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Proactive Moves During a Bear Market

Published on October 3, 2022

John Hagensen

This week, John examines proactive tax, estate and financial planning moves that are fully within your control and more effective to execute during a bear market. Plus, Creative Planning Private Wealth Manager Dr. Dan Pallesen is back with John to talk about status quo bias and how it can negatively impact our financial decisions.

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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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John Hagensen: Welcome to the Rethink Your Money Podcast presented by Creative Planning. I’m John Hagensen, and ahead on the show, we’ll examine proactive moves that are fully within your control. I’m talking about tax, estate, and financial planning opportunities that are either only available or are far more effective to execute during bear markets. The weekend’s radio program also featured a limited time offer for our wealth path analysis. If interested, you can find more details regarding that offer in the episode notes, and now join me as I help you rethink your money.

We know the markets are in turmoil. Inflation is at 40 year highs. The fed is out there puffing its chest saying they’re going to punch all of us in the mouth and aggressively take action to slow this train down and cool off inflation and probably drive us into a recession. That soft landing seems further and further away, doesn’t it now? But this environment is not hopeless. You have arrows in your quiver to not only make it through this, but thrive. And over the past couple of weeks, the mistakes that I am seeing, one after another, the emotional thoughts I’m hearing that lead to really regrettable financial moves, it feels to me like those things are at peak levels. And that’s why I could not be more excited about the timeliness of today’s program where I’m going to be sharing with you ideas to absolutely dominate this volatile environment. Not just get through it, we’re going to crush in this bear market, and I’m going to help you do that today.

We’ll look at tax opportunities, investment opportunities, and estate planning opportunities with a primary focus on reducing taxes because there are ways for you to position yourself right now where you will be in a much better spot five years from now because of this volatility. It’s an opportunity. Oh, and better yet, my profession, financial planning, we do this all the time, this is going to pay off so great for you 40 year old when you’re 68, right? And the 40 year old is going, “Cool. In 28 years. I can’t even think out that far.” No, no. What I’ll share with you today, well not only improve your long term financial situation, these are things that will make an immediate positive impact on your life right now. And so if you feel like you’re holding onto the back of the airplane, you’re at the mercy of whatever is happening in Ukraine or Washington DC, climb up into the cockpit with me and let’s start piloting this airplane on our terms.

Well, about a month ago, one of our neighbors had to have their foundation reinforced. The ground had settled, they have a basement, and so there’s a contract there, and for a few weeks they were fixing the foundation. It was a pretty big project. And I was talking with them and they mentioned that it’s discouraging because it’s expensive and it’s not a fun thing to do to your house. When you’re finished, you’re not looking at the red knobs of your new Wolf range in your beautifully remodeled kitchen. But while the payoff is a little less exciting, the foundation of their home is a heck of a lot more important than the funky hall bathroom’s textured wallpaper. I’m going to focus with you on the foundation. We’re going to look at taxes first and foremost, we’ll talk about estate and risk management and the investment plan itself, but taxes are going to be woven throughout today’s show, and they’re a lot like fixing your foundation. They’re not fun, they’re not sexy, but they play arguably the key role in your financial success.

And so while history doesn’t always repeat itself, it often rhymes as the saying goes, and we can learn a lot from history. So let’s go way back and examine why the statement I’m about to make is true, and that is we are sitting likely in the lowest tax environment you will ever see for the rest of your life. And no, I don’t have a crystal ball, but I understand basic arithmetic. In 1913, the top tax bracket if you made over $500,000, which by the way is the equivalent to making $11 million per year right now, adjusted for inflation was 7%. Remarkably low, right? Well then we had to fund World War I and it jumped to 15% in 1916, then to 67% in 1917, and 77% in 1918. So over a five year period, it went from 7% to 77%. War is expensive. Then we went into World War II, and in 1944, the top tax rate, and you didn’t mishear me when I say this, was at 94% on those earning over $200,000, which is about $2.5 Million of income in today’s dollars.

So think about that, someone today making $3 million, and no, we don’t feel sorry for them, they’re making $3 million a year, but that last $500,000, they’d be retaining $0.06 on the dollar. They’d be losing 94% of that income between $2.5 million and $3 million. That’s why in some of these high tax countries once you hit those thresholds, you just put a sign on the door of your business and say, “I’ll be back in January.” It’s not even worth it. And this is why Will Rogers, by the way, famously said, “The difference between death and taxes is that death doesn’t get worse every time Congress meets.” Well, you might be thinking to yourself well, that was World War II. What happened after that? Well, for the 1950s, 60s, and 70s, the top tax rate was never at any point below 70%. Then of course, we had the Tax Reform Act of ’86, supply side economics. Top rate went all the way down to 28%. That lasted for three years, then it went all the way back to a 39.6.

And today as we sit in the Trump tax reform environment, the top tax bracket is 37%. So consider this, our debt to GDP right now is at 128%. It’s on par with a lot of countries in the world that we do not want to be associated with from an economic standpoint. This is compared by the way to 31% in 1981. And sometimes the first thought is well, maybe our GDP just hasn’t grown a whole lot. Nope, that’s not true. Our GDP is the highest in the world at $23 trillion. China is at $16 trillion. Japan is a distant third at $5 trillion. We account here in America for a quarter of the entire globe’s GDP. And so all of that to say, we’ve had taxes for 40 year periods never drop below 70%. We’re at 37% right now. Which direction do you think taxes are likely to go over the next 25 years? That’s right, they’re going to increase. They have to or we’ll be insolvent, or we’ll have to massively reduce government spending, where if history is any sort of guide, we know that’s not going to happen.

And so this is an enormous opportunity because we’ve got down markets, the lowest tax rates any of us are going to see for the rest of our lives in a very short window before these tax rates sunset. Let me provide you with some practical tax reduction tips that apply right now. Number one, harvest losses. You probably have positions in your account that are down in value. Remember, you cannot purchase the same within 30 days or the wash sale rule will apply and you can’t book those losses. And if you’re thinking well, John, that sounds counterintuitive. Why would I want to sell in lock in losses at the bottom of the market? No, no, no. You repurchase something similar.

In fact, I had a perspective client come in, and by come in, I mean we met via Zoom in March of 2020, and they had heard me talking on this very radio show about harvesting losses because at the time the market was down about 35%, fastest bear market we had seen, but they missed this second part about staying invested. They said, “Well, we’ll just get out for a month or two, maybe three, and then we’ll just hop back in because the market is going nowhere but down anyhow, and we’ll just go right back into the same securities, but we’ll sit in cash while we’re waiting.”

Well, this was a $2.4 million portfolio and I tried to explain to them that this was a risky strategy on a couple million dollars because you just don’t know when the market is going to recover. But they shrugged it off. Well, we all know the story. In just over two months the market was up 37% from where they sold, and so on their size portfolio, they had lost forever $750,000 of growth and all the compounding growth upon that $750,000 over the next 20 or 30 years of their life. Millions of dollars was lost, but not because they wanted to harvest losses, but because they went into a market timing approach with it. Do not do that. Stay invested.

This is why direct indexing has become increasingly popular as technology has facilitated this for even smaller accounts, and that’s basically where you unwrap an index fund and put all the holdings individually in your account. We do this for many clients here at Creative Planning, and the reason is because if you look at the S&P 500, for example, even with almost a 30% gain in the index, 94 of those company stocks ended 2021 in a bear market, meaning they were more than 20% down off of their highs. Well, if you own the S&P 500 as an index fund, you’re just up 27%. There’s nothing you can do to harvest losses. But if you own those individually, you can isolate those 94 securities, some of which were down 50%, 60%, 70% and offset other gains with those losses. We can help you with that if you’ve got questions about direct indexing, who it works best for, what types of accounts. My colleagues and I are happy to walk you through that during your wealth path analysis.

So number one is harvest losses. Number two is just pay taxes now, especially on these depressed assets within a bear market. You can do this a number of ways, but the most common is through Roth conversions where you migrate monies in tax deferred accounts directly into tax free accounts. And this makes sense if you really think about it because you’re paying tax on today’s value and then all of the eventual long term recovery occurs tax free in your Roth account. And so we’re in a historically low tax rate environment to begin with, and asset values are down. We have advised our clients to do this throughout many of the past bear markets, but right now because of the Trump tax reform, which is sun setting, you have an incredible opportunity with the convergence of those two things.

And this is such an opportunity, and I received so many questions around this that later on in the program, I’ll be sharing with you the three most asked questions around Roth conversions so that you can have clarity around this probably once in a lifetime now moving forward opportunity. But I want you to consider this, the Tax Cuts and Jobs Act, right? Commonly known as the Trump tax reform, was signed December 22nd of 2017, and most of it went into effect January 1st of 2018. So you’ve had 2018, 2019, 2020, 2021, and we’re three quarters of the way through 2022. We’re almost five years into the lowest tax environment you’re likely ever going to see, and we’ve only got three months left this year to take advantage of some of these things, so it’s go time. Don’t let the fifth year of the Trump tax reform pass you by without taking advantage of these strategies, and they are there for the taking.

Announcer: You hear different topics discussed on this program each week. If you have questions, go to CreativePlanning.com and they’ll help you find the answers. That’s CreativePlanning.com. Now back to Rethink Your Money, presented by Creative Planning with your host John Hagensen.

John: My wife Brittany is on this kick right now about adopting this blue eyed kitten that’s being fostered by a friend of hers. She’s trying to wear me down, but I’ve been telling her now for over a week, not happening, not happening because the entire thing is emotional. Nothing against cats. You might love cats, but we have seven kids and we already have an awesome four year old dog that’s completely trained and really easy, and I don’t want to clean a litter box for the next 12 years after Britney’s emotions come down, and real life starts with having another animal. But it’s not just kittens, emotions drive a lot of decisions, and if we don’t keep them in check, especially when it comes to our money, we hurt ourselves.

In fact, a recent study showed that 66% of investors have made an impulsive investing decision that they later regretted, and so stay disciplined and remember to view times like these as a very clear and present opportunity rather than some sort of roadblock to your financial success. Think about 2008 and 2009, people who thought this way and bought stocks and real estate that at a time were down 50% to 60% off of their highs were rewarded for that discipline and courage, and those who sold at losses are just now recovering nearly 15 years later. Remember, recessions are garage sales for those who know what they’re doing.

And of course, as I talk about ’08 and ’09 and buying in March of 2020, it sounds really good, doesn’t it? But of course, like a lot of things in life, the knowing isn’t the hard part. It’s the actual doing, which is the only aspect that leads to positive outcomes. That’s the hard part. And to discuss this idea more, I have an expert here at Creative Planning returning to the show. He’s been a personal friend of mine for well over a decade. He’s a great father, husband, average golfer, not great golfer. I was going to add that in there, but not really. He hits the ball a country mile, but not always straight, not always in the short grass. And so with that introduction, please welcome to the show, Dr. Dan Pallesen.

Dr. Dan Pallesen: Thanks for having me, John.

John: Your background is unique as a clinical psychologist and now a certified financial planner, a wealth manager here at Creative Planning, and so instead of folks lying on a couch and discussing past problems or mommy issues, people sit at a conference table and discuss their hopes and concerns around their financial future. With your extensive experience, Dan, in both fields, what overlap has stood out most to you when it comes to finance and psychology?

Dr. Dan: I think number one is that money is just a huge source of conflict for people, and for couples, it’s often the source of their arguments or just the conflict they have of not being able to be on the same page. It’s just their beliefs and understanding about how money should work for that household. And even individually, if someone is just in individual therapy and they’re coming in because they feel some depression or some anxiety, a lot of times money is partly at the root of those feelings or fear around money or anxiety around money, or hopelessness about their situation because of money and not knowing what their future holds with regard to their finances.

But the second thing is that just talking about money, even directly, money is very emotional. We have these experiences at a very young age around money, whether our parents talked about it directly, or maybe they didn’t talk about it and that was the takeaway, was that money should not be talked about. But whatever the case is, when we discuss money, it’s emotional. We have emotions tied to it. And I think for a third takeaway that I have is a lot of times we seek mental health or behavioral health help because we know what we need to do or not be doing, but we don’t do that. We continue to do the things that aren’t necessarily good for us. So there’s some misalignment between what we know to be true or what we know to be good for us and what our actions are actually doing, and so helping people align what they know is the best for them and what they’re actually doing. There’s so many parallels with my clinical work as a psychologist and now my work as a wealth manager.

John: It’s so true. I mean, if simple things were easy, we’d all be walking around with six pack abs. We intellectually understand how to be healthy, it’s the doing that’s a challenge. And so why do you think it’s so tough for us from a psychological standpoint to transition from knowing to actually doing?

Dr. Dan: Well, let me answer that by offering some grace for ourselves and for others. This isn’t I want to come down on you or myself or people listening, but do you know about how many decisions we have to make per day?

John: My guess would be maybe 5,000.

Dr. Dan: Yeah, and even that sounds like a lot. But no, this has been looked at in many different ways, and the consensus is that we make more than 30,000 decisions per day, so we don’t have the capacity or bandwidth to bring our full attention and intention with every decision we make. So a lot of times what happens is we just default to what we’ve always done. It’s called the status quo bias or inertia. It’s autopilot. All of these decisions that we have to face every single day, we just do what we’ve always done, and so we see that bleeding into areas of finance and in health and in relationships. We know what we need to do to get the best outcome, but because that takes extra effort, we often just default to autopilot or the automatic response.

John: I’m speaking with certified financial planner and doctor of psychology, Dan Pallesen, and if this is resonating with you, know that making positive changes that require effort can be a challenge. First off, congrats, you’re human. You’re not an alien. You’re just like the rest of us. But also, what first step can you take? I’m seeing far too many people making mistakes out of emotion, being overwhelmed, and most importantly, it’s usually because there’s a lack of a genuine, true, definable financial plan. And so then you’re not only fighting your human nature and the status quo bias, but you also lack the necessary conviction and confidence that accompanies a measurable plan.

I meet with radio listeners who often tell me they have a plan, but then when we discuss what they have, it’s an investment allocation. It’s not a coordinated estate plan and tax plan, income, risk management. It’s not a real plan. There’s no attorneys or CPAs as well as their certified financial planner involved in this. And maybe it sounds a little bit harsh, but it’s not a plan. It’s incomplete, and I wouldn’t have a lot of confidence in uncertain times either if I didn’t have conviction about my plan.

And so my goal, my mission, isn’t that everyone becomes clients of Creative Planning. No, my dream is that every American has a real, true financial plan that’s been built by a credentialed fiduciary that’s independent and acting in their best interests. So in understanding that we’re essentially fighting our human nature when it comes to removing the status quo, are there any tips that you can share with us to help improve our situation?

Dr. Dan: Yeah, absolutely. There’s another study out there, and this is a pretty popular one, forgive me for not having it exactly right, but you look at the differences of organ donors in countries. There was two countries, I think it was like Sweden and Norway, and in one country, we’ll say Sweden, 80% of the citizens were organ donors. And in Norway, only 10% of the citizens were Oregon donors.

Now these aren’t exact stats, it’s just off the top of my head, but they’re figuring out why is it that Swedes were just more generous than Norwegians? And what they found was, no, it’s not that one country produces more generous citizens, it’s just for the Swedes, being an organ donor was the default option at their DMV. And in Norway, the default option was not to be an organ donor. You had to opt in if you wanted to be an organ donor. And the vast difference between who was actually donating was huge because it was just, again, the default option, the status quo.

John: And it really just demonstrates that we’re busy, and as you said, we’re making 30,000 decisions a day and sometimes needing to initiate one more, even if it’s not a hard one, we just don’t do it, or we delay it to our detriment as a result of this status quo bias. Well, great wisdom and insight. As always, Dr. Dan, I appreciate you spending some time with us here on Rethink Your Money.

Dr. Dan: Thanks, John. It’s always my pleasure.

John: Here’s the key, left to our own devices we’ve struggled with this since the beginning of time. Our President Peter Mallouk tweeted that when you can’t control what’s happening, challenge yourself to control the way you respond to what’s happening. That’s where the power is. By the way, he’s a great follow on Twitter. You can follow him along with the other thousands of people that do @PeterMallouk. So how are you responding right now? Are you controlling what you can control? Because the two attributes that successful long-term investors adhere to are that they have a plan and they view volatility as an opportunity.

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: Today’s show is all about providing you with practical tips to take advantage of this worst performing first three quarters of a year for stocks and bonds in over five decades. On the last segment, I spoke with Dr. Dan Pallesen about getting off our butts and taking action. Leave the status quo bias in the rear view mirror. We have three months left in this year to implement tax tips, some of which I spoke about at the top of the show.

So for those of you with teenagers, here’s some really good dating advice to give them. Have them pay attention to how their special someone reacts when things don’t go their way. You know when the server at the restaurant botches the order, are they gracious and kind or are they combative and rude? You see, that’s why tough times are a blessing in disguise because they reveal the true colors of the people around us. In the same vein, difficult investing environments reveal the true colors of our financial plan. You see, we can get fooled in good times, whether it’s in a friendship or a dating relationship, or with the advice we’re getting or the plan that we have in place. Sometimes we can have a really bad strategy that ends up working out okay because we had a lot of tailwinds working to our advantage.

Mistaking a bull market for being a genius. Oh, that Warren Buffet guy, value investing. Old school. What an idiot. Well, to use his famous quote, “When the tide goes out, you see who’s swimming naked.” Sorry, Matt Damon and your crypto commercials. How are you going to respond in this environment? Let me actually start by telling you how I don’t want you to respond, but before I share that with you, let’s play a little trivia game. First question, how many bear markets have we experienced in the U.S. stock market, 15 or 30? How many do you think? This is a drop of 20% or more. How many have we gone through? The answer, 30? And by the way, here’s a rhetorical question that’s a follow up, how many of those 30 have eventually faded and led to new highs? The answer to that, every single one.

Second question around these bear markets like we’re experiencing right now, what’s the range of time a typical bear market lasts? Do you think it’s six to 18 months? Or do you think it’s 36 to 48 months? The answer, six to 18 months, which is a lot shorter than you might have thought, certainly if you guessed the other answer, three to four years. But oftentimes this is because when we’re in the midst of it, six to 18 months feels like any eternity where we’re questioning our strategies and wondering where we’re going wrong and why this isn’t working and are we going to be able to retire and are we going to run out of money? But we’re already a ways into this thing and the typical one lasts six to 18 months.

Third question, after a market declines 20%, like we’re sitting right now, what’s the typical one year return following a 20% decline? Is it another negative 4% or a positive 22%? Well, I think you probably got this one right, that it’s a positive 22%, which makes sense when the market has already dropped significantly and we know historically for the last century it’s averaged about 10% a year. Well, then you would think statistically you’d be more likely to have good times following that downturn than bad times, but that’s not what it feels like when we’re in it. That’s not the narrative we’re hearing, and if you take that out even longer than one year, the typical three year return following a 20% decline is up 41%. The typical five year return following a 20% decline is up 72%.

So here’s that super common mistake that I promised I’d get to, shifting your portfolio right now more conservatively. Recoveries are quick and they happen long before the recession announcement is over. Nobody’s shooting flares up in the air telling you coast is clear, here’s the bottom. Think March of 2020. When pessimism is at its peak, the market is already coming off of its lows. If you’ve shifted more conservatively, your plan was messed up from the beginning. You had a bad plan and got bad advice. Nothing that’s happened right now is outside of the scope of what should have been expected historically speaking. Typical correction in the calendar year is 14%. About every three or four calendar years, the market is down. About every five years we have a bear market.

So either your risk tolerance was off or your time horizon was off, but you cannot move money from stocks that are down 25% or 30% into cash or a life insurance policy or an annuity or even bonds for that matter, unless you want to lock in those losses. But it feels so intuitive. It makes us happy. It lowers our stress. We feel relief. Now I can sleep at night. And this is why investing is so hard. And as I spoke about last segment with Dr. Dan, our human nature generally tempts us to do the exact opposite of how we make money as an investor, which is leaning into down assets that are undervalued and on sale rather than unloading them at a huge discount. I mean, think if you had shifted more conservatively in early 2009, or during the .com bubble bursting, or in March of 2020. As Morgan Howsell, my favorite financial writer says, “Every past crash was an opportunity and every current crash is a crisis.”

And so now we know what not to do. So here’s the most important tip from an investment perspective during a market crash, do the opposite. You have got to rebalance your portfolio systematically and you need to do this every single time. So instead of shifting more conservatively, you are actually selling your short term bonds that are up about a half a percent right now, using those strong dollars to buy stocks while they’re down 25% or 30%. This will keep your asset allocation in line with your long term goals and allows you to take advantage of the fear and emotion that the average American is acting on in these moments.

Well, in addition to the tax opportunities, in addition to the investment opportunities of buying low, there are some incredibly unique estate planning opportunities right now. And so while markets react negatively to rising inflation and fears of this near term recession, there are three estate planning silver linings that become even more attractive. And I want to share those with you because I think estate planning so often, it’s this outside task where you maybe go and do it every 10 years. It’s completely disjointed from the rest of your financial plan. Your advisor and your attorney never even talked because you’re not working with a firm like us at Creative Planning, that’s also a law firm with estate attorneys and real estate attorneys and tax attorneys that are integrated with the plan, which is one of the areas where I think we add so much value for our clients. But there should be an ongoing planning dynamic of estate planning.

And so here are three things that I suspect may not even be on your radar but are really important. Number one, consider lifetime gifts. As a result of the Trump tax reform, we still have very large exemption amounts until 2026, when it sunsets. And when it does, they’re scheduled to be reduced by half. Right now any person can give up to $12.06 million. And by the way, twice that if you’re married. So you’re looking at over $24 million without incurring any present gift tax or generation skipping transfer tax. So the two real benefits is that it will lock in your gift tax and your generation skipping tax before they go down, and it allows you to transfer assets out of your taxable estate at reduced valuations. We all know investments are down right now. Oh, and by the way, an additional benefit is that it will protect those assets from creditors.

Second estate planning tip to consider right now is what’s called a GRAT. Like what in the world are you talking about, John? What is a GRAT? It’s a Grantor Retained Annuity Trust. Now this is particularly attractive when asset values and interest rates are low, and obviously, rates have jumped a lot recently, but they’re still, from a historical perspective, relatively low. The GRAT is an irrevocable trust with a fixed term, which is usually somewhere between two and 10 years.

The GRAT makes annuity payments back to the donor at a rate which returns the entire original funding amount back to the donor, plus a statutory interest amount. And as a result, no taxable gift is made when the donor actually funds the GRAT. But at the end of the term, if the assets in the GRAT have appreciated above that rate, which is by the way for 2022, 3.6%, all of that appreciation passes tax free to the donors chosen beneficiaries. So I know that’s a little bit complicated, that’s why we have attorneys on the team that can help with that, and we can discuss that also in your wealth path analysis if you request one, and that may apply for you.

Third Estate planning technique for this environment, intrafamily loans. Now this is also related to interest rates, and so now is a pretty good time, but not quite as good as before to look at these intrafamily loans, just as with GRATs because these are an effective way to transfer your assets to a family member without making a present gift. Now you do have to charge your family member interest, which is why if rates are lower it’s more attractive and you can charge them less than commercial lending rates, but it does need to be in the ballpark of what’s available out there, otherwise it would be considered a gift. So again, three of the options. Lifetime gifts, Grantor Retained Annuity Trusts, and intrafamily loans are all estate planning opportunities that we can discuss with you.

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: Leadership matters all the time, but it matters most in times of crisis. That’s when you really need great leadership, don’t you? As a former airline pilot, I think of the parallels often between finance and flying. In fact, my second book, The Retirement Flight Plan, draws on these comparisons throughout the book, but the difference between Captain Sully and the worst pilot that I ever flew with was indistinguishable. When we were cruising at 35,000 feet dunking Biscoff cookies into our coffee and the autopilot was on. They’re both about the same. But when you get bird strikes in both engines after leaving LaGuardia, you better hope you have a retired fighter pilot with the experience and skill of Captain Sully because that’s when the differentiation is going to show up. And the same exact thing is true when it comes to financial advisors.

In good markets, I don’t know, I made 10%. Oh, you made 11% or 12%, I don’t know. My taxes were fine. But when we encounter the worst first nine months to a year for a stock bond portfolio in over 50 years, you start seeing the quality of the advice that you are receiving. And the reality is the majority of our clients here at Creative Planning fire their current advisor to work with us. Occasionally, we’ll have someone who’s a do it yourself-er who’s now said, “My situation has become more complex, or I don’t enjoy doing this anymore and I’d like to have someone else help me with it.” That happens, certainly. But the majority of our clients leave another advisor because they think the value we provide is in excess to what they’re currently receiving. Plain and simple.

And I understand that that that can be a roadblock because oftentimes there’s nothing wrong with your current relationship. They’re probably your friend. You may even have a great personal relationship with them. You’ve been doing business together for a long time. And along the line of that status quo bias that Dr. Dan spoke about earlier in the program, it can be hard sometimes to move off of that, but it’s not a whole lot different than those friendships that we’ve all had where you were friends in your early twenties, but now you’re much older and they’re still in 10 fantasy football leagues and taking tequila shots on a Tuesday at two in the afternoon, and you’re like, “Yeah, I love you, but I kind of just outgrown this relationship.” And so often you’ve just outgrown your relationship with your advisor. It’s not completely broken, but it’s clearly suboptimal.

And so with that said, I’ll share with you a few of the reasons why some recent clients decided to move on from their current advisors. The first is one that you hear me talking about all the time. It’s one of our pillars here at Creative Planning about being comprehensive. The first is no tax coordination. I mean, a recent perspective client came in, they were disappointed because their advisor had sold off a bunch of capital gains by just auto rebalancing on a calendar quarter. It pushed the client over, meaning they made too much money to pay the lowest rate on their Medicare Part B and D. So now their social security income payment is lower and they receive less income and the advisor had absolutely no idea what had even happened until they said, “What’s going on here?” And their CPA explained it to them. That’s not good enough.

Number two, no estate planning coordination. Had a scenario where an adult child who was 18 had a medical issue. They had no power of attorney on file. Remember, you’re their parent, but now they’re an adult and these people had no documentation to be able to make medical decisions on that child’s behalf, and it had never been discussed with their financial advisor. And their financial advisor was kind of like, “I don’t know. That’s like your estate stuff. That’s legal documents. I don’t really have to do with that.” That’s not good enough in 2022.

Number three, and I’ve talked about this multiple times on the show, no defined measurable financial plan. They fired their advisor because they said, “Why are we paying you 1% a year to build an ETF portfolio, talk to us on the phone once a year, maybe in the office about our golf game, and maybe if we’re lucky, rebalance it, or you sometimes respond when I call you.” This is 2022, you can get that for free. You need to find measurable financial plans. And I don’t mean oh, there’s this little simulation they run occasionally that says, “We think we’ll be okay in retirement.” That’s not good enough. In depth detailed financial plan or that advisor shouldn’t be surprised when they’re fired.

A fourth one, and we will go over this on that wealth path analysis if you request it by going to CreativePlanning.com/radio, is to know what your paying. This client came in and was shocked that they were paying what they were. Most of the fees were internal. They were in really expensive variable annuities, and couldn’t believe for what they were getting and the suboptimal returns and the high commissions that had been paid. That’s not good enough.

And the final reason I saw someone recently fire their advisor and choose to start working with us was because their current advisor was too old. And I’m not being an ageist, but they were in their sixties and this client was in their fifties. And the bigger issue wasn’t that the advisor was 60, it was just that there was no good continuity plan. It wasn’t a team approach. There was one advisor, he was older than them, and his kid that had just graduated college was coming in to help take over and they’re like, “We don’t really think he knows what he’s doing or really like him all that much. It’s not the same relationship.”

And so the average advisor in America by a lot of studies is over 60 years old, so if you’re 50 or 60 and you’re thinking about retirement eventually, is your advisor when they’re 85 still going to be on top of these things? That you hope that they have a team, a group of people like we do at Creative Planning where there’s continuity. And so even if you have a great relationship with your current advisor, I think the objective question is just am I getting the tax coordination? Am I getting a state integration? Do I have a really dialed in, in-depth detailed financial plan? Do I know what I’m paying? And is there good continuity if something happens to my advisor where not just myself but my spouse and my children, are all those people going to be taken care of long after my current advisor is unable to help us.

As promised, let’s transition over to the three most asked Roth conversion questions. The first question, do I need earned income? This really throws people off. “John, I’d love to convert. I can’t do it. I’m retired.” You don’t need earned income. You do for a Roth contribution, but not a conversion. In fact, a really advantageous time to do these conversions is the window between when you retire and you’re not yet to age 72 and required to start taking those minimum distributions. And of course, in those scenarios, you often don’t have earned income. Don’t go about these conversions on your own.

And the main reason for that is my second question, can I reverse this conversion if I change my mind during the year? No. Which is why I was just saying make sure you talk with a CPA before you execute this. We’re in October. December 31st passes, you’ve lost another year. That’s the amount of time you have, but that’s also why this is the perfect time to be looking at this. Because if you convert in January and then you receive a huge bonus or an inheritance in July, you can’t reverse that conversion. You have a lot more predictability of your income the later in the year you wait and it’s coinciding with a bear market, so some real huge opportunities as spoken about at the top of the program.

Third and final common question around Roth conversions, what are the limit amounts? How much can I convert? The answer is unlimited. Huh? Wait, unlimited, how can that be? That didn’t make any sense. I mean, I can just convert a million dollars tomorrow. Why wouldn’t there be any limits? Well, the reason is fairly logical if you think this through. It’s self-policing because if you converted all $1 million tomorrow, it would add $1 million of income to whatever you were already making and everything above $647,850, and again, this is if you’re married, filing jointly would be taxed at 37% plus the 3.8% per the net investment income tax. So very few people would like to do that. In fact, I’ve seen a few people do it by mistake because they knew just enough to be dangerous and they said, “Oh, this conversion. This is great.” And then they realized after the fact, I shouldn’t have converted all of it at once. Whoops. In general, this is a calculation you want your advisor and your CPA to coordinate on your behalf together, and this is the time of year to do it.

Well, we have covered so many different aspects already today around taxes and estate planning and investment planning in this volatile market, but I’d like to change gears a little bit to something that I think is even more important as we conclude today’s show, and that is to make sure that your money stays in its place. No, I don’t mean in your IRA or in your Roth or your brokerage account. I just mean that even if you execute all the things that we’ve discussed today to perfection, your financial plan is dialed in, your estate plans updated regularly, your taxes are reviewed multiple times per year, your advisor is a CFP that’s a rockstar fiduciary who just crushes it for you, especially in these bear markets.

But if your hope and your joy is rooted in your money, your happiness will be fleeting because while all those things matter, you’re going to need to find peace outside of the superficial and material. And I want to share with you a personal story where this became crystallized for me. I was a high school student at Seattle Christian up in the Pacific Northwest, and I went to Romania and worked in the orphanages there in Bucharest, and it made a lasting impact on my life. I’m sad to say that sometimes I lose perspective. I do get focused on the material and the superficial and the here and now, and that’s certainly not a recipe for lasting fulfillment.

Well, and I shared this story a couple of years ago on the program, but I think these types of moments are worth repeating to remind ourselves of what’s important. I showed up to my host family’s high rise concrete apartment in the middle of this eastern European city, and it was a family with 11 children in a two bedroom apartment. And the generosity and gratitude that they displayed, even the parents giving up their bed so that I could have a bed to sleep on. The fact that they fed me this amazing food while they all sat around as a family and watched me eat because they couldn’t afford to also eat that type of food. They had saved and sacrificed and prepared for me to be their guest, and that experience of their kindness in my life was in part a major catalyst for our four adoptions.

And my wife, Brittany, had her own experiences prior to our paths crossing, and it’s just incredible how things work out in our lives so perfectly that we could have never planned for ourselves. And what a blessing that is. And I really had two takeaways for my time in Romania, and I promise these apply for all of us, especially to conclude today’s show where times are uncertain and you may be anxious and nervous and worried. These well known truths bear repeating. The first is that money isn’t going to make us happy. No amount will do it. I know a lot of rich people, you probably do too. Some of them are clients of ours. They are far less happy than those impoverished Romanians who hosted me at their apartment.

And the second is that while money in and of itself will not make us happy, it is an incredibly powerful tool in our lives when used in alignment with our values and our purpose. I mean, I’m so blessed by our sons from Ethiopia that we adopted when they were 11 and 10, but their need to be adopted stemmed out of solvable challenges that money could have remedied. You see, money, whether we want to acknowledge it or not, plays a significant role in some of the most meaningful parts of our lives. And so while it won’t make us happy, it’s important that we steward what we have to the best of our abilities. And as I conclude, I’d like to thank you for spending your valuable time with me. And remember, we are the wealthiest society in the history of planet Earth. Let’s all 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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