This week, John discusses the financial impact of midterm elections, why staying invested is paramount to your success and how to protect yourself or loved ones from the growing concern of financial elder abuse.
Read more about the market and elections
Read about six financial moves you can make this fall
Read more on the factors to consider when dividing assets during a divorce
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 Hegenson, and ahead on today’s show, the financial impact of midterm elections, why staying invested is paramount to your success, as well as how to protect yourself or loved ones from the growing concern of financial elder abuse. Now join me as I help you rethink your money.
Let’s get into our way back machine and warp to May of 2020. At the time, my kids were just finishing up one of the weirdest semesters of school you could possibly imagine sitting on Zoom virtually at our home. I was working in our in-laws motor home that was parked on the side of our property. Beck, our oldest, who’s now in the Army, he had graduated high school at semester and was unable to leave for the Army due to the pandemic, so he was living in our motor home that was parked behind my defacto office on the side of our property. He would come rolling out of that motor home about 11:00 in the morning, like the 18-year-old that he was in the middle of a pandemic, looking like all of us after we’ve exited a matinee at the movie theater. He’s sitting there squinting, “That’s so bright,” walking into our house for breakfast/lunch, I don’t know what you call it. I mean, it was like a real world version of the Walking Dead minus the zombies.
We were in unprecedented times. But what can be incredibly confounding is when the stock market completely disconnects from real life. And so, as we sat in May of 2020, we looked to the previous month of April as 30 million Americans filed for unemployment and destitute small businesses closed forever and rent strikes were demanded, and city and state governments forecasting years of grim austerity, the US stock market had its best month in more than 30 years. Day after day, my kids are sitting there with their headphones on virtual school, our offices are closed to the public, we’re meeting virtually, and yet, day after day while we were treated to stories of absolute ruin in the real economy, it was accompanied right next to another glorious rise in the stock market.
We all recall, there was a sharp selloff in March of 2020, the fastest bear market, in fact, that we’ve ever seen down almost 35% before you could blink an eye. But by the end of April, the S&P 500 index had bounced back to where it was in the fall of 2019, as if almost this entire pandemic was just a momentary annoyance. In hindsight, there were many explanations for why this disconnect occurred, starting with our fiscal policy where we helicoptered money to individuals and businesses, our monetary policy where we slammed interest rates, allowing for essentially companies and individuals to borrow at almost 0% rates. Those factors led to many of the biggest companies in the world making enormous profits and projecting really high future earnings.
Sure, we had the airlines and energy and retail getting beat up, but you also had Apple and Amazon flexing like they were tanned and oiled up on the stage of a body building contest. Peloton, flashing that big smile, by the way, now down nearly 97%, it was all the rage. Everybody wanted the cool new fad at-home workout regimen. Can’t imagine that company was going to stay worth $50 billion. What a surprise. Go join NordicTrack at the end of the bar. But remember, the real economy and the stock market don’t correlate one to one, and certainly don’t in the short term. Remember Benjamin Graham’s famous quote, “In the short run, the market’s a voting machine, but in the long run, it’s a weighing machine.” Couldn’t be more true of what we have witnessed the last couple of years.
But in addition to the economy, the other important aspect of real life that doesn’t correlate to the stock market and it throws us off, it confuses us, is the lack of correlation between our investment performance and political outcomes. I mean, is there anything that makes people angrier than the other side of the aisle winning elections? Is there anything that makes people more fearful than their disliked candidate grabbing a victory? If there are, there aren’t many. From the day I became a financial advisor, I have implored my clients to not mix their politics with their portfolio. Ryan Schwartz, the managing director of our Omaha office here at Creative Planning, and by the way, the Ryan Schwartz who was named to the Barron’s Top 100 Independent Advisors in America recently, wrote a piece for our clients on this that I will attach to the radio page. You can view not only the article but the charts that he provided by going to creativeplanning.com/radio, where he echoed my sentiment with the article entitled Why We’ll Be Financially Okay Regardless of the Party in Power.
Let me provide you with three reasons not to panic as we approach the midterm election. On November 8th, which is right around the corner, we are going to determine at the polls which political party will control Congress. And while every election brings about some anxiety, this one feels especially significant given all the recent market volatility, the worst 50-year period for a stock bond portfolio and 40-year high inflation. There’s just a lot of political uncertainty, a lot of emotion around this. My hope, though, is that I can lower some of that emotion here over the next couple of minutes, because while this election’s outcome is sure to impact future legislation and potentially things you really care about, it’s likely going to have less influence on the financial markets than you might expect. Here is why: markets don’t follow politics.
The economy and the markets don’t care which political party is in charge. Instead, they’re impacted by policy, not politics, and care about really only one thing: the impact of future earnings. This assertion is illustrated by the fact that market returns during the Obama and Trump administrations were virtually identical at 16.3 and 16% respectively. Which, by the way, if you’re wondering, is significantly greater than the 30-year average of 10.6%. You and I both know that many voters had strong opinions about both of those two political leaders. Those who were able to set their political feelings aside and remain invested, they were rewarded.
The trend holds true over the long run as well if you’re wondering. The historical return differential between Republican and Democratic administrations has been virtually non-existent. Going all the way back to 1860, we’ve had 94 periods of a Republican president, the annual compounded return of a 60% stock, 40% bond portfolio, provided investors an 8.2% return. The 65 periods where we had a Democratic President, 8.4%. So the difference was 8.2 and 8.4% since 1860 on a 60/40 portfolio. And if you’re wondering is there a difference during election years, there have been 40 of those periods, annualized return 8.9%. The return during the 119 periods that were non-election years, 8.0%.
Another reason not to panic as we approach this midterm election, even if your party doesn’t win, is that markets favor a division of power. Many polls, and we’ll see how these play out, have predicted that Republicans are likely to take control following this midterm election, while senate control is probably still too close to call. But while a divided government can make it challenging to pass legislation, it typically leads to more stability in the markets. The reason for that is because markets don’t like uncertainty. When a single political party has the ability to pass sweeping legislation, as we’ve seen the last couple of years, markets often respond with volatility. On the flip side, when you have a divided government, it can lead to political gridlock, which for the markets is good because it typically means fewer laws are passed, resulting in less economic change and uncertainty.
The final reason I want you to lower your anxiety around this midterm election when it comes to your money is that market volatility leading up to midterm elections typically smooths out following them. And so, while we’ve seen higher volatility recently, that is typical if you look since 1970, you see approximately 25% more volatility in the four months leading up to the midterms when compared to non-midterm election years. And while past performance is certainly no guarantee of future results, the stock market historically has above average returns looking forward after midterm elections are complete.
On the radio page of the website, you’ll find a chart that breaks down the price return one year after a US midterm election all the way back to 1950. But here’s your summary for today. The average one year return since 1950 following a midterm election is 15.1%, more than double that of all other years during a similar period. This is a really good reminder to remain invested through periods of political uncertainty. It’s normal to feel anxiety. Think back to 2016. President Trump won in a bit of a surprise to many, and those who didn’t like the idea of him being president said, “I need to sell my stocks, this is going to be terrible.” And then what happened in 2017? The market was up 22%. You simply cannot invest based on your political happiness because so often when you do you end up risking that you’ll be on the wrong side of a bull market. Creative Planning President and CEO, Peter Mallouk, spoke about this back in 2020 during the presidential election, and it still holds perfectly true today. Have a listen.
Peter Mallouk: I completely agree. I have phone calls with clients every day of my career, and I remember the day after President Obama won talking to people that were losing their minds and thought, “Oh, I’ve got to move to a different country.” There were a couple people I could not convince to stay invested, and it was a huge mistake, the market was way up under President Obama. And then had the same discussions with President Trump. Don’t let your emotions, whatever side of this you’re on and how unhappy you are about the presidency or the Senate, the market barely cares. The market cares about interest rates and earnings and adaptation of technology, innovation, and demographics more than they care about this. I know it’s hard to believe it. It’s not to say there’s not an economic impact either way, there definitely is, but it’s one of many, many things that factors into the way that the market looks at things. So if there’s one takeaway from this very short episode that we’re doing, it’s go ahead and be emotionally and psychologically invested in the political outcome, but don’t let it bleed over into the way you see the long run economy of the United States.
John: Again, that was Creative Planning President and CEO, Peter Mallouk, on his podcast Down the Middle. You can find that wherever you listen to podcasts. But while history doesn’t repeat itself, it often rhymes. The bottom line is elections are important in our lives and it’s natural if you feel anxious about the midterm elections and its future impact on the country, you’re normal. You’re a human. It’s probably a good thing that you’re engaged and you care. However, regardless of the outcome on November 8th, be reassured that while we can’t predict the future, history has shown that being invested in a diversified mix of assets in line with your individual goals, your risk tolerance, your timeline, your personal financial situation is a sound strategy. Put simply, don’t let your political worries derail your long-term investment strategy.
If you have any questions about this, we have been helping our clients navigate many political environments since 1983, and we would love to answer any questions on your mind about the money that you’ve worked so hard to save over your lifetime. Visit us today at creativeplanning.com to request a visit with a local advisor. Again, that’s creativeplanning.com.
Well, if panicking and freaking out about the result of the midterm elections isn’t a good strategy according to me, what can you do? Well, private wealth manager and Barron’s Top 100 Independent Financial Advisor in America, Tim Sutton, wrote an article that I will also post to the radio page on the six financial moves that you can make this fall. I’ll quickly go through each so that you can stay on top of your finances with these simple tips.
Number one, access your credit report. Now is a great time to check in on your credit. The three major credit bureaus, Equifax, Experian, and TransUnion, allow you to access one free report each year. Double check the report, make sure that there are no unexpected errors. Number two, contribute to your HSA. Triple tax treatment $3,650 per individual or 7,300 for a family in 2022. This can be a tax efficient way to save for future medical expenses. If you haven’t already contributed during the year, now is a great time to start.
Number three, reevaluate your employer-sponsored benefits. Many companies offer an open enrollment period this time of year, in the fall, so that you can make any necessary changes to your benefits before the year ends. Review the options that you have to make sure they continue to meet your needs. The fourth financial move I want you to make this fall, check in on your retirement plan. Are you on track to contribute enough to your employer-sponsored retirement plan during the year to receive the employer match? That’s the first thing, that’s the no-brainer. Make sure you’re contributing enough to receive the full match. And depending upon your situation, you may want to max out your total contribution for the year. Now is a great time to check in on where you’re at regarding those thresholds.
Number five, finalize your charitable donations. Don’t wait until December 30th to donate to the causes you care about most. Fall’s a great time to finalize those charitable contributions. Side note, consider maximizing your impact by donating low cost basis stock. If you have a lot of unrealized gains in certain securities, you can receive a tax deduction on the full value and both you and the charity can avoid paying taxes on any capital gains, assuming that you’ve held that investment for at least 12 months. The sixth financial move I want you to make this fall, harvest losses. Tax loss harvesting is a strategy that allows you to sell assets that have declined in value in the short term, which is a common occurrence in heavily equity weighted portfolios, and replace them with highly correlated alternatives. If you do this correctly, the risk profile and expected return of your portfolio remains unchanged, but temporary tax losses are extracted during the transaction.
To recap those six tips: access your credit report, contribute to your HSA, reevaluate your employer-sponsored benefits, check in on your retirement plan, finalize your charitable donations, and harvest your losses. If you have questions about how to execute upon any of these things or you’ve got questions about anything else regarding your personal finances, visit us at creativeplanning.com to speak with a local advisor.
Announcer: At creativeplanning.com, you’ll learn how your investments, taxes, and estate plan 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 Hegenson.
John: It has been a tumultuous last 12 months for Tom Brady. I know what you’re thinking, “He’s probably a billionaire. In the words of Derek Zoolander, ‘He’s ridiculously good looking.’ What possibly could be wrong in Tommy’s life?”
Well, he retires, and then it came out that he was angling to be an owner of the Miami Dolphins and play for them through some back channeling while he was playing for a division rival, his New England Patriots. Then he is accused of getting his coach fired as one of the conditions for him to come out of retirement. And now he’s back in the offense, and they’ve lost to the Steelers and the Panthers with their third string quarterback. And in what is a far more important loss than anything on the field is his divorce to supermodel Giselle, whom he has children with.
And whether it’s Hollywood or sports, when famous couples that have been together in the spotlight for over two or three years in reality and have kids together, when they get divorced, it’s disappointing. Because we’re thinking, “Oh, that’s a couple that was actually going to defy all the odds of those that are in the public spotlight and make it and have a long-term marriage. We were hoping they’re going to be like Noah and Allie in The Notebook and holding hands at the nursing home on the twin-sized bed.” And while few do, the vast majority don’t.
There are a lot of challenges with divorce whether you are a billionaire couple or whether you’re middle class or whether you’re poor, and the financial implications are one of those major challenges when a divorce occurs. I mean, we’re all mostly familiar with the statistics around divorce. About 45% of all first marriages will terminate with divorce as the result. And then it just gets worse. 60% of second marriages end in divorce. 73% of third marriages end in divorce. Another way of looking at this: between 20 and 25% of everyone listening to this show right now has been divorced at least once.
There are nearly 2,400 divorces every single day in America, meaning an average of 16,800 divorces each week take place and an upwards of 875,000 divorces per year. If you’re wondering, eight years is the average length of a first marriage that ends with a divorce. And so I’d be remiss hosting a personal finance show as a partner and managing director at a national wealth management firm if I didn’t occasionally touch on the implications of divorce when it comes to your finances. I spoke recently with Amanda Burge, who is a private wealth manager out of our Overland Park, Kansas office about her experience as a certified financial planner who focuses her practice on working with women who are going through divorces. She’s a mother who’s also navigated a divorce in her own life, and it’s through her personal and professional experience that she’s able to come alongside women and help in an area that she can relate well with. One of the specific things that I wanted to know from Amanda was regarded a coordinated divorce approach rather than the more traditional isolated and segmented approach to divorce. Here’s what she had to say.
Amanda Burge: The idea where you’ve got a team approach, and so you’ve got the tax that’s working with the estate planning that’s working with the retirement projections, well, all of that changes, especially if there’s one spouse that’s working and one spouse that’s been at home as a homemaker or raising children and doesn’t have income. I think it’s becoming a lot more in demand as people see the value in that because the alternative to that, which is what’s been happening for so many years, is you’ve got your attorney and the other side has their attorney, and once they’re done and the document is signed, that’s it. You don’t have anyone helping you navigate all of those parts, including dividing the assets. There’s no oversight on that. So no one’s going to force one side or the other to split an account or refinance a house, things like that. I think as people are realizing there’s no downside to, it’s just a bigger team approach, we’re seeing a lot more of that here.
John: We know this to be true. Transitional periods necessitate financial adjustments. The most common transitional period: retirement. I mean, I’ve met with thousands of people in my career, and the most common reason they want to talk is because they’re near retirement and they understand that their situation’s going to change dramatically regarding their investments and their tax and their insurance and their estate strategies. They realize those are going to need to change as well. Here’s another transitional period, how about when you inherit money? Someone has 250K saved for retirement and they’re in their 50s, they’re maybe a little bit behind and all of a sudden they inherit two and a half million dollars. I know you’re listening right now going, “Man, two and a half million, that would be nice.” I see it all the time. Their situation has now changed and that person’s strategies will likely need to change as well.
Sometimes it’s one of an unfortunate scenario like the death of a spouse, a medical event. But these are all examples, and one that happens nearly half the time to all married couples is divorce. Here are a couple tips that I have for insuring an equal split. If you or someone you know is going through a divorce, one of the most common mistakes that I see made by couples splitting up assets is that they take a snapshot of all their assets’ current market value. They just use that amount to make decisions. This is totally incomplete. It doesn’t take into account tax liabilities and potential long-term value of assets, and that can lead to an inequitable division.
So in addition to that snapshot current value, let me unpack the two areas I just alluded to when assessing the true value of assets. The first are those tax implications. A hundred bucks equals a hundred bucks, right? Not necessarily. If the $100 is held in cash or the $100 is invested in stock or the $100 is held in employer-sponsored retirement plan, they have totally different tax liabilities. It’s important to consider the tax implications of those various assets when dividing assets in a divorce. So when you look at cash for stocks, $100 in a savings account has no tax liability. However, when a stock’s worth $100, the difference between what you paid for it and its current value is taxable at either longer or short term capital gains. Therefore, due to the difference in tax treatment, $100 in cash and $100 in stock are not equal.
In fact, Stephanie Trentham, a certified financial planner and certified divorce financial analysts here at Creative Planning wrote an article specifically on the factors to consider when dividing assets in a divorce. I will post that to the radio page. So all sorts of resources out at creativeplanning.com/radio if you would like to review them. The tax implication of cash versus retirement account assets is that withdrawals from employer-sponsored plans, such as a 401(k) or maybe it’s been rolled into an IRA, is that those are taxed at ordinary income upon withdrawal, which can obviously significantly reduce the actual amount of money that you receive.
The third example is cash versus real estate. Following a divorce, it’s very common that one spouse assumes the full ownership of the home. If you’re the spouse who stays in the home, you’ll need to refinance the mortgage if there is one, and transfer the home into your name. And once you have sole ownership, you’re responsible for paying capital gains taxes on any profit that exceeds the current exclusion of $250,000 when the home is eventually sold. So the 250,000 exclusion is an important consideration because if you decide to sell that home prior to your divorce and split the proceeds, you are subject to a higher exclusion amount of $500,000. That can make a big difference come tax time.
So when we look at tips for insuring an equal split during a divorce, the first is tax implications. The second are the potential investment returns. Not all assets have the same growth potential, which is why it’s very important to consider the future value of assets. For example, a car is depreciating, a stock is an appreciating asset, at least we hope so if we’re invested properly. Oftentimes, all assets are not split 50/50 to create an equitable divorce settlement. Be mindful of these various things and do not go about this alone. If you or someone you know is going through a divorce, make sure they have the professional guidance that they need, not just from their divorce attorney, which is obviously important, but also from their entire wealth management team. Because the tax implications and future investment returns are just scratching the surface of what financial implications need to be considered during what is almost always a difficult time as you go through a divorce.
Announcer: At Creative Planning, we provide custom tailored solutions for all your money management needs, as our team is structured to cover all areas of your financial life. Why not give your wealth a second look? Visit creativeplanning.com. Now, back to Rethink Your Money, presented by Creative Planning with your host John Hegenson.
John: I want to start with an epiphany that I had this week, and that is that of the 26,000 days on average that we are alive, most are materially insignificant. But sneaking into that 70-year reel of our lives are about 20 to 30 days that change our entire future. How about the birth of your children, a wedding day, graduation from college? Maybe it’s tough time, loss of a loved one, divorce. I mean, I think about the day that I met my spouse. We’d been set up by our moms who had been friends for a long time. As she drove down from Bismarck, North Dakota to Arizona State University to start another semester, and I was an airline pilot based out of LAX, we met up along her trek in none other than Las Vegas, Nevada. And that was a really good day, the best day. It was the start of our family.
I reflect back that if a lot of those things didn’t happen the way they did, my life looks really different. That was one of those few life-altering days out of the 26,000. The reason I bring this up is because investing in the stock market, very similar. Over your 40 or 50-year time horizon, maybe 20,000 days as an investor, most of the time it’s moving less than 1% up or down. On a daily basis, it’s up 53% of days and down 47% of days historically speaking. However, just like with our lives, there are certain days that change your returns forever. And just as I didn’t know the significance that day in Las Vegas because I couldn’t possibly see the future and the magnitude of that moment, same is true with the stock market. When are the best days going to occur? Good luck guessing. I’ve been hearing more and more lately, “John, maybe I should just hoard cash rather than continuing to stress out about these fluctuations in my accounts.” But as I say often, the risk of being out of the market is often greater than the risk of being in.
Let me share with you three reasons to avoid the urge to pull your money out of the market. Number one, time in the market smooths out the volatility of returns. And here’s what I mean. If you and I were talking and you said, “All right, John, invest my money 100% in stocks, and in one year I’m going to judge how you’ve done. What can I expect out of my portfolio?” I would tell you historically speaking since 1950, we could be up 47% in a year and you would love me and things would be going incredibly well and you’d think I was the smartest investor of all time. You might say, “Oh that’s amazing. This is great. I love it. I’m going to invest with you.” I’d say, “Wait. But before you do that, let me share with you that you could also be down 39%.” This may lead you to a conclusion that I don’t want to invest in the stock market for this very reason. There’s nearly a 90% range of outcomes on the high end and the low end, that’s just wildly unpredictable. I can’t handle those sorts of swings. And that’s why I would tell you you are completely gambling with your money if you put assets that you need in one year, 100% in stocks, because that is your historical range of outcomes.
But here’s why stocks are a long-term investment. That same 100% stock portfolio, over a five-year period since 1950, your best case scenario is your up 28% per year, which would still be incredible over a five-year period. What’s your downside over five years? Worst rolling five-year period since 1950, you were down 3% per year over a five-year period. How about over a 10-year period? Best rolling 10-year period since 1950, you were up 19% per year. The key here is that the longer you’re invested, your floor is increasing. Your worst rolling 10-year period since 1950, you were down 1% per year. I mean, it’s still not great if you shred your statement for 10 years because you’re trying to be disciplined in your stock portfolio and you open it up and you’ve lost 1% per year for 10 years. I mean, no one’s excited about that, but that’s been the worst possible scenario. And taking every rolling 20-year period since 1950, best case you made 17% per year, but get this your worst rolling 20 year period out of all of them since 1950, you still made 6% on average per year for 20 years.
Recent studies show that investors on average hold their mutual funds for less than four years, meaning most investors never take advantage of that increased predictability of returns over long periods of time because they’re constantly resetting back to that 47% or down 39% scenario over a one-year period because they don’t stay invested for the long haul. And why? Oftentimes because they’re fearful in bear markets like we are sitting in right now. The second reason it’s incredibly important to stay invested is that fearful investors are their own worst enemy. Fear-driven selling is the single biggest mistake investors make during these sorts of periods. Morgan Housel, my favorite financial writer, said it best when he said, “Every past crash was an opportunity, and every current crash is a crisis.”
When speaking about market volatility, Creative Planning CEO, Peter Mallouk, often asks audience members the question, “What’s the one thing all bear markets have in common?” The answer: they all eventually end, and the market moves on to make new highs. Here is where I’d like to circle back and reference why missing out on the best days in the market can be incredibly costly. Starting January 1st of 1980, if you had $10,000 and you were invested in the S&P 500 index, never took your money out, it’s grown to just under $1.1 million. 10 grand to $1.1 million by putting it in the S&P 500 and losing your login. What if you missed just the five best days? I mean, we’re talking a 40-plus year period you just missed the five best days. You went from nearly $1.1 million to 675,000. It’s pretty astonishing, nearly half of your returns gone by being out of the market on the five best days over a four-decade period. How about if you missed the best 10 days, but we’re invested the rest of the 40-plus years, your $1.1 million potential down to 487,000.
And if you miss the 50 best days in the market, by the way, this is according to Fidelity, you didn’t have $1.1 million, you had $78,000. You just don’t know which day you’re going to meet your future spouse, so put on the pilot uniform and go stand on the curb at the Las Vegas Airport and wait for to pick you up. Don’t get out of the market.
My third reason why you must stay invested is that you’ll miss out on dollar cost averaging opportunities. I’d like to encourage you, as I think about the ways that my colleagues and myself have helped families successfully manage this sort of market volatility without them needing to lose sleep over their returns, if you’re stressed out about this, get a second opinion, talk to a credentialed fiduciary. If you’re not sure where to turn, we here at Creative Planning have been helping families since 1983. We’ve got clients in all 50 states, 65 countries around the world. We’re a law firm. We’re a tax practice. We have over 300 certified financial planners. There’s a reason Barron’s has called us a family office for all. We’re managing or advising on %225 billion.
Lean on our experience by requesting a complimentary second opinion. You can achieve this by going to creativeplanning.com right now to request to visit with a local advisor. Again, that’s creativeplanning.com for your second opinion.
And along those lines, sometimes I truly wonder, “Why doesn’t everyone get a second opinion like I just offered?” I mean, after all, this is everything we’ve worked for. But I’d like to encourage you, be conditionally loyal to your financial advisor. We talked earlier about divorce. It may be time to give a hard look at divorcing your financial advisor. “John, that’s harsh, that’s mean.” No, you’re paying this professional to do a phenomenal job for you. I’ve talked at length in previous shows about what you should be looking for in a financial advisor, like independent, so not manufacturing or pushing their own products, they’re not getting huge kickbacks from third parties. You should be working with a fiduciary, someone that’s not dually licensed as a broker and acting in your best interests some of the time and some of the time selling you things. You should be working with an advisor that’s able to customize your plan and your portfolio. They should be comprehensive. And by comprehensive I mean like us, 85 CPAs, 45 attorneys, 300-plus certified financial planners, a law firm, a tax practice, a trust company. That’s what wealth management is, and I spoke about that to open last week’s show. If you missed that or would like to listen to other previous episodes, you can find those at creativeplanning.com/radio, or you can search Rethink Your Money wherever you listen to podcasts.
But I can share with you the hundreds of meetings I’ve had over the years with prospective clients who have done a lot of things really well. They’ve had intentionality around their savings. They’ve tried to make good decisions. And maybe even they’ve had a bit of success from a financial security standpoint. But a lot of times it’s not because of their advisor, it’s in spite of their advisor. Not experienced, conflicts of interest, doesn’t run a good practice, real small book of business, I see it all. There are a number of different issues, but one of the ones that I would like to focus on is purely a lack of competency.
This may surprise you, but let me go back to my days as an airline pilot. My colleagues and I had extensive training and experience to the point where you’re type-rated on the specific aircraft you fly, whereby the time you are sitting in that airplane with passengers behind you, you know every aspect of that airplane. That’s one of the many reasons why flying around in a pressurized cylinder at 36,000 feet is incredibly safe, a lot safer than driving your car. You go talk to a doctor, they went to medical school. They passed their board exams. Our attorneys here at Creative Planning went to law school, they passed the bar exam. Certified public accountants, significant schooling and testing. So there’s a baseline of competency there. There’s none of that amongst financial advisors.
As I transitioned from commercial aviation way back when into finance, I was shocked at how little I needed to know or have passed to be a licensed financial advisor. Many of our wealth managers are certified financial planners. Some have their doctorates, master’s degrees. Many are also CPAs or JDs along with their CFP. That’s a lot different than passing your state insurance exam and saying, “Hey, I’m a financial advisor.” In fact, I recall one financial advisor whose firm was named X, Y, Z Financial Planning. And not only did they have zero certified financial planners, but the owner wasn’t even a licensed financial advisor. They were an insurance agent, and the business name was Financial Planning. How confusing is that for the public?
And so with that being said, here are a few of the reasons why you should not hire a financial advisor, and I see these all the time. Number one, they’re your friend. Now, I think it’s great that you have friends, but friendship isn’t one of the criteria for who should manage your life savings. You’re not looking to be best friends with your cardiologist when you have open heart surgery. You want them to be competent and great at the surgery, not playing slow pitch softball with you on the weekends. Here’s one that I see: they’re a golf buddy. I’m not saying there’s anything wrong with golfing, but that’s not a reason to hire the person to manage your life savings. They’re your neighbor. They’re an advisor that throws great Christmas parties. “Gosh, I just want to get invited to those, they are so fun.” Their office is near your home. Those are terrible reasons to hire a financial advisor.
But with that said, they’re reasons because we’re humans and we’re connected beings. You generally hire someone out of trust. And who do you trust? Well, people that are in your normal sphere. And so, at an emotional level it’s pretty justified, but at a pragmatic level, I want you to ask yourself these three questions as a way to double check that you have an advisor for the right reasons. Number one, when is the last time that your financial advisor reviewed your tax return? We are in one of the lowest tax environments in over five decades. What have you done since 2018 when we entered the Trump tax reform? How often are you receiving proactive tax strategies in coordination with your CPA and your financial advisor?
Number two, when’s the last time that your financial advisor reviewed your estate planning documents? Do you know the specifics of your trust and what that outlines? Maybe you’ve never even completed your estate planning documents or they’re outdated. Again, when’s the last time your advisor reviewed those and went through them with you? The third and final question I want you asking yourself, when is the last time that your financial advisor reviewed all of your insurance documents? If you can confidently answer those questions, you’ve got a really darn good wealth manager. I don’t know the rest of the context of your situation, but yeah, great. You’re probably not working with them just because they golf with you, they’re really good.
But conversely, if you don’t like the answers to those questions, you might have hired your advisor for the wrong reasons, for one of those reasons I shared before. I want to encourage you, get a second opinion from an independent credentialed fiduciary. It doesn’t have to be us at Creative Planning, but if you’re not sure where to turn, we would love to offer that to you. Let’s make sure that you are not missing anything, that you’re on the right track because you’ve worked far too hard for what you’ve saved. Visit us at creativeplanning.com to request that second opinion with a local advisor. Again, that’s creativeplanning.com to request your complimentary second opinion.
Announcer: At Creative Planning, our wealth managers work with in-house CPAs and attorneys to ensure your money is working as hard as it can for you. Give your wealth a second look at creativeplanning.com and connect with your local advisor. Now, back to Rethink Your Money, presented by Creative Planning with your host John Hegenson.
John: My late grandmother’s memorial service was this weekend. She was 95 years old when she passed. And as I reflect on the memories I have with her, one beautiful, all-encompassing principle really guided her life, and that was by serving others. My father and his two older brothers when they were still in elementary and middle school to Malaysia, where my late grandfather was the principal at an international school and my grandmother also worked at that school. It was a school for a lot of Christian missionaries that were there in Malaysia. My dad still holds his ping pong paddle as the Malaysians do where he only uses one side of the paddle. It’s kind of weird because he doesn’t have a backhand, but he also never gets jammed in that weird little middle space right along your body. Plus, it’s a little bit intimidating having him hold the paddle that way.
My dad has stories of hiking through the jungle and having leeches all over his body, which is a little bit nasty, or the time that there was a giant snake in the tree of his front yard and a neighbor had to come remove it. But between that willingness to go across the world to do something that they believed in, or later after their children had grown, teaching at an international school in the country of Yemen in the Middle East, my grandmother was mild and meek and she didn’t say much, but you certainly knew that you could depend on her.
But as she got older, scammers really played on my grandmother’s kindness. It actually became a bit of a problem for our family because she would be writing these 50 and $100 checks once she was in her mid to late 80s and well up into her 90s, to basically anyone or any organization who would ask for it. After all, it was consistent with her desire to help those in need. Jerry Bell, one of our elder law attorneys here at Creative Planning and a previous guest here on Rethink Your Money, wrote an article that’ll be posted to the radio page of our website on the growing concern of elder financial abuse. And so, if you have a parent or maybe a grandparent who is elderly, I want to share with you how you can keep them from falling victim to financial fraud.
If you think this isn’t prevalent, think again. There are an estimated 7.86 million cases of elder financial fraud annually here in the United States, resulting in $148 billion of financial losses. Of those cases, only around 334,000 are reported to authorities. So think about that, there are almost eight million cases, less than 5% are ever reported. Financial exploitation can happen to anyone, yet, these cases are often vastly under-reported due to victim’s shame or the fact that the abuser’s a family member or a trusted caregiver or because the victim doesn’t know even how to report the abuse.
The key to identifying elder financial fraud is to be on the lookout for unexpected transactions or a change in your loved one’s financial patterns. Here are some potential signs of financial abuse: unusual banking activity such as large unexplained withdrawals, the shutoff of electricity, phone, water, or other utilities due to unpaid bills, the sudden closing of investment accounts or CDs regardless of penalties, unauthorized ATM withdrawals or checks made out to cash, sudden changes to estate planning documents such as wills and trusts, an unexpected transfer of assets to a family member or unrelated individual, unusual credit card charges, the inability of the elderly loved one to access their own financial accounts, suspicious signatures on checks or checks written to unknown individuals, new credit cards or joint accounts, sudden activity in a previous inactive account, new, and I’m putting up in air quotes here, friends who offer financial advice and accompany your loved one to the bank, that is so nice of them. “I’ll drive you up to the bank, Mrs. Johnson,” a family member or caretaker threatens to withhold access to loved ones or a vital service unless money’s given or an inflated fee is paid. And lastly, the disappearance of money, financial statements, or valuable objects.
I think all of those feel pretty intuitive, like those should all be red flags. The best way to prevent elder financial fraud is to stop the abuse before it even begins. Take some preventative measures to protect your finances or the finances of your loved ones by considering these: use automatic bill pay and direct deposit, keep all financial documents and statements in a secure location, know what documents are in place, maintain ties. What I mean is, elders most susceptible to fraud are those that are isolated and without strong connections to friends and family. There’s no accountability there. So make plans to regularly connect with your loved ones.
Next preventative measure” designate a financial power of attorney. Regardless of your age, it’s wise to designate a trusted individual to serve as your financial power of attorney in case an unexpected event renders you unable to make financial decisions. Next, conduct thorough background checks of all caregivers. This is one that I’ve seen personally as a financial advisor, when you’re meeting with an elderly client and all of a sudden this caregiver that drives them everywhere is wanting to be involved in meetings and wanting to know more about their finances. Be very mindful of any caregivers involved in your elderly family member’s lives, especially new ones. Conduct a thorough background check.
The next important measure, cancel unused credit cards. This one’s pretty obvious. It’s easier to monitor credit cards you use on a regular basis. Ensure that you or your loved one’s credit report is regularly monitored. A primary way elder financial fraud is identified is when unknown accounts appear on an individual’s credit report. Remember, federal law allows you to access a free copy of your credit report every 12 months. And lastly, offer to help. If you have a parent or relative who seems to be struggling, offer to provide assistance in a manner that he or she is comfortable with. And after hearing this, if you are suspecting that elder financial fraud has occurred in maybe one of your loved one’s lives, report the abuse to your local police and contact your local Adult Protective Services agency. You should also report the fraud to the bank and investment institutions and request additional security protections be placed on the accounts.
Many states also have a toll-free hotline that you can find on the radio page of our website if you’d like to access this. And of course, here at Creative Planning, we are willing to help in any way we can. Our legal team can provide elder law services and has access to in-house support from wealth managers and accountants and insurance specialists who can assist with comprehensive long-term planning needs and asset protection. Visit us at creativeplanning.com if you’d like to request a second opinion regarding anything you’ve heard. Again, that’s creativeplanning.com.
I want to transition over to a real world financial planning situation that involved one of our Minneapolis clients to help illustrate the practical impact of a real financial plan and comprehensive wealth management. Last week, I talked about the difference between investment management and wealth management. One of my colleagues, Travis Bezella, who is the managing director here at Creative Planning for our Minnesota team, shared with me and encountered the ad with a client who has about $5 million of assets managed here at Creative Planning and a net worth around $10 million.
We manage all of their liquid assets. We prepared their estate plan and filed their tax returns. But about a year ago, we also suggested to review their property and casualty insurance coverages with our insurance team to make sure there weren’t any gaps in coverage, and secondarily, see if we could get more competitive pricing. After reviewing his policies, our insurance specialist discovered that he was carrying auto insurance for his two grown daughters. They were adults, they were out of the house. He didn’t own these vehicles, they were driving, and our insurance specialist pointed out that he didn’t have any insurable interest, and that if either of those daughters were to get into an accident, their claim could be denied because of this. Our insurance team wasn’t actually able to help provide competitive pricing, but this gap was identified. In turn, our client had his daughters go out and get their own insurance policies on those vehicles.
Here’s the crazy part, not more than one week later, one of those two daughters was in a car accident and thankfully everyone was okay, but this claim could have been denied had our insurance team not pointed out this insurance gap to them. And so often we stop at just investment advice, but maybe we extend that to estate and tax advice and we see those things as the biggest value-add from a wealth manager, but being truly comprehensive like we are here at Creative Planning and providing advice by specialists in these other areas can’t be overlooked. And yes, I’m totally biased, but I can’t think of another wealth management firm that can coordinate these types of resources the way that we can for the benefit of clients just like this out in Minneapolis. And so, this is just one example of our 300-plus certified financial planners showing incredible diligence in their pursuit to help our clients grow and protect the wealth that they’ve worked so hard to accumulate.
I’d like to invite you to take a first step with us here at Creative Planning and request a second opinion from a local Creative Planning advisor. You can do so by going to creativeplanning.com. Again, that is creativeplanning.com.
If you missed part of today’s show or would like to listen to previous episodes, you can find those wherever you listen to podcasts by searching Rethink Your Money or by visiting the radio page of our website at creativeplanning.com/radio. And remember, we are the wealthiest society in the history of Planet Earth. Let’s make our money matter. If you enjoy the podcast, please subscribe, share, and leave us a rating.
Disclosures: The preceding program is furnished by Creative Planning, an SEC-registered investment advisory firm that manages or advises on $225 billion in assets. John Hegenson 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.
