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Five Myths Promoted By Financial Advisors

Peter Mallouk Portrait

John Hagensen

Managing Director
PUBLISHED
October 10, 2022

This week, John shares five myths promoted by financial advisors, discusses the truth about whole life insurance and provides an outlook for bonds now that interest rates have jumped. Plus, John is joined by a Creative Planning Estate Planning Attorney, Chrissy Knopke, to discuss how to assign beneficiary designations most efficiently to specific assets.

Presented by Creative Planning, each week Host and Managing Director John Hagensen cuts through the headlines and loud takes to challenge the advice you may have been given and reaffirm what you know to be true. Plus, don’t miss his weekly interviews with Creative Planning specialists as they cover investing, taxes, estate planning and many other areas that impact your financial life!

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Transcript:

John Hagensen: Welcome to the Rethink Your Money podcast presented by Creative Planning. I’m John Hagensen, and ahead on today’s show, I’ll share with you the truth about whole life insurance, five minutes I’ve seen promoted by financial advisors as well as the outlook for bonds now that interest rates have jumped. Now join me as I help you rethink your money.

Let me begin with a reminder for us. Nothing in life is free. I think we know that intellectually, but sometimes we forget. Imagine you walk into a restaurant, you order your food and then them telling you at the end of the meal it’s all free. You’re like, “Wait, what? It’s all free?” You start asking them, “I mean, is this your 10-year anniversary for the restaurant? Are you doing some giveaway today? It’s not my birthday. I don’t know if you have any mistake and if you do the free birthday meal thing, because that’s not today for me.”

But the restaurant replies by telling you, “No, it’s always free. Look, we just don’t charge for anything here. People just come in to eat and it’s on the house.” You’re looking around, it’s a beautiful building. They’ve got hostesses and servers and a kitchen staff. The cost of all the food and beverages. It was really good actually too. You would know something isn’t right here. This doesn’t make sense.

And that’s obviously a hypothetical to help illustrate the point, but how about a more real world example that actually happens? I remember a while back there was an airline, and this caught my attention as a former airline pilot that had fares ridiculously underpriced. I mean, they were at the point where I told my wife, “Something is off here.” And then I took a flight with them and it all made sense. “Oh, you’d like a water,” that costs money. “You’d like to board four and a half seconds earlier than someone else? That’ll be 50 bucks. Oh, you wanted a seatbelt with your seat? That’ll be a charge.”

I mean, I was waiting for them to tell me that I had to swipe my credit card to use the lavatory. They charge you by the minute once you go in. By the way, that may not be a bad idea. The back of the airplane may smell a whole lot better than it does on a lot of flights. And obviously I’m being facetious, but they charged for a whole lot of things that you don’t traditionally pay for.

So of course it made sense. Oh, the fares are cheaper. They get you on the flight and then they increase revenue with all of these other hub sales. But again, nothing in life is free. Apples to apples, one airline isn’t going to charge half the price of another. The stock market returns, have a fee and its name is volatility. You want filet mignon returns? It’ll cost you uncertainty. Think of volatility in bear markets in the same way that you don’t expect that restaurant to give you free food.

You shouldn’t expect a historical return of 10% per year on average for the last century, massively above what cash or treasuries have earned without some sort of cost. It’s not the way the world works. It’s why risk and return are correlated. Our president, Peter Mallouk had a great tweet earlier this week where he said, “Short-term volatility is the price stock market investors pay for long-term performance.” Yet every time there’s a bear market, plenty of pundits will encourage you to bail out, telling you that you’re naive to stick with your plan. Great investors stay focused on the long-term.”

And he’s absolutely correct in that statement. So here’s the restaurant menu with the prices right next to it. I’m not putting market price for the fresh fish. I’m going to give you the prices to be a stock market investor. You will encounter a 14% correction on average each year. Sometimes you’ll have it happen more than once in a year. Sometimes it’ll be a couple of years that you’re able to avoid that market correction, but on average, your accounts will be reduced peak to trough by 14% in a calendar year.

All right. Next item on the menu. One in every three to four years, the broad stock markets will be worth less on December 31st than they were the previous January 1st. That’s not that uncommon. As we’ve now entered Major League Baseball’s post season, a really good hitter in 2022 gets a hit a third of the time. I mean, you’re basically the best hitter in the league right now with a batting average of 333 when that person gets a hit. We’re not shocked. That’s about how frequently the market ends negative for a calendar year. It shouldn’t surprise you.

Next item on the menu to look at the costs of the stock market every five years, you’ll have a bear market, which is down more than 20%. About 10% of five year periods you’ll have less money than you had five years earlier.

You do everything right. You stay disciplined. You don’t panic sell. You shred your statement for five years. You open it up and have less money. Man, it’s not often, but 10% of the time it happens. And six times in the past hundred years, the stock markets dropped more than 40%.

So in looking at that menu, why would anyone pay that fee? Well, because that filet mignon is melting in your mouth. That’s why. Stocks of averaged 10% per year and are almost always positive if given a 10 year time horizon. By comparison, bonds have made about 5%. Of course golden cash abysmal during that same period of time. And maybe it doesn’t sound like much.

5% in bonds, 10% in stocks. I mean, do I really need to have exposure to the stock market, John? It doesn’t seem like it’s that much better. 5% a year? Oh, it’s significant. Consider this, on a $500,000 portfolio at 10% returns over a 20-year period, your account would’ve grown to $3.6 million. So a half a million to 3.6 million in 20 years at a 10% rate of return. That same 500,000 earning only 5% a year as bonds have averaged over the same 20 year period, you have 1.3 million.

Now, if you’re confused and thinking that’s strange, I started with the same amount of money, received half the returns, but I have way less than half the amount of money after 20 years. And the reason for that is that compounding is exponential. And quite honestly, our minds think in a linear growth fashion. It’s hard to wrap our heads around the exponential growth of compounding.

If I ask you to add two plus two plus two plus two 15 times, you can actually quickly figure that out in your head. My fifth grader cruise could same thing as 15 times two. It’s 30. But if I said multiply two times, two times, two times, two times two 15 times, unless you’re Russell Crowe in a beautiful mind, you aren’t coming up with that on the spot.

By the way, if you’re wondering it’s $32,768. Verse growth by addition, which would be again 30. That’s the power of compounding. So for most people to accomplish their lifetime goals from a financial perspective, they’re going to need to participate in the compounding power of owning the largest companies around the country and around the world. But it ain’t free.

You don’t get Cadillac returns for Suzuki prices, and so you shouldn’t be surprised or downtrodden when we are in a bear market and experiencing tremendous volatility. In fact, you should be excited because the great part about this is you have more opportunity today than you did nine months ago because the market is already down.

Don’t be the idiot running out of the store when everything goes on sale. And regardless of what the pundits are telling you, the store isn’t on fire and going to burn down, so you’ve got to run out. It’s just a normal sale. In fact, the average bear market is down 34%. So we’ve still got a ways to go to even reach the average drawdown of a typical bear market.

Let me put some numbers around this. Over the last 95 years, the three-year cumulative return coming out of a bear market was down 20% or more is 41%. Cumulative five-year returns coming out of a bear market are up 72% on average. So as you can see, when the market is volatile, it’s an opportunity for those who are prepared. Continue investing in alignment with your financial plan. And when the bill arrives at your table in the form of volatility in the occasional bear market, don’t act surprised that the restaurant’s charging you for your cob salad.

Here at Creative Planning, we are coaching our clients on these principles every single day, and I want you to feel secure that your plan accounts for these risks because they’re normal and that you’ll not only get through them, but over the long haul, you will be better off financially because of them. Make no mistake, the decisions that you make right now in these moments in bear markets, in the face of uncertainty is what will define your financial future.

I don’t want you going about this alone or with an advisor that you don’t have 100% confidence in. The stakes are far too high. If you have more questions about this, you can speak with one of our local wealth managers. We’ve been doing this since 1983. We are independent fiduciaries. Visit our website right now at creativeplanning.com to request a second opinion.

Now, I’d like to back up slightly and consider how we even got to where we are today. Our president, who’s a three-time Barron’s financial advisor of the year, Peter Mallouk wrote a great piece on this that was sent out to all of our clients. I’m going to post that to the radio page of our website at creativeplanning.com/radio, if you’d like to read it and its entirety. But he also summarized this on his monthly podcast entitled Down the Middle with our director of financial education, Jonathan Clements. Have a listen to Peter explaining how we got where we are.

Peter Mallouk: First, we have low unemployment, the economy is very strong, and then COVID happens. We go into complete lockdown. Entire country and most of the world is shut down and inside. Some stimulus is put into place to keep everybody from going to the unemployment lines. We had to have stimulus in the beginning. The issue was it was much like a blizzard. Everyone was inside. Blizzard is over. Everyone wants to go outside. But that’s not what the economics textbooks say. The economic textbooks say, “Hey, all these indicators are down. No one is buying anything.” We need to do what the textbook says, which is monetary and fiscal policy are the two levers and fiscal policies, what Congress does and the president. They did a lot of giving money away to every type of group of people you could imagine, from corporations to small businesses to individuals.

And then monetary policy, which is the Federal Reserve’s ability to affect the money supply or the purchasing power of money. I think what a lot of people know, the Fed can lower interest rates, which then causes the marketplace, which is to lower interest rates, which makes its cheaper and easier to buy a home, or a car, or a washer, or dryer, anything you have to finance.

So the issue was it was a blizzard. Everyone was going to come outside and spend anyway, but instead, we kept giving them money and lowering the cost of money that making it easier to borrow. So what did people do? They bought a record number of homes and cars, and planes, and boats, and bikes, and everything else. And we had high inflation. Of course, if you have more money chasing the same amount of things, you’re going to have inflation.

But it wasn’t even the same amount of things. The supply chain, which we all thought would probably be fixed by now, never got fixed because while the United States is open for business. Lots of China still goes into rolling blackouts. We still have all kinds of supply chain issues. So more money chasing less supplies equals high persistent inflation. And now what’s the Fed going to have to do? They’re going to have to raise rates to slow that down. They’ve been doing that very, very aggressively.

They’ve got to get rid of inflation because inflation erodes people’s confidence in the dollar. It encourages speculation. It encourages people to borrow and buy things that they can’t afford, which results in bubbles. It’s all kinds of problems. So they really want to get in front of this and control it. They had a lot of catching up to do. So the raising rates very aggressively, which is going to bring housing to a screeching halt. It’s not shown up in the numbers today, but it’s already fallen off a cliff.

I think we’re seeing major purchases go off a cliff too. I think we’ll have a minimum, a mild recession out of this and the stock market and bond market see that stock market suffering because that bond market is suffering because when interest rates go up, bonds go down. If you’ve got a 3% bond and new bonds are coming out at six, guess what? No one wants to buy your 3% bond.

So we’re seeing both stocks and bonds suffer together, which is pretty rare. It’s not unprecedented, but it’s pretty rare. And also all of this happened to start in January. And so when you look at it from a calendar year perspective, it looks like quite the debacle.

John: Again, that was our president Peter Mallouk sharing his thoughts on his podcast Down the Middle. You can find that wherever you listen to podcasts. So as I conclude this first segment of the show, the question is where do you go from here? The answer is you get as much money to work as quickly as absolutely possible. You may have another year. This might not be the bottom. It may be prolonged, but when it recovers, it recovers quickly and without warning.

And in hindsight, it always makes sense why the market bottomed to where it did. But in the moment, it usually comes from an unpredictable place. If you are a younger accumulator, this is your once every five-year opportunity. Dollar cost average if able. Increase your savings rate. If you’re someone holding cash, what are you waiting for? Get it to work as soon as possible. And if you’re someone with a diversified portfolio that has some shorter-term bonds, those aren’t down. They’re certainly not down near as much as the stock market, so it’s time to rebalance. Even intermediate term bonds are down far less than long-term bonds in stocks. Rebalance your portfolio. Don’t try to time the bottom. Get your money working while things are on sale.

Announcer: At Creative Planning, we provide custom tailored solutions for all your money management needs. Why not give your wealth a second look and learn how the team at Creative Planning covers all areas of your financial life. Visit creativeplanning.com. Now, back to Rethink Your Money presented by Creative Planning with your host, John Hagensen.

John: I recently had a client come in with a lot of questions around their estate plan and in particular how to most efficiently assign beneficiary designations to specific assets. And this person had a unique situation with a blended family and a lot of fantastic questions. And while I’m a certified financial planner and have general knowledge around estate planning, I was able to loop in one of our 45 attorneys here at Creative Planning to dive much deeper into these unique and specific questions and get them answered.

I always think of those scenarios akin to me being sort of a generalist family physician and looping in a neurologist to perform the actual brain surgery once we identify something is going on in the brain. I’m so grateful that our clients have access to a state planning specialist when in depth situations like this arise. And that conversation prompted me to reach out to our extra special guest, Creative Planning estate planning attorney, Chrissy Knopke for more insight around this very topic. Thank you for joining us here on the show, Chrissy.

Chrissy Knopke:               I’m excited to be here. Thank you for having me.

John: Occasionally we have topics that you and I discuss around estate planning that can be a bit more niche and specific to a small group of listeners, but I’m really looking forward to this today because it applies to all of us. And so with that said, are there any assets, Chrissy, that cannot in fact have a beneficiary designation?

Chrissy : Great question. In most states, you can put a beneficiary on all of your financial accounts. So bank accounts, checking accounts, 401ks, IRAs, life insurance, all of those things can easily have a beneficiary designated on them. There are only about a third of the states that allow you to put a beneficiary on real estate and most people do not realize that. And when they purchase a house, there’s a lot going on. So that’s really the last thing they’re really thinking about is, “Oh, if I die, where is this house going?” So only about at the third of the states allow you to designate and you have to do that in a legal document that is recorded with the county.

John: Wow. So you’re telling us if you happen to be in one of those states, your beneficiaries may get a bit of a surprise when they realize they weren’t listed as a beneficiary?

Chrissy: Yeah. So the number one question is, “Well, if I can’t put a beneficiary on it, what’s going to happen?” So if it’s just in people’s names and they pass away, probate. Because when you pass away and something is stuck in a decedent’s name, only one person can change title on it and that’s a probate judge. So if you can’t designate a beneficiary, those kids are like, “Wait, I have to go hire an attorney, I have to file their will. I have to take this through probate just to be able to sell the house? That seems really crazy.” And so it’s quite a process.

John: How about checking and savings accounts?

Chrissy: Yeah. Oftentimes when I ask clients when they walk in the door, does your checking account have a POD is what checking and savings call it, a payable on death designation. Clients immediately say to me, “What is that?” Which makes me know they don’t have one because banks do really not a great job of asking you if you want to designate one. You have to go in there and say, “Hey, I would like a payable on death form and then designate who you want to receive your assets.

The other big issue that I see a lot is clients say, “Well, it’s owned jointly with my spouse so we don’t need to designate anybody, right?” And inevitably what happens is people forget. So maybe the first spouse passes away and then that surviving spouse is incapacitated or just totally forgets because they’re overwhelmed with stuff and they never put a beneficiary on it and then it’s stuck in that last survivor’s name.

John: And there can be nuance to people titling assets jointly. I’ve seen it often where there’s not a lot of thought given to it. It’s done somewhat flippantly. Maybe something like the difference between tenants in common versus joint tenancy with rights of survivorship. But from your vantage point, what are some of the other complications you see with people titling assets jointly?

Chrissy: If you do this long enough, you’ve seen everything. I can tell you an hour ago I just sat with clients not married. So boyfriend girlfriend. They’ve been together for 20 years, but they’re not going to get married and they just purchased a home. And so I asked to see the deed and they said, “Well, we purchased it jointly.” So the deed said joint tenants with right of survivorship. So I explained that, “Okay. Well, if client one passes away, client two owns all of the house.” And client one said, “Well, I don’t want that. I want when I die that my heirs, my kids get 50% of this house and that he has up to a year to move out.”

I said, “Well, with this deed, that’s not what’s going to happen. It’s going to be last man standing gets the whole piece of the pie.” And that was something that obviously they made in a split second decision at the title company when they purchased that house without even really thinking about the outcome of what that meant for when one or both of them passes away.

John: Well, there’s a perfect real world example. We have situations similar to this often and frankly it makes sense. Unless they’re talking with an attorney and receiving advice, they’re likely not going to know this. So what you’re telling us is that it’s really important when you’re titling things to understand what are the specific implications relative to that designation.

Chrissy: Exactly. It’s also very important. In many states, language matters on a deed. So in Kansas, they refer to it in the court system as magic language. Does your deed have the magic language which says joint tenants with rights of survivorship. So a lot of times husband and wives will just buy property and it’ll say husband and wife. And in some states that means if husband passes away the whole amount goes to the wife and vice versa.

But in some states, for example, Kansas, if that magic language isn’t on there and it just says husband and wife, husband owns 50%, wife owns 50%, and if they didn’t do something to designate where it goes, that 50% has to go through probate if that person passes away. So it’s just always very important to understand joint tenancy, tenants in common, beneficiary designations. These are not things that are just a flippant decision.

John: We’re speaking with estate planning attorney here at Creative Planning. Chrissy Knopke. My question, Chrissy, is why are they not titling these in a trust? Wouldn’t that be ideal?

Chrissy: It is ideal. That’s always typically the best solution. Exactly what I told my clients this morning that, “Hey, if you guys want to control the 50% and where your 50% goes and the duration of time that the other owner has to live in the house and what expenses are going to be paid, that can all easily be dealt with retitling the house into the trust.” So if one or both parties pass away, nothing can be stuck in their name and need probate. It’s going through the trust and the trust is dictating those terms.

John: I know I hear often that a trust is going to be too expensive or they’ll say, “John, I’m not rich. I don’t need a trust.” Can you debunk some of those myths for us, Chrissy?

Chrissy: So the expenses are very minimal compared to probate. And I try to get clients to realize that all the time because they say, “Oh, it’s just one house going through probate. How expensive can it be?” Well, your kids, unless they’re attorneys, can’t represent themselves. So they have to hire an attorney. So there’s attorney’s fees. There’s filing fees in the court system. Oftentimes each state will charge a percentage of what’s going through probate and that is the fee to the county of what they receive just because the asset had to go through probate.

So typically a trust, depending on if you’re married or how many pieces of real estate, pretty much less than $3,000. Sometimes it’s more than that, but that is going to be significantly less than taking an asset through probate.

John: Well, I couldn’t agree more. I look at my family with seven kids, two of which are 21 and 19 along with our five children who are still minors. So I know firsthand that there are some changes when your children reach that age of maturity and they’re not minors anymore. Can you speak a little bit to some of the concerns of listing minors as beneficiaries? Because I do see that fairly often as well.

Chrissy: One of the biggest mistakes I see, so I will ask clients, “Hey, who is the beneficiary on this account?” And it’s a three-year-old child. Children can’t inherit assets in the United States until they reach age 18. So if some-

John: Chrissy, that three-year-old really wants to redo the nursery, like has big plans for the house, if they inherit that property.

Chrissy: Exactly. A rocket scientist and just able to manage things at five years old. So I always tell clients, so if something happens and that child actually does become the beneficiary before they reach age 18, what happens is that asset then goes into a conservatorship account managed by the county probate department. And then on their 18th birthday, that asset is theirs.

Same issue even when we have younger people that aren’t very responsible or financially savvy yet. So 18 year olds, 19, 20, 25 year olds often can’t manage finances. And if they are the beneficiary on everything and they’re over the age of 18, still senior in high school, there’s nothing we can do to restrict access to those accounts. If they are able to get them, they’re theirs. They can spend them any way they want. The other concern that you didn’t bring up but made me think of it is you have seven kids.

So if someone sits in my office and says, “Hey, I just want to put a beneficiary deed on my real estate in Kansas and I want to list all seven of my kids equally.” So it won’t go through probate, but it’ll go seven ways to seven different kids that all have different personalities. And depending on the state law like in Kansas, if they are married, their spouses all have to sign off.

So that could be 14 people in some instances that have to agree to selling the home, hiring a real estate agent, sales price, and then all have to sign the deed. So it can get really complex if you’re just trying do control in a state with beneficiary designations.

John: Yeah. Well, I’m happy to report that I am not the cobbler with holes in my shoes. I actually do have a great updated, well-built estate plan and that’s thanks primarily to the awesome legal team here at Creative Planning. So I think that we’ll be okay. Hopefully not needing to have 14 different people signing off on things if something were to happen to us.

So I have to give you and your team a big thanks for helping my family and so many of our clients dial in their estate planning for the benefit of those that they love because that’s really who we’re doing it for. It’s not really as much for us as it is for those around us. And as always, Chrissy, you crushed it today with fantastic wisdom and insight and look forward to talking with you again down the road here on Rethink Your Money.

Chrissy: Thank you for having me

Announcer: At creativeplanning.com. you’ll learn how your estate plan as well as your taxes and your investments can work harder together. Go to creativeplanning.com Creative Planning, a richer Way to Wealth. Now back to Rethink Your Money presented by Creative Planning with your host, John Hagensen.

John: One of the things my wife and I try to teach our kids is that their words have consequences. So don’t speak hastily. Once we’ve said something, you can’t just take it back. I mean, sure you can apologize and hopefully that person shows you grace because they’ve likely also said something they’ve regretted in the past as well. Now, you’ve likely also taken the other approach at times where you’re uncertain and you decide to sleep on something and then over the next day or two, you feel more clarity one way or another.

I’m not talking about putting off what could be done today for tomorrow just to simply procrastinate. I’m referencing large decisions where you’re not feeling a sense of clarity. As I was preparing for today’s show and thinking through how I can best help you make progress, especially in these uncertain, volatile times. It dawned on me that in my thousands of visits with clients and prospective clients as a wealth manager, most of the major regrets that people have can be traced back to hasty financial decisions. Decisions that weren’t being guided by a great long-term plan and accountability, but rather often spurred by a commission hungry in many cases, hate to say it, advisor who’s promoting this now or never mentality.

So one of the best pieces of advice that I can share with you, and I know it’s general, but especially if you’re feeling emotional when it comes to your money with a lot of negative sentiment out there, take your time. Act slowly, especially on impulsive moves that are accompanied with no escape hatch. Those types of decisions might mean selling all your stocks and going to cash, right? If that’s the wrong move down the road, there’s no do-over. It has enormous implications. So you’d really want to make sure you took your time before making a decision like that.

It might mean buying a 14-year annuity contract or some other highly illiquid and highly penalized insurance contract that if you change your mind even two years down the road, you have somewhere around a 10% penalty to get out of it. Another one of those hasty decisions with no escape hatch that I’ve seen often is electing Social Security benefits too early.

Because remember, once your 12 months pass that decision, you can’t reverse. It’s irrevocable. And speaking of Social Security, the USA Today had a piece on preparing for 2023s Social Security boost that if you’re nearing or in retirement, I think will be helpful for you to know. And it’s obviously a big deal for millions of Americans who count upon Social Security to help them cover their expenses. And at this point I can only speculate, but it’s pretty safe to say that your checks are going to be a lot larger come next year because of course they’re indexed for inflation and we’re at 40-year highs.

But there are still a lot of misconceptions about this impending benefit boost. So let me share with you three high level aspects of this that I think are important. Number one, you don’t have to do anything to claim this. I’ve had clients ask to receive the cost of living adjustment, what do I need to do? Nothing. Beginning in January of ’23, you’ll automatically start getting more for the program.

Oh, and by the way, if you are 62 years old or older, even if you’re currently not receiving the benefits, you will receive this inflation adjustment. If you’re under 62, it does impact your future benefits, but it’s amortized over a significantly longer period of time. So if you are 62 or older, you are getting a much bigger boost than your younger sibling. It’s always given you a hard time about being older who’s 60. They’re not benefiting as much from this inflation, and you can remind them of that next time you’re barbecuing after church.

Second thing I want you to know, it’s just to help your savings keep up with inflation. Remember, if Social Security benefits didn’t increase, your buying power would decrease. This really isn’t more money in your pocket, although it feels like it. It’s just simply keeping up with inflation. And number three, your checks will increase by a certain percentage of your current monthly benefit.

So the cost of living adjustment is not a certain dollar value, which obviously helps make the increase fair to everyone. It also means the increase you get might be different from your spouses or your neighbors. And if you’re someone who likes knowing the details, the official Social Security COLA for 2023 will be announced this month in October. It’s based on the third quarter inflation data, and that doesn’t end until September 30th, which we just passed.

So I should have something for you more definitive before too long on an upcoming show. If you have any questions around Social Security, go to creativeplanning.com. Speak with one of our local advisors because this is one of those decisions that I find a lot of folks don’t know the details and all of their options.

And again, 12 months after electing, there’s nothing we can do to help you. I don’t want you to have that regret from a hasty decision around Social Security. We can walk you through that as we have thousands of others just like you. Again, that’s creativeplanning.com to have any of your Social Security questions answered.

Well, let’s stay with a theme of hasty decisions. One of the other things I see is that it can increase your susceptibility to becoming a victim of fraud. And here’s an example of just egregious fraud that we see unfortunately far too often. A St. Johns Investment advisor was found to have defrauded six elderly clients of almost $800,000. And 54 year old Joan McCarthy pled guilty to this. She was with a St. Johns branch of MD management, which is a financial firm that caters to doctors when she redirected client deposits to herself between 2006 and 2019.

Now, much like the Bernie Madoff Ponzi scheme, even really smart people, these are doctors who got through medical school can be scammed. And so vigilance is incredibly important even when you’re working with a financial advisor. She was fined more than a million dollars by a federal regulator and permanently banned from ever doing business in the industry again. Well, thank you very much. That seems pretty obvious. And she’s facing 24 charges in total.

I don’t want to share this with you to frighten you. I don’t want you walking around constantly in fear, but these things do happen and that’s why I want to provide you with five simple steps to protect yourself against financial scam by an advisor.

Number one, know exactly where your money is held. It should be at a third-party custodian, not the advisor. And you should receive statements directly from that custodian, Schwab, Fidelity, TD Ameritrade, you know the names.

Number two, don’t buy crazy investments from companies you’ve never heard of. If you buy an S&P 500 Index Fund from Vanguard or Schwab or somewhere like that, you’re probably less likely that that’s a scam than some alternative investment with 10 million in it from a company that you’ve likely never heard of.

Number three, consider the size of the firm that you’re at. I look at a firm like us here at Creative Planning with almost 1,500 employees, 300 plus certified financial planners, 85 CPAs, 45 attorneys, a trust department, an institutional team, a 401K team, all working together on clients accounts. That’s certainly a lot more checks and balances than someone sitting in an office, Joe Schmoe Financial with a part-time assistant.

Now again, is Joe Schmoe probably going to show up on American Greed? No. Highly unlikely. But again, how do you do the best job protecting yourself? I’d consider the size of the firm and how long they’ve been in business. And along those same lines, number four, consider the regulatory record of your advisor. It’s public information. And the fifth way to lower your risk of being a victim of fraud, don’t listen to Kim Kardashian. That’s right.

The Securities and Exchange Commission charged the reality star with promoting a cryptocurrency on her Instagram account without disclosing how much she was paid to do so, the agency announced. Kardashian agreed to pay $1.26 million in penalties to settle the charges and has said through her attorney that she will continue to cooperate with the SEC’s investigation. If you’re wondering, she made quarter of a million dollars for one Instagram post that said, “Are you guys into crypto?” And then put a link to EthereumMax’s website which offered instructions for how to buy a token, the SEC said.

If you’re wondering, EthereumMax has no affiliation with the second largest crypto Ether and EMAX has lost 94% since Kardashian’s post according to the data from CoinMarketCap. So there you go. I know. It’s totally shocking that coins being promoted by Kim Kardashian have not proven to be great long term investments. Gosh, it just seems crazy, doesn’t it? But while the story about Joan McCarthy siphoning off doctor’s monies to the tune of 800 grand is obviously full on fraud.

Most of the bad advice I see is much more subtle. It’s advice that takes quasi truth and then twist it all around, usually in hopes of making a big fat commission. And this is the type of bad advice that more broadly impacts the majority of Americans. The first are structured notes being pitched as essentially no risk. I’m not kidding you, there was a broker in town pitching these structured notes that were paying eight, nine, 10% when treasuries were at one and essentially advocating these as very low risk, if any.

So let me share with you what structured notes are. They’re created by banks and other financial institutions. And the issuer of the note will bundle together different types of securities such as stocks and bonds and commodities, and they bundle them together in a way that will create the desired risk and return for the investor over a particular period of time.

So there’s a bond component and a derivative component to these structured notes. And it’s important to remember that, yes, this is a debt obligation and they’re paying interest typically, or dividends to the investors, similar to a bond during the terms of the notes. And often this makes people think, “Oh, this does seem really safe and secure.” However, there is always a potential for loss with a structured note because structured notes suffer from a higher degree of interest rate risk, market risk, and liquidity risk than underlying debt obligations and derivatives.

If the issuer of the note defaults, the entire value of the investment can be lost. This means that if the issuing bank were to go bankrupt, investors could lose their entire investment, a hundred percent of it. And so that’s not to say whether structure notes are good or bad, but they’re often promoted as this weirdly high returning, but still incredibly low risk investment. Not true.

The next myth I see promoted by financial advisors is that these guaranteed withdrawal benefits on annuities that their return is the actual return of your money. Unfortunately, most unknowing purchasers of the contract don’t realize that that return isn’t actually on their account balance and can never be withdrawn in full and is simply a number that they calculate an income benefit off of, which by the way, only matters if you run out of money inside of the account and you’re still alive. Otherwise you’re just taking withdrawals from your own account.

Number three, alternative investments are safe because they have such low volatility. Now with alternatives, which I’ve spoken about on this program, you can seek excess return and diversification. I mean, that’s the reason they exist, but there’s also a lack of transparency and a lot less liquidity. So that’s why you’re usually including these on the edges of a core portfolio. But I’ve heard brokers that sell commissionable alternative products basically saying, “Why would you want to be in the market when you can buy these alternatives that don’t have the volatility?” And look at these great returns.

Are alternatives bad or good? Neither. They have pros and cons like all investments, but they’re certainly not safe simply because the price isn’t moving daily. Another myth I see propagated is that bonds have significant interest rate risk. So you should probably just avoid bonds. They’re not a good investment. Our president, Peter Mallouk spoke on this recently on his podcast. Have a listen to his thoughts on what a bond investor should be doing.

Peter: So if you’re a bond market investor, many Creative Planning clients have bonds, if you’re a bond market investor and you have longer term bonds and you need to take the money out before those bonds mature, well this is a disaster. But that’s not any Creative Planning clients. So we know with our clients what their duration… Like how long they need this portfolio to last, and the duration of their bond portfolio is less than they need this money in their portfolio to work for them.

For a long term investor like the Creative Planning client, this is actually very positive. So you think about the bond yields you’re collecting, whether it’s two, three, 4%. Well, as those bonds mature, they’re getting replaced with higher yielding bonds at five, six, 7%. So it’s no different than if you went to a bank, you bought a CD at 2%. Six months later they put a sign up that says, “Hey, we’re selling new CDs at 5%.”

You wouldn’t be upset. You go, “This is great. When my CD matures, I’m going to get a new 5% CD.” So for the long term bond investor, your bonds are coming due, you collect them and you go into higher yielding bonds. It makes it much more likely for you to achieve your goals because it takes the pressure off the stock side of the portfolio to do all of the performance by itself.

So for someone who’s got a long time, and if you’re retired and you expect to live more than 10 years, you’ve got a long time, this is fantastic for the bond investors. The expected return for bonds going forward has almost doubled because bond returns, believe it or not, for all the market boom and everything else, 99% of what you get from the bond, what the expected return is just the interest from the bonds. So when the interest on new bonds goes up and you start to buy those, when you replace your old ones, very, very positive for the long term bond investor. The price you pay for that is watching your current bonds go down in value while you wait for them to mature.

John: And so there you have it. The interest rate risk of bonds is really only an issue when the time horizon of your overall financial plan isn’t well synthesized with bond durations.

Announcer: At Creative Planning, we provide custom tailored solutions for all your money management needs. If you have any questions about what you’ve been hearing, visit creativeplanning.com and connect with a local advisor. Why not give your wealth a second look? Now, back to rethink Your Money, presented by Creative Planning with your host, John Hagensen.

John: When Brittany and I first got married. We went on a Princess Cruise with our really good friends. It was one of those scenarios where we were completely broke, but one of our other friends’ parents worked for Princess. We ran the math on this interior cabin. By the way, “No, we did not have a balcony. We didn’t even have a window.” But with all of our food and drinks included and the friends and family discount, it was about the same price as staying home.

So there was no way we were passing that up. And on one of the first days, we’re cruising down to Mexico out of Long Beach, sun shining. My friend Tyler looks over at my wife, Brittany, and says, “Why are you putting coconut oil all over your legs right now?” And my wife begins to explain to him that she read how it’s a great natural sunscreen. So he starts lathering it. All day long, Tyler is sitting up on this top deck taken in the Mexican sun, drinking his Corona with a lime, and the next morning he walked out to breakfast and looked like a lobster.

I’ve never seen anything like it. It hurt to look at the guy. He was so red. And to this day the story remains absolutely hilarious because he just blindly listened to my wife who probably learned about this on Instagram or something, and wound up more burned than I’ve ever seen a human being. So what’s the lesson for all of us in this? No, it’s not, don’t listen to your wife or your friend’s wives. It’s not what the lesson is. The lesson is verify before you act on things.

So as promised, to continue on with our discussion of the five myths that are promoted by financial advisors, which is probably the most prevalent and one that we’re going to take a few minutes to unpack, and that is that whole life insurance is a great asset class to be included in a well diversified portfolio.

There are more than 400,000 insurance agents in the country, and I don’t think I’m stepping out on a limb to assume that almost each and every one of them would love to sell you a whole life insurance policy. If you buy a policy with premiums of about 40,000 per year, let’s say, the commission is typically between 20 and $44,000 for that agent. And as you might imagine, that commission is pretty motivating. And to make matters worse, generally the worst policies offer the highest commissions.

So as a result of this ridiculous conflict of interest, agents often throw out some serious myths of their own to try to persuade you why you should buy their product, why it’s amazing, all the great things that it can do for you. But no, no, no. You’re too smart. You listen to Rethink Your Money, and as a result, you now know the damning statistic that 80% of those who buy a whole life policy get rid of it prior to death.

That’s weird because it’s a whole life policy meant forever. Four out of five people surrender the policy and Dr. James Dale wrote a fantastic blog post at the whitecoatinvestor.com that I will be using as a reference. But let me go through the 10 reasons why whole life insurance is not a great asset class. So let’s just think of it as an asset class.

If I shared with you these 10 things regarding this asset class, the characteristics of it, would you want to buy it? Number one, there’s an approximate 50% front load the first year you buy it. I already spoke to the commissions just a moment ago. Number two, surrender penalties that last for years and years and years. Number three, requires ongoing contributions for decades. So there’s huge commitment risk to whole life insurance. Number four, difficult to rebalance with other asset classes. Number five, backed by the guarantees of a single company.

Number six, requires you to pay interest to get your money. So you can borrow against it along the way, which is a big selling point, but you have to pay interest. Number seven, guaranteed negative returns for the first decade. What do you mean? No, you didn’t mishear me. You have guaranteed negative returns for the first decade. Number eight, low returns even if you hold it for decades. Number nine, must be held for life to provide even a low investment return. Oh, and number 10, you’re also excluded from this asset class for poor health or dangerous hobbies.

Does that sound like an asset class you want to own? Well, of course not. And before you say, “Well, what about, John, on a split funded defined benefit plan for someone making $3 million a year, would it make sense for that person to own it so they could put more into the plan and receive a higher deduction?” Well, maybe that makes sense for that person. But I’m talking about for 99.9% of people. Whole life is something you were sold, not something you bought. And as mentioned, 80% of people who own them have either gotten rid of them or will before death.

If you own a whole life policy and you’re not sure whether you like it or not, here’s a really good way to remove any endowment bias. Ask yourself this very simple question. Today, right now, let’s say I was a whole life insurance salesman. I’m putting that hat on right now and I wanted to sell you a whole life insurance policy. Would you buy one? Would you buy a new whole life insurance policy right now?

If your answer to that question is absolutely not, no way that doesn’t make any sense, you might want to dig a little deeper into why you are continuing to hold that investment. And in a sense, making the decision to repurchase it every single year. Now, if you’re hearing that and saying, “Well, I absolutely don’t want my whole life insurance policy anymore. I am in the 80%. Why the heck did I buy this thing? What do I do now?” You have options. But don’t go about it alone. Make sure you talk with an experienced credentialed fiduciary because one of the biggest things you’ll want to assess are the tax implications and or any penalties that may be involved.

So let’s transition over to something completely different as we finish up today’s show. You’d probably agree that most of us are motivated to do things because we want to do right by our family. So much of financial planning and my interaction with thousands of families over the years, I see that. We love our family and I think oftentimes we are thinking multi-generational. Certainly if we have enough where we’re comfortable that we’ll probably be okay.

I don’t just mean someone who has $50 million, but also just the millionaire next door who’s comfortable, who wants to be a part of their kids and grandkids’ lives. And while estate planning certainly impacts you while you’re alive, much of it revolves around how things are taken care of once you’ve passed. And it’s why your estate plan, it has large implications for those that you love.

So if you’re hearing this and you are committed in knocking the cover off the ball for the benefit of your heirs, let me offer you a couple timely tips right now of how you can do that. So the first is gift money now. Because think about this, we are in a down market. We’ve talked extensively about this, it’s everywhere. You already know that. And your younger beneficiaries can maximize their savings while in a bear market.

So gift them money so that they can load up and purchase more shares now while the market is down. And by the way, we’re also in the lowest tax environment we’ve seen in decades. Remember, you have a $16,000 annual gift tax exclusion amount that you can gift to your kid and another 16,000 to their spouse if they’re married. And if you’re married, you and your spouse can both gift 16,000 to each. So $64,000 max could be gifted without impacting your estate exclusion.

So here are a few practical things you can do with those gifts. Number one, pay off high interest credit cards for them so that they can save. This will allow them to redirect money they’re spending right now on credit card payments and instead purchase stocks while they’re on sale in this bear market. Here’s another one, pay off private student loans that aren’t going to be forgiven.

Not quite as advantageous as credit cards, but paying off this debt accomplishes the exact same objective as paying off their credit cards. Gift for a down payment on a home. So again, they don’t have to pull from investment accounts or if that was saved into savings account. They can now deploy that into their growth oriented investments that have a long time to run and they’re purchasing again while everything is on sale.

You can directly pay for medical bills or school tuition. And here’s the best part about that. If you pay these directly, they don’t even count against the 16,000. So if you happen to be overfunded for your retirement, and this is a big priority to you, you could pay these directly and also still gift for a few of the items I’ve already mentioned.

And the last thing, which is a little bit more abstract, you can Roth IRA convert your assets right now on monies inside your IRA that you intend to leave for your beneficiaries down the road, thus allowing them to inherit the money tax free rather than being taxed at ordinary income by inheriting traditional IRAs.

Here’s the challenge with gifting though. It’s one of those aspects of personal finance that truly requires you to coordinate your investments, your taxes, your estate planning, because for example, you need to know how much you can gift and still have a sustainable retirement plan for yourself. That’s retirement planning. Which securities are you going to sell for the gift? That’s investment planning? Which accounts do you withdraw to make the gift? There’s tax planning. Are there going to be estate tax implications? There’s some estate planning.

Then on the other side, for your heir who’s receiving the gift today, they need to know how to maximize it relative to their retirement plan and estate plan, and tax plan, an investment plan. And these are the sorts of scenarios where great coaching and guidance cannot be overstated. There are huge opportunities that exist right now in these uncertain times for those who know how to take advantage of it. And remember, we are the wealthiest society in the history of planet Earth. Let’s make our money matter.

Disclaimer: The preceding program is furnished by Creative Planning, an SEC registered investment advisory firm that manages or advises on $225 billion in assets. John Hagensen works for Creative Planning and all opinions expressed by John or his guests are solely their own and do not represent the opinion of Creative Planning. This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels.

Clients of Creative Planning may maintain positions in the securities discussed on this show. For individual guidance, please speak with an attorney, CPA or financial planner directly for customized legal tax or financial advice that accounts for your personal risk tolerance, objectives and suitability. If you would like our help, request to speak to an advisor by going to creativeplanning.com. Creative Planning tax and legal are separate entities that must be engaged independently.

 

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