so, you could make an argument why it should be outside of an IRA. But inside of an IRA, what you're really interested in is total return over time. And I don't believe...

Joe: Well, yeah, but...

Pat: What's that?

Joe: Your operative word there is time. We're in our 70s, and monthly income as opposed to long-term growth is perhaps more important.

Pat: No, no, but it doesn't matter. And the reason is because you can sell a mutual fund that's got capital appreciation.

Scott: Or a company that appreciates.

Pat: Or appreciates.

Scott: And spend the appreciation.

Pat: Take the gains if you want, but I would actually go back and refashion the whole portfolio to actually make it...I would use mutual funds or ETFs and I would get some mid-cap and small-cap exposure in there. And I wouldn't pay almost no attention to what the dividends are on those particular stocks because I'm interested in total return.

Scott: And sometimes, these companies pay out a dividend, the dividend is greater than their earnings.

Pat: By the way, you've got tons of time on your hands. Don't...you're not going any...well, I shouldn't say that. Most people in their 70s of plenty of [crosstalk 00:25:44] left.

Scott: You've got a greater than 50% chance that either you or your wife will be alive into your 90s. Greater than 50% chance, so that's a long time.

We're gonna take a quick break. This is Allworth's Money Matters.

Announcer: Can't get enough of Allworth's Money Matters? Visit allworthfinancial.com/radio to listen to the Money Matters podcast.

Scott: All right. Welcome back to Allworth's Money Matters. This is Scott Hanson.

Pat: Pat McClain.

Scott: We realize that some of you listen on the radio, and you just heard some commercials or news or something and some listen via podcast. And so when we say we'll be right back, we probably were only gone two seconds.

But in any case, before we take some calls, I wanna talk about a practice that has gone on in the investment management industry. It's now called wealth management, by the way. It was brokerage...they were brokers. Then they became financial advisors. And it was the brokerage business, the investment business. Now it's wealth management. Everyone calls themselves wealth managers, for whatever reason.

But these...the large banks will compete against one another, and they poach each other's advisors. And you might...maybe you've worked with someone for the last 25 years and they're at Merrill Lynch or Smith Barney or whatever, and you've watched them move every several years, 10 years.

Pat: Yeah, it used to be five, but it's longer now.

Scott: And the way this is...

Pat: Scott, do you remember? So Scott and I have owned a business, an investment advisory firm in Sacramento for almost 30 years now. But there was a gentleman who was a big stockbroker in town for years and years. And he would jump firms about every five years. So he'd move from one big wirehouse to the next to the next.

And one time he jumped firms, we ran... This was when people read physical newspapers. We ran a quarter-page ad in "The Sacramento Bee," that showed a phone dangling that says, "It's 9:00 a.m. Do you know where your advisor is?"

Scott: Well, because this guy used to say, "It's 3:00 p.m. Do you know where your money is?" He did a radio program for years.

Pat: Yes. So we ran an ad that said... I don't know if we got any business from it.

Scott: It was just kind of fun to poke at him.

Pat: It was. And he was actually a friend of mine.

Scott: I know. That's what makes it even more funny.

Pat: And we ran this ad. And it just had a picture of a phone dangling.

Scott: So if you live in the Sacramento region, you know who Kelly Brothers is. Kelly Brothers, for years, was a TV news anchor and then, I don't know, 15 years ago, transitioned into the wealth management.

Pat: A great guy.

Scott: A good guy. A good firm.

Pat: Yeah, for sure.

Scott: Kelly and his family have a dog named Hansen McClain.

Pat: I think it might still be alive. I hope so.

Scott: The last time I talked to him...

Pat: Okay.

Scott: They call him Hansen.

Pat: Okay.

Scott: Because Pat McClain had a charity fundraiser, his wife wanted the dog. He said, "I will buy the dog." Pat knew the money was...they were gonna money from Pat one way or the other. So Pat said, "I'll buy the dog as long as you name the dog Hanson McClain, which was the name of our firm at the time.

Pat: The fact that he's a competitor and we're still friends.

Scott: One of our main competitors. I still love that. Yeah.

Pat: It was an expensive joke at the charity.

Scott: We talked about being competitors. But he has a good firm. A really good firm. I mean, there are some great advisors out there.

Pat: There are some terrible advisors out there.

Scott: There's some terrible advisors out there. So I would consider a great advisor, kind of competitors. But I mean, the reality is, there's plenty of opportunities out there for everybody.

Pat: Yes. So back to our...what we were talking about is our business and they have a tendency to be these larger wirehouse firms, oftentimes now, owned by banks. And they pay these recruiting bonuses. And they used to pay them every five years. So what they would do is they would come to you and you're Bill Smith, the advisor at, you know, Bank Brokerage. And they'd say, "Hey, Bill. We want you to come and join our bank brokerage. And the way we're gonna do it is we're gonna give you a check that is the equivalent of four years, five years of the income that you made last year."

So Bill made $300,000 last year, $400,000. They say, "We're gonna scratch you a check for $2 million if you come over here. And by the way, bring all your clients. By the way, Bill, we're not just gonna give it to you. What we're gonna do is we're going to forgive 15% of it over a seven-year period or 20% over a five-year period."

So what these are called is forgivable loans. And they use them as recruitment tools in order to get people to move from one brokerage firm to the other. That's how they do it.

Scott: Yeah, very common.

Pat: That's how they do it. Super common. Not common in the...

Scott: As of February of this year, this was according to an article out of "Citywire RIA," as of February, "Morgan Stanley was extending as much as 350% of someone's last 12-month revenues as a bonus." But to your point, Pat, they are giving away a forgivable loan. So let's say they give someone a check for $1 million. It's not taxable immediately. It's only taxable when that loan is forgiven.

So the brokerage firm will say, "Look, Pat, you come work for us. We're gonna give you...here's a check for $1 million. But in return, you've gotta pay us back over the next 10 years, unless you hit certain production targets."

Pat: Quotas. If you hit these quotas, we'll forgive these.

Scott: We will forgive the loan. It's golden handcuffs.

Pat: So it doesn't happen in the...

Scott: Independent RAs, independent advisory space.

Pat: It only in these... So what it does is it creates incredible conflicts of interest.

Scott: Incredible conflicts of interest.

Pat: Because all of a sudden, you've gotta hit production bonuses on an annual basis. And by the way, let's just face it, the people...investment advisors are in the money business. So they typically understand money, present company included. That matters. But not at the sacrifice of how you're managing the client's dollars. So that one product may pay a higher commission than another product. And if I need to hit this certain quota this year, I'm going to promote this product over this product because of the commissions that are paid.

Scott: That's the conflict it's created.

Pat: That's the conflict. And here's what's happened at First Republic Bank.

Scott: Which was just seized...forced sale by the Feds, right?

Pat: They have a wealth division, and they were paying up to 400% of someone's revenue for that.

Scott: They had a quite respected wealth division.

Pat: They did.

Scott: They did.

Pat: They did.

Scott: Till they went bankrupt.

Pat: So when this whole thing was blowing up, the advisors weren't able to leave.

Scott: Receivership, excuse me.

Pat: Or they'd have to scratch this big check back to the new firm.

Scott: It's a mess.

Pat: Or the firm that they went to, would scratch the big check back to First Republic, which is oftentimes what happens. But they're just backroom deals.

Scott: It's just a dirty... It's one of these things that, frankly, I'm surprised the regulators allow this to happen just because of the conflicts that it creates. You're indebted to your employer?

Pat: I don't think there's...

Scott: How can you act as a fiduciary? You are indebted to your employer. And most of the time, these guys spend the money.

Pat: Yes.

Scott: I mean, by and large, I hate to say it, a lot of people in the investment business and financial advice business are not that good at managing their own money. They live high. They live high. And the conflicts it creates, whether it's, "Hey, why don't you take... You're gonna buy a new house, a vacation home? Don't sell your securities. Why don't you take a loan against them instead? That way, you don't have to sell your securities. Let's just borrow against the stuff you have. Let's [crosstalk 00:34:19]."

Pat: Which is actually a form of revenue.

Scott: Because I could... By the way, my employer requires me to have X amount of loans done each year.

Pat: And by the way, if you borrow against your securities rather than sell them, I actually get paid as the broker on that.

Scott: It's a disgusting model.

Pat: Anyway, it's...just be aware.

Scott: And by the way, there are some great... And I picked on Morgan Stanley. There are some great advisors at Morgan Stanley. But still, this is the model that they... If your advisor is there, your advisor is choosing to still within that model. So if they recommend something out of the ordinary, like, "Do you have a quota?" I don't think they call it a quota.

Pat: They don't call it a quota.

Scott: They don't call it a quota. They call it something else. Anyway, let's take some calls here. Again, if you'd like to be part of our program, you can send us an email at questions@moneymatters.com. We'll schedule a time to record. Or you can call 833-99WORTH.

We're talking with Matt. Matt, you're with Allworth's Money Matters.

Matt: Hi, Scott and Pat. Thanks very much for taking my call.

Scott: Yes, sir.

Matt: I love your show. I've been listening to it for over 20 years.

Pat: Oh, good. Thank you.

Scott: I like long-term listeners.

Matt: I'll get right to my question. I know that time is tight. You guys had mentioned in the past that you started the first reverse mortgage company. Is that correct?

Pat: A reverse mortgage company. It wasn't the first.

Scott: Not the first.

Matt: A reverse.

Pat: A reverse, and that was in 2004. And we sold it in 2008 to...

Scott: '07.

Pat: '07, to Genworth.

Scott: That's correct.

Pat: Okay.

Matt: So that's why I wanted to ask you guys because it's entered my mind and I spoke with a mortgage guy not too long ago. And we were talking about finances, and he said, "You might consider a reverse mortgage." Well, you know, my wife and I live on a fixed income. We're both 69. And I'm not gonna get into all of the specifics but I'll just give you the round numbers. We've got a house that's worth $800,000 and we've got about $600,000 in equity. Over $600,000 in equity. Not a ton in savings. Not a ton in the 401(k) because of medical issues and this and that. I'm not gonna bore you with all the details.

The bottom line is my goal to get the house paid off because our house payment right now, we still have six years to pay on it, it's about 70% of our income. So we have our social security plus we have a small pension. So and we live fine. And we don't have too much house. We don't...I'm okay with living here the rest of my life. That's not a problem.

But I talked to the guy about a reverse...this particular individual about reverse mortgages. And he's telling me that FHA has gotta guarantee the loan, we've gotta pay $16,000 fees to FHA to guarantee the loan. And then on top of that, there's closing costs, this and that. He said, "You'll be out probably at least 20,000 bucks." And I'm thinking, I've got $600,000 in equity in this home, why would I give up $20,000 of that? I...

Pat: So let's step back for a second.

Scott: And I don't know what the exact fees are anymore.

Pat: So let's step back for a second. So the size of a reverse mortgage... And by the way, this is from memory. The rules have changed over time. But the general concept is the same. The size of the reverse mortgage is based on two factors. One is the value of the home. Forget what the equity in the home is. But the value of the home. And then the age of the individual or the couple that is living in the home, the people on title. If that...

Scott: If you're 91 years old, you can get a reverse mortgage for almost what your home is worth, right?

Pat: So when they quote you that number, my guess is they quoted you to the maximum that you would actually be eligible for in a reverse mortgage, not for just the $200,000 that you want to pay off the mortgage. And I'm not saying whether you should do it one way or the other. But my guess is that those numbers are wrong because probably they quoted it at you being able to borrow $300,000, $400,000, $500,000 of the home based upon your age and the value of the home. And then that's the number.

What you do with those proceeds obviously is the first thing they do is they pay off the first lienholder, which is the primary mortgage. And then the rest will oftentimes either as a lump sum to you or as a line of credit. So let's not get hung up on that $20,000 because unless you know the answer to that, what was the loan amount?

Matt: Well, they wouldn't tell me exactly what the loan amount would be but all he would tell me was once the loan was closed, they would pay off the first, which is $197,000. And they would provide me with a line of credit of $91,000.

Pat: Okay. That's the answer. That's the answer. So it's about $300,000. So what you were talking about at $20,000 is approximately 6.5%, which doesn't sound that unusual. Reverse mortgages are not cheap. They are more expensive than a primary mortgage. There's no question about it. You have six years left on your mortgage.

Scott: I mean, one other way to tackle this... And if we were having the conversation a year ago, it would have been different, right? So a year ago, we might have said, "Why don't you just refinance it into a 30-year mortgage?" So forget about...

Pat: That's fixed.

Scott: A 30-year fixed mortgage, let's forget about getting it paid off.

Matt: I agree.

Pat: And not worry about it. And that's how I would have addressed it.

Scott: And it still may be today.

Pat: And it might make sense for today. You shouldn't worry about paying off this mortgage. Right?

Scott: What do you have in savings?

Matt: Probably only, like, a couple hundred thousand.

Scott: Oh, okay.

Matt: But...

Scott: So you're my brother, Matt, here's what I would say. Here's what I... Here's what I would... If you have a couple hundred... Well, you have a couple hundred thousand in savings.

Pat: How much are your payments a month?

Matt: Thirty-two hundred, which includes principle, interest, taxes, and insurance.

Pat: And you're not prepaying any of this?

Matt: I'm not prepaying any of it, $3200 and it's only a 3% loan.

Pat: This is a rough one. I can see where you actually...

Matt: But see, I did a refi to get the 3%. I think I did it three years ago.

Scott: What's your savings look like then?

Pat: Stop. Stop. So when you did a refi three years ago, what was the length of the loan?

Scott: Was it a 10-year?

Pat: Was it 10 years?

Matt: Ten years. It was a 10-year loan, so that's why I got six years left on it.

Pat: Yeah, that's why. See, yeah.

Scott: Yeah, I don't like your structure, Matt, because...

Matt: I know.

Scott: Right? None of us get out of here alive. Probably, at some point in time, we're all gonna get sick or injured, right? Like, you're 69. Like, if you're in reasonably good health, you might wanna enjoy life a little more now instead of waiting six years when your home is paid off.

Pat: Yeah. And quite frankly, for the rest of the listeners, our counsel back then was, look, the difference between a 10-year loan and a 30-year loan back two, three years ago was about 0.5%. And buy the 30-year loan and pay a little bit higher in interest and then decide where you are.

Scott: Well, here's where we are.

Pat: Here's where we're at.

Scott: What do you have in savings?

Pat: Two hundred.

Scott: And are you generating income from that?

Matt: Well, it's in a 401(k) and I manage my own. Yes, I do get a regular income from that.

Scott: Okay, so 401(k)s. So it's not just cash.

Matt: No, no, no. But you know what? When I...if I was to withdraw some of that, I do my own taxes and I understand finances to a degree, but I could technically withdraw some of that and not pay tax on it because of where we're at taxwise and income-wise. Because I generate about $5,000 a month. So like I said, our house payment is about 70% of my take home.

Scott: Yeah, that's a lot.

Pat: Yeah, yeah, yeah

Matt: It's too much.

Scott: How long do you plan on being in the house?

Matt: Forever.

Pat: This is really tough.

Scott: Are there... And I don't know the answer. I mean, if you could get a 30-year mortgage with a variable rate...there still is. I don't know if I'd do that because [crosstalk 00:42:45].

Pat: Yeah, without that risk.

Matt: That's scary, though.

Scott: No, I know, I just needed to shove that out of my head.

Pat: What would a 30-year rate mortgage be at today?

Scott: Three point four...I mean, 6.4%.

Matt: Yeah.

Pat: Yeah. Yeah.

Matt: This is the dilemma I've been going through.

Scott: And, look, like, here's where reverse mortgages make the most sense. So one of our early employees, his mother-in-law came to him. She was 84 years old. She had been losing weight. People just thought she was just aging and losing weight. She says, "Can I talk to you about this reverse mortgage, how these things work?" Now she had been widowed a handful of years. Did not wanna leave her house. She had racked up credit card debt of, what, $38,000, $42,000, somewhere in that neighborhood.

And she got to the point she couldn't get any more credit, so she literally was cutting back on her caloric intake because of cash flow.

Pat: But she had plenty of equity in her home.

Scott: She didn't wanna be a burden on her... Like, reverse mortgage changed her life. So, like, that's the perfect situation. The complete opposite end is someone who, on the day they turn 62, takes out as much equity as they can from their house so they can go blow it. It's kind of like the last trip to the well, right? So you're still relatively...

Matt: That's not me.

Pat: Yeah, that's not you at all.

Scott: That's not you. I gave you two extremes, right?

Matt: I understand.

Pat: This is a really... I mean, so what's the downside in waiting?

Scott: Well, it's too much...he doesn't have any money. He knows six years from now, the cash flow is gonna be fine.

Pat: And when you pass away, where is the money gonna go? Where is the equity in the home gonna go when you and your spouse pass away?

Matt: It goes into the trust and my son is the trustee [crosstalk 00:44:48] at that point.

Pat: You have one child? Or how many kids?

Matt: Just one.

Pat: And how is he doing?

Matt: Oh, fine.

Scott: Look, my dad got a reverse mortgage when he was, like, 75.

Pat: Yeah, I gotta tell you...

Scott: From some guy who cold-called him, and he asked me later. He told me how great they were, which I thought was hilarious.

Pat: Your dad didn't realize you owned...

Scott: Oh, yeah, I guess I was still little Scotty.

Pat: I gotta tell you, I think I would probably bite the bullet and do the reverse mortgage.

Scott: Do the reverse mortgage.

Matt: Really?

Pat: Yes, yeah.

Matt: That is not...

Pat: Look at... What's that?

Matt: Not what I expected you to say.

Pat: Well, look, if you said, "My goal is to die with as much money as possible," then I would say keep getting this thing paid off and just tighten your belt. But to what end? The first thing I would say was, "Look, you should move out to the house. Sell the home."

Scott: I mean, that's one thing, downsize.

Pat: Sell the home and downsize to a $600,000 house.

Scott: Six hundred thousand, I mean that would be the simplest thing.

Pat: That would be the best thing, financially. Right? This is what you gotta do.

Matt: But this is our lifestyle, though.

Pat: That's right. That's why I didn't say that. Because you said, "We are not moving," right?

Scott: The same reason this 84-year-old did wanna move. Right?

Matt: Yeah, [crosstalk 00:46:10].

Pat: So then you're like, what is the other alternative? You know, you're surrounded by water with nothing to drink. You've got $800,000 in net worth. Right? And you just can't access it.

Matt: Yeah, I know. Well, what brought this to mind, one of the reasons why...well, I really respect you guys immensely and I even told the mortgage guy, "I'm not doing anything until I talk to Scott and Pat."

Pat: Oh, thank you.

Matt: Because you guys are the only ones I trust.

Scott: By the way, any advice we give is not really advice. Go consult your own advisor.

Pat: Okay.

Matt: Thank you.

Pat: So where did you think we would go?

Scott: We're not a client engagement.

Matt: Well, over the last couple of years, you know, we've had things break. So we don't owe anybody any money other than our mortgage. But the washer/dryer goes out, it's a couple grand.

Scott: That's right. No, no, homes are expensive. Yeah.

Matt: So I put out a couple grand here. The air conditioner goes out. There's $13,000 there. So I'm finding myself tapping my retirement, my 401(k) money a little bit at a time and a little bit at a time. And I'm thinking, if I do a reverse mortgage, I need more access than $91,000.

Pat: Oh, you're not...you're gonna have a lot more access than $91,000. Because you no longer...

Matt: Well...

Pat: You've got taxes and insurance. So the $3200...

Matt: Correct, I save about $2500 a month.

Pat: Yeah, correct. And that $2500 a month is $30,000 a year. So anything that is broken, breaks down... Do you have one automobile or two automobiles in the family?

Matt: Three.

Pat: Okay. Look, one's gotta go. I mean, really, one's gotta go. And I would make an argument that you should probably possibly share an automobile in the next few years. But money is a tool to get to your ends. It's not to die with the most money.

Matt: I agree.

Pat: Right?

Matt: I agree.

Pat: I mean, if you do it right. Like, my dad always wanted to...like, the last check he wrote, he wanted it to bounce. Like, he's gonna end up there.

Scott: You said, "Dad, I think your current checks are bouncing."

Pat: Well, I'm not gonna speak ill of my father. But...

Scott: And I didn't mean anything derogatory.

Pat: I get it. You knew my dad. I would go with the reverse mortgage. And the cost is gonna...

Matt: Okay.

Scott: I would too.

Pat: That cost is gonna bother you, but the alternatives are...what are the alternatives? Continue your current lifestyle, get to six years from now, you're 75. You've now got excess cash flow. Perfect. You can't enjoy it.

Scott: I would look at...

Matt: So take that $2500 in savings every month and bank or [crosstalk 00:49:01].

Pat: Just stop taking the distributions from the IRA.

Matt: Yeah. I think you're right.

Scott: Or convert a little to a Roth [crosstalk 00:49:07].

Pat: Or convert a little to a Roth.

Scott: But I would look at that line of credit, that $91,000...

Pat: Don't touch it.

Scott: And I think it grows every year if you don't spend it. Doesn't it? At least it used to.

Matt: He said it does.

Scott: I would ignore it for a decade. Let it just keep growing. It's gonna be worth...and maybe you'll never need it. But I would use that for...

Pat: Look, the 20 grand, it would bother me as well.

Scott: I don't like the thought of you spending next six years having the majority of your money paying down a loan.

Matt: I know. You're right.

Pat: Yeah.

Scott: No one knows...I mean...

Matt: That's what I called you.

Scott: If you were 49, I'd be like, "You're gonna have to figure it out." But, like...

Pat: And you're not buying a motor home or blowing this frivolously. It's your current lifestyle.

Pat: Yeah. And I gotta tell you, look, I don't think there's anything wrong with reverse mortgages. They're more certainly more expensive than a regular mortgage.

Scott: But you don't have to make a payment.

Pat: But you don't have to make a payment and quite frankly, what that insurance is, is to actually protect the lender if you live too long.

Scott: Or the housing market tanks.

Pat: Or the housing market tanks or a combination of the two.

Matt: But I still own the home.

Scott: Yeah.

Pat: That's right. As long as you...

Scott: When my dad passed away, myself and my siblings inherited the home. We sold it and paid off the balance of the reverse mortgage.

Pat: Just like a regular mortgage.

Scott: It was just like a regular mortgage.

Matt: Okay. All right.

Pat: Yeah. So anyway, enjoy it. I mean, that's... You know, and the alternatives, there's no silver bullet here. They are just a series of choices you need to make, and this is...

Scott: And, look, Matt, one of the things that attracted us to the reverse mortgages years ago, this was 20 years ago we got interested, like, we view this as a necessary retirement income tool for many Americans.

Pat: That's right.

Scott: Like, it's awesome if you can get to retirement and have two million bucks saved up. But the vast majority of Americans don't have $2 million saved up. But the majority of retirees do own a home and there are times like in your situation when this tool can really help.

Pat: Yeah. And we didn't think anything was wrong with reverse mortgages. They're more expensive, so be it. We just entered the space because we actually thought that there was a need. That there was...and it came from this radio show, quite frankly.

People would call and asking us questions about reverse mortgages, we went and did research. And we're like, these reverse mortgages make sense for some people. What we thought was that the way the industry was actually delivering them wasn't...

Scott: Oh, [crosstalk 00:51:42], yeah.

Pat: They weren't being delivered in the context of a financial plan. They were just being delivered as a product.

Scott: And oftentimes, people would say, "Take the cash," and there's some annuity on it.

Pat: Yeah. So anyway, I appreciate the call. Thank you for being a longtime listener.

Scott: Yeah. And I was sincere in this is not considered direct advice.

Pat: Yeah. We can't. So...

Scott: By the way, I think we have a disclaimer that usually says those things, just because... Anyway, it's been great being here. I think we had a good program today. I appreciated the variety of different topics we had. Yes, they were all kind of interesting. I guess that's why I still [crosstalk 00:52:17]. I had a good time.

Pat: Well, thank you for being here, Mr. Hanson.

Scott: Anyway, this has been Allworth's Money Matters.

Pat: We'll see you next week.

Announcer: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or estate planning attorney to conduct your own due diligence.