Latest / Financial Futures: A Measured Wealth Podcast / Adding Value Through Portfolio, Planning and Behavior: Inside Vanguard’s Advisor Alpha with Michael DiJoseph

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Adding Value Through Portfolio, Planning and Behavior: Inside Vanguard’s Advisor Alpha with Michael DiJoseph · Financial Futures: A Measured Wealth Podcast

• 0:01
  SPEAKER_04: Ever wonder how an advisor can add value to your long-term financial future?
• 0:06
  SPEAKER_04: Stay with us as we break down Vanguard's advisor alpha research and discuss how advisors can add meaningful value through better tax planning, portfolio structure, and behavioral coaching.
• 0:17
  SPEAKER_00: The information presented on this program is believed to be factual and up to date at the time of its recording.
• 0:23
  SPEAKER_00: We do not guarantee its accuracy and it should not be regarded as a complete analysis of the topics covered.
• 0:28
  SPEAKER_00: Discussions and answers to questions do not involve the rendering of investment advice, personalized or otherwise, but are limited to the dissemination of general information.
• 0:38
  SPEAKER_00: A professional advisor should be consulted before implementing any of the options presented.
• 0:42
  SPEAKER_00: Measured Wealth Private Client Group is registered with the Securities and Exchange Commission and only transacts business in states in which it is registered or exempt from registration.
• 0:51
  SPEAKER_01: This episode references third-party research conducted by Vanguard Investment Advisory Research Center.
• 0:57
  SPEAKER_01: Vanguard is not affiliated with Measured Wealth Private Client Group, and Vanguard did not sponsor, review, or approve this episode.
• 1:04
  SPEAKER_01: Our guest views are their own and are provided for general educational purposes.
• 1:08
  SPEAKER_01: Discussions regarding performance, statistics, and research claims belong to our guests and to Vanguard.
• 1:14
  SPEAKER_01: This episode includes examples of how advisors may add value for some investors over time, depending on individual circumstances.
• 1:21
  SPEAKER_01: Results vary and no strategy can assure a profit or protect against loss.
• 1:27
  SPEAKER_01: Welcome to Financial Futures, a Measured Wealth podcast powered by the team at Measured Wealth in beautiful forts of New Hampshire.
• 1:36
  SPEAKER_01: Each episode we're bringing you fresh insights on retirement.
• 1:39
  SPEAKER_01: Investing in everything you need to take control of your financial future.
• 1:43
  SPEAKER_01: Whether you're preparing for retirement or already living it, we're here to help you make informed choices with Costello.
• 1:50
  SPEAKER_01: To kick off today's conversation, future hosts, certified financial player, chartered financial analyst, George Saharopoulos.
• 2:02
  SPEAKER_04: Hello everyone.
• 2:03
  SPEAKER_04: Today I'm speaking with Michael DeJoseph, a senior strategist in Vanguard's Investment Advisory Research Center.
• 2:10
  SPEAKER_04: Michael is a chartered financial analyst and during his career has published over 25 research papers and articles on retirement income, investor behavior, and portfolio strategy, with the foundation being Vanguard's Advisor Alpha Research, which Michael co-authored back in 2001.
• 2:29
  SPEAKER_04: Michael, thank you for joining.
• 2:30
  SPEAKER_02: Thanks for having me, George.
• 2:32
  SPEAKER_04: Awesome.
• 2:32
  SPEAKER_04: Uh so today we're celebrating 25 years of Advisors Alpha Research.
• 2:37
  SPEAKER_04: Uh how does it feel to know that the research has stood the test of time?
• 2:41
  SPEAKER_02: Well, I think it's more of a testament to to advisors than the research, right?
• 2:45
  SPEAKER_02: So when you say celebrating 25 years of the research paper that we just put out, the subtitle of it was 25 years of clients and their advisors thriving together.
• 2:54
  SPEAKER_02: And so I think that's the important point there.
• 2:56
  SPEAKER_02: Um so as great as it feels to be part of the research, it feels even better to have been part of an industry that's that's so well aligned doing great things for their clients.
• 3:04
  SPEAKER_04: Yeah, this has probably been the most well-read research paper by advisors out there.
• 3:11
  SPEAKER_04: I can certainly remember when it came out back in the day, or when I first started as an advisor, which was back in 2004, this paper had already been out, but it was really confirmation for me that we could add some serious value to investors' uh long-term success.
• 3:28
  SPEAKER_04: So this was great for me.
• 3:30
  SPEAKER_04: Um how did this research first come about?
• 3:34
  SPEAKER_02: Yeah, George, uh great question.
• 3:36
  SPEAKER_02: So if you go back, so Vanguard, right, my firm, famously founded and led uh for the first 25 years by Jack Bogle, our founder, right, who um you know candidly was not a not a big fan of financial advisors.
• 3:50
  SPEAKER_02: Although I think if you actually look back at what a financial advisor was at the time, so maybe we kind of take a step back and and look at how the industry has changed, and that kind of uh informs where this came from.
• 4:01
  SPEAKER_02: Well, if you go back when when Vanguard was formed uh in the mid-70s, I mean, financial advisor was a stockbroker, right?
• 4:08
  SPEAKER_02: I mean, that's somebody who was picking up a phone, cold calling, making dials, trying to sell securities that their firm probably underwrote in the first place, right?
• 4:15
  SPEAKER_02: Just trying to sell the equity in these companies.
• 4:17
  SPEAKER_02: And that was really the model, I'd say, probably till you know, the certainly through the 1980s, and then you started to get into the 1990s and eventually the advent of the uh the online discount brokerage where clients could go and do the trading themselves.
• 4:31
  SPEAKER_02: And so I think for the first 25 years of our company's history, you know, Jack Bogle was probably correct in that, you know, financial advice maybe wasn't a good deal for clients because they were being sold individual securities and their portfolio really didn't kind of have a plan.
• 4:44
  SPEAKER_02: There was certainly very little financial planning in the industry at the time.
• 4:48
  SPEAKER_02: But around that time, we did see a change start to occur, and that was the proliferation, although small at the time, of holistic financial planning.
• 4:56
  SPEAKER_02: And so, you know, Vanguard and and you know, our leadership team kind of looked around and said, hey, you know what, we actually do believe in financial advisors if it's offering a good deal to their clients.
• 5:07
  SPEAKER_02: Right.
• 5:08
  SPEAKER_02: And so what are those things?
• 5:09
  SPEAKER_02: Well, we would say, hey, there's the investment portfolio.
• 5:11
  SPEAKER_02: It's not to say that that's not important, but it's you know, building a broadly diversified portfolio, one that's relatively low cost, right?
• 5:18
  SPEAKER_02: You know, we tend to be associated with indexing, but it was really kind of the uh Jack Bogle is famous for the low cost hypothesis, right?
• 5:25
  SPEAKER_02: Costs matter.
• 5:26
  SPEAKER_02: But then it was kind of taking it to that next step and acknowledging that financial advice is much broader than just building and charging for investment portfolios.
• 5:34
  SPEAKER_02: And so it's the financial planning, layering on financial plans, uh doing the broad holistic wealth management, the tax management, right?
• 5:42
  SPEAKER_02: The the estate planning, the legacy, and then acknowledging two other parts too, which I think have historically been underappreciated, which is behavioral coaching, as we would call it.
• 5:51
  SPEAKER_02: And so, you know, I'm sure everyone listening here today is a perfect investor and they've never been tempted to bail out of the market, right?
• 5:58
  SPEAKER_02: But the reality is that you know markets are hard.
• 6:01
  SPEAKER_02: You know, when the markets become volatile and it seem like they're never going to go back up, the temptation's really strong, even for you and I, right?
• 6:07
  SPEAKER_03: Like professionals.
• 6:09
  SPEAKER_02: A little bit of extra help, the emotional circuit breaker there was a big part of it.
• 6:12
  SPEAKER_02: And then the the fourth component I would say is um you know the part that can't really be quantified.
• 6:17
  SPEAKER_02: It's not dollars and cents, but it's more on the emotional side, uh, that peace of mind that you know an advisor like yourself can offer to your clients the time, the willingness, and the ability to do this on their own.
• 6:29
  SPEAKER_02: Again, like we look around, most clients are very successful, very hardworking, very intelligent.
• 6:34
  SPEAKER_02: That doesn't mean that they have the temperament to build a portfolio and stick with it through ups and downs and potentially years of underperformance and the strategy.
• 6:42
  SPEAKER_02: So that's where it came from.
• 6:44
  SPEAKER_02: It was us kind of saying, hey, we do believe in advice, but you know, with the caveat that we believe in good advice, and that's kind of how we've defined it as Vanguard Advisors Alpha.
• 6:52
  SPEAKER_04: And where do you think we are today?
• 6:54
  SPEAKER_04: Uh there's been a huge transition.
• 6:57
  SPEAKER_04: I think a lot of progress has been made um in migrating to these eight modules, which we're gonna dive into a little bit deeper.
• 7:06
  SPEAKER_04: But is there still work to do?
• 7:07
  SPEAKER_04: Is there still uh transformation to take place?
• 7:10
  SPEAKER_02: Aaron Powell When we think about what are the really big changes, uh to me it's kind of four areas.
• 7:15
  SPEAKER_02: One, it's what we would call reduced leakage.
• 7:17
  SPEAKER_02: And so if you think about advisors alpha, it's you know, tax efficiency is a big part of it, investor behavior is a big part of it, costs and investment returns.
• 7:25
  SPEAKER_02: And so investment costs have come down tremendously, and that's been the single biggest driver in you know ours and most others' research in terms of what actually drives investment outcomes is lowering costs.
• 7:38
  SPEAKER_02: And so that's been a big one.
• 7:39
  SPEAKER_02: On a related note, clients have better investment portfolios.
• 7:43
  SPEAKER_02: Um, so they're lower costs, they're more sophisticated, they're higher quality.
• 7:46
  SPEAKER_02: We've seen better investor behavior.
• 7:48
  SPEAKER_02: I I would almost entirely attribute it to advisors.
• 7:51
  SPEAKER_02: And this is a big one.
• 7:53
  SPEAKER_02: Client preferences have shifted.
• 7:54
  SPEAKER_02: And what I mean by that is again, the traditional value proposition was hey, you know, maximize my returns, help me avoid a loss, right?
• 8:02
  SPEAKER_02: And I think clients have really shifted towards a framework that's more of like help help me meet my goals, help me accomplish what's really important to me, help me mitigate some of those things that keep me up at night.
• 8:12
  SPEAKER_02: Um, and advisors have adapted accordingly and and and met the client where they are.
• 8:17
  SPEAKER_02: And that said, uh, you know, people are people.
• 8:19
  SPEAKER_02: I think we all still have the same temptations and and you know, the greed and the fear and all of that.
• 8:24
  SPEAKER_02: And so I think the opportunity here is if advisors need to keep their foot on the gas to keep doing this, or we'd probably revert back to where we were.
• 8:31
  SPEAKER_02: And the other big thing there too is just technology, right?
• 8:34
  SPEAKER_02: Like how does technology affect our industry going forward?
• 8:37
  SPEAKER_02: And how do you know folks like you and I, George, really use it intelligently to drive really good outcomes for our clients?
• 8:44
  SPEAKER_04: Yeah, absolutely.
• 8:45
  SPEAKER_04: And I think all of that has led to benefits for advisors as well, higher retention rates, stronger client relationships.
• 8:54
  SPEAKER_04: And uh it was interesting to see on the technology side, everything that's coming out is really something that can help an advisor become more productive and you know get the advice out to a broader audience.
• 9:06
  SPEAKER_04: What was interesting was the the relationship alpha uh is what I found that you know, even those who seek out digital advice still want some human interaction, which I thought was great.
• 9:18
  SPEAKER_04: That was great to hear.
• 9:19
  SPEAKER_04: So, Michael, can we do a little dive into those eight different areas of value that advisors provide?
• 9:25
  SPEAKER_04: Uh we can start with suitable asset allocation.
• 9:28
  SPEAKER_04: You know, for me, uh as I was reviewing this, this is a great way.
• 9:34
  SPEAKER_04: First of all, it's the foundation for that behavioral coaching.
• 9:38
  SPEAKER_04: It helps reduce return variability.
• 9:41
  SPEAKER_04: And even the paper talks about you know, simple can be a strength.
• 9:45
  SPEAKER_04: Anything to add to that?
• 9:47
  SPEAKER_02: Yeah, just say when we when we actually look at investment outcomes in terms of you know the returns and the volatility, meaning, you know, how uh you know, is it going up, is it going down, kind of how frequently is that happening?
• 9:58
  SPEAKER_02: Uh the single biggest driver of those two things is the broad asset allocation.
• 10:03
  SPEAKER_02: And so that's literally as simple as stocks, bonds, and cash.
• 10:06
  SPEAKER_02: Like what percent's in stocks, what's in bonds, what's in cash.
• 10:10
  SPEAKER_02: And so getting that right is really important.
• 10:12
  SPEAKER_02: And there's no right answer, right?
• 10:14
  SPEAKER_02: There's no there's no one size fits all solution for that.
• 10:17
  SPEAKER_02: You know, we hear a lot about the the 60-40 portfolio or the 40-60 portfolio, and ultimately those are things of how much risk can your client take, how much risk can they afford to take, right?
• 10:28
  SPEAKER_02: Like before uh they can't keep the lights on, you know, how much can they take on the emotional side, et cetera, right?
• 10:34
  SPEAKER_02: Like what are their resources, what are their constraints?
• 10:37
  SPEAKER_02: And so uh at the end of the day, it's a math problem, but there's an emotional component to it, and so an advisor that's working with their clients to get a good asset allocation.
• 10:45
  SPEAKER_02: Really important now, the thing there is again, George, you and I have both been in the industry for a while, that the sheer quality of sophisticated products that are available at an extremely low cost today is incredible.
• 10:58
  SPEAKER_02: Right?
• 10:58
  SPEAKER_02: Like you can get broadly diversified, whether it's index or active funds and equities or fixed income, um, you know, for fractions of a percent that are managed by some of the best institutional investors and the best portfolio management teams in the world, putting these portfolios together, then you can build use as the building blocks for your clients.
• 11:17
  SPEAKER_02: So super important there, but ultimately it means to an end to the code.
• 11:20
  SPEAKER_04: Yeah, absolutely.
• 11:21
  SPEAKER_04: Cost is a big factor and broad asset allocation.
• 11:25
  SPEAKER_04: And even in the paper, what I found interesting was you know, this is gonna be a journey to find that right spot for a client.
• 11:32
  SPEAKER_04: It may not just happen right away, but over time, you get that asset allocation right, and it it can mean a lot, uh, especially when we get to the behavioral coaching part.
• 11:42
  SPEAKER_04: But that leads us into the second module, which is investment selection.
• 11:46
  SPEAKER_04: Already touched upon low cost.
• 11:49
  SPEAKER_04: Low cost, low turnover equals lower taxes, lower expenses, and higher net return.
• 11:56
  SPEAKER_04: And this is really where Vanguard shines.
• 11:58
  SPEAKER_04: But uh, Michael, anything to expand on that?
• 12:00
  SPEAKER_02: Just that um, you know, like you said, the the value of the low cost there, I would just, you know, Vanguard tends to be known as an index provider, right?
• 12:07
  SPEAKER_02: But the reality is we're also one of the biggest active managers in the world.
• 12:09
  SPEAKER_02: And so it's really about, you know, we believe in skill, both on indexing and active.
• 12:14
  SPEAKER_02: You know, I think there's also this myth that indexing is easy.
• 12:17
  SPEAKER_02: It is not, right?
• 12:18
  SPEAKER_02: Like I've, you know, I've seen what the individuals and the teams that manage these portfolios do.
• 12:23
  SPEAKER_02: It's extremely complicated.
• 12:25
  SPEAKER_02: It takes a lot of skill, a lot of resources to do.
• 12:28
  SPEAKER_02: Um, it's a very sophisticated investment strategy, right?
• 12:31
  SPEAKER_02: Like I talked about Jack Bogle.
• 12:32
  SPEAKER_02: You know, I think people think that Jack Bogle was a zealot for indexing, right?
• 12:36
  SPEAKER_02: But the reality is, I think to me, Vanguard's DNA is really about democratizing strategies that are historically only available to institutions and and you know, to those with access, right?
• 12:49
  SPEAKER_02: And and we've come along and and we democratized indexing, we drove down costs on the investment side, we're super proud of that, right?
• 12:55
  SPEAKER_02: I think our competitors probably aren't happy that that we exist, but ultimately we're a mutually owned company, meaning our our investors and our funds, and you know, and so any profit that we take in, we we give it right back to our shareholders in in terms of lower costs.
• 13:09
  SPEAKER_02: Uh but taken together the asset allocation and the investment selection, there's a ton of value to be added there.
• 13:14
  SPEAKER_02: Like you said, you know, all of these eight things that we're going to talk about are interlinked, right?
• 13:19
  SPEAKER_02: Those are interlinked into behavioral coaching.
• 13:21
  SPEAKER_02: It's like if you didn't get the asset allocation right and the market turns around, like there may be nothing you can do to keep them invested if the portfolio was just too aggressive for both their ability to meet their goals and their ability to withstand kind of the emotional ups and downs of it.
• 13:35
  SPEAKER_02: But I I'll just re-emphasize the asset allocation, the implementation of it via investment selection.
• 13:40
  SPEAKER_02: The biggest difference today where we are in advice, and I think you know, the the opportunity going forward here is just a uh wholesale acknowledgement by us in the industry and uh certainly by our clients that those are a means to an end.
• 13:54
  SPEAKER_02: Yeah, everything we're doing is like it's a tool in the toolbox to help you achieve a goal.
• 13:57
  SPEAKER_02: It is not the goal in and of itself to just have a portfolio.
• 14:00
  SPEAKER_04: Right.
• 14:01
  SPEAKER_04: And uh you bring up a good point about um about the work involved in putting together the indexes because I've heard from others that there's really nothing passive about indexing.
• 14:12
  SPEAKER_04: You know, there's a lot of work behind the scenes, so that's that's a tribute to Vanguard.
• 14:16
  SPEAKER_04: The third module, rebalancing.
• 14:19
  SPEAKER_04: I you know, find that rebalancing is controlling risk, minimizing drift.
• 14:26
  SPEAKER_04: I love how the paper provided an example of a portfolio that has drifted, but what typically increases is the the weight of equities over time, and that's gonna increase the risk.
• 14:38
  SPEAKER_04: Uh anything to add on that, Mike?
• 14:40
  SPEAKER_02: Just that rebalancing's hard.
• 14:41
  SPEAKER_04: Yeah.
• 14:42
  SPEAKER_02: I don't mean it's technically hard, although, you know, it could be.
• 14:44
  SPEAKER_02: I I always tell the story.
• 14:46
  SPEAKER_02: My first job before coming to Vanguard, I actually worked as an advisor.
• 14:49
  SPEAKER_02: So I had a uh team of senior advisors that I worked under, and you know, I spent a lot of my time doing investment research, rebalancing portfolios, and you know, you go back then uh roughly 20 years ago or so, and it was you know, create a spreadsheet, calculate the weights of the portfolio, figure out the trades that need to occur to rebalance it, and I would actually have to fax.
• 15:09
  SPEAKER_02: I don't remember fax, I would actually have to fax a trade ticket over to the custodian to rebalance a portfolio.
• 15:14
  SPEAKER_02: So uh it was actually technically hard then.
• 15:16
  SPEAKER_02: Today it's probably something closer to push a couple buttons.
• 15:19
  SPEAKER_02: But that's it, it's emotionally difficult for the reason that you just said rebalancing means by definition you're selling a winner to buy a loser.
• 15:27
  SPEAKER_02: Right?
• 15:27
  SPEAKER_02: And you're not doing it to get better returns necessarily, you're doing it to control risk.
• 15:32
  SPEAKER_02: And that's such an abstract thing in the moment.
• 15:35
  SPEAKER_02: So it's again, let's say the market's up 20 or 30 percent, which has occurred several times in the last few years here.
• 15:41
  SPEAKER_02: Rebalancing is going at the end of the year and saying, hey, even though the market seems like it keeps going up double digits every year, we're gonna sell a percentage of your equity and we're gonna invest it in fixed income, which you know, steady eddy, right?
• 15:53
  SPEAKER_02: And it's emotionally difficult, and it's difficult on the other side too, probably even more so in a sense of okay, stock market's down 40, 50 percent, and some of these huge drawdowns, you go back to 2008, 2009, down 50%, and we're gonna say, hey, we're gonna buy more now.
• 16:07
  SPEAKER_02: And the reality is like you're not rebalancing right at the bottom, usually.
• 16:11
  SPEAKER_02: You're probably doing it along the way, or you're doing it at the end of the year, you know, maybe you rebalanced at the end of 2008, and then the market went down another, you know, 20 or 30 percent in the the first quarter there of 2009.
• 16:21
  SPEAKER_02: Like really, really difficult, but really important when you actually zoom out and look at it over time, both in your ability to control risk and your ability to, you know, whether you're an advisor or or an investor on your own, the ability to kind of control the temptations and the emotions that come from the big swings.
• 16:37
  SPEAKER_02: But again, it goes back to like we talked about that asset allocation.
• 16:40
  SPEAKER_02: It's so important to get that right.
• 16:42
  SPEAKER_04: Absolutely, absolutely.
• 16:43
  SPEAKER_04: And in keeping that asset allocation strategy going forward through good markets, bad markets.
• 16:49
  SPEAKER_04: But you're right, there is something behind doing the rebalance during difficult times, whether you're you know selling and buying an equity market that's increasing or uh or buying equities when when the when the market's decreasing.
• 17:03
  SPEAKER_04: Yeah, there's a uh a lot behind that.
• 17:05
  SPEAKER_04: But that kind of leads us into the next module, which is behavioral coaching.
• 17:10
  SPEAKER_04: This is a big one.
• 17:12
  SPEAKER_04: And it goes back to starting with the suitable asset allocation and even goes back to you know the rebalancing part.
• 17:19
  SPEAKER_04: But in the end, we're gonna be in good markets, we're gonna be in bad markets, but it's a bad market where you know people get emotional and they look at it uh uh the market more short term versus long term and uh look at a way to get stop the bleeding.
• 17:37
  SPEAKER_04: And sometimes those those decisions really aren't beneficial to them in the long term.
• 17:42
  SPEAKER_04: So what are your thoughts on behavioral coaching uh for clients?
• 17:47
  SPEAKER_02: This is the one I think is most important.
• 17:49
  SPEAKER_02: Uh I think you and I probably agree on that.
• 17:51
  SPEAKER_02: Uh this is also the one that's probably the hardest to talk about because most people think, well, that's not that doesn't apply to me, right?
• 17:57
  SPEAKER_02: That's everyone else.
• 17:58
  SPEAKER_02: But again, it's easy to sit here, you know, as you and I are recording this today.
• 18:03
  SPEAKER_02: The market's fairly calm.
• 18:04
  SPEAKER_02: All right, there's a little bit of volatility, but we're not in the midst of any big drawdown or anything.
• 18:08
  SPEAKER_02: Uh, you know, hopefully by the time it comes up, it's still not.
• 18:10
  SPEAKER_02: But our research has shown that it's the number one most important element of advice.
• 18:14
  unknown: Right.
• 18:15
  SPEAKER_02: And we can look at that in a couple ways.
• 18:16
  SPEAKER_02: We can look at that in aggregate, which we do, and we we look around and say, hey, what are all the assets out in the industry?
• 18:22
  SPEAKER_02: What does that look like?
• 18:23
  SPEAKER_02: What's the average dollar doing?
• 18:25
  SPEAKER_02: Right, and we see this behavior gap, let's call it 2% or so a year in aggregate.
• 18:30
  SPEAKER_02: And you're talking, you know, tens of trillions of dollars of assets are underperforming the funds in which they invest because of the timing of cash flows.
• 18:38
  SPEAKER_02: So our research has said, okay, well, if that's you know, over long periods of time in aggregate, average dollars underperforming, well, what about during volatile market years?
• 18:46
  SPEAKER_02: Right?
• 18:47
  SPEAKER_02: So if you look at like a 2020 or 2022, you know, those volatile years, that number might be two or three X, what I just said.
• 18:53
  SPEAKER_02: So this is really important to clients.
• 18:56
  SPEAKER_02: Uh it's just, you know, I just can't overstate it because that's an aggregate.
• 18:59
  SPEAKER_02: And then if you look at, you know, George as as someone who manages um, you know, assets and does planning for a number of families and households, like come the end of the year, you don't do a town hall for your entire uh practice, right?
• 19:12
  SPEAKER_02: You're not inviting all of your clients to a meeting and saying, here's our investment review.
• 19:16
  SPEAKER_02: You're having individual meetings, you're sitting across the table or or on a Zoom with the families that you work with and you're reviewing their individual circumstances.
• 19:24
  SPEAKER_02: And so for any individual, all of the things that we've talked about and will talk about, you know, building the suitable asset allocation, doing the rebalancing, doing the financial planning, creating the financial plan, going through the different goals, you know, putting the plan into place, sticking with it, all of that can be destroyed.
• 19:40
  SPEAKER_04: Yeah, and this is really hard to quantify as well.
• 19:43
  SPEAKER_04: But just an example in 2020 when COVID hit and the market sharply went down 30, 35 percent.
• 19:52
  SPEAKER_04: Making drastic changes during those markets, people miss the growth that took place afterwards and um the quick return of the market as well.
• 20:03
  SPEAKER_04: I think one of the charts may have uh mentioned, you know, making sudden moves to an all, let's say, money market or cash position could have netted a negative return over the course of uh several years and a fixed income return of you know in the single digits versus staying the course, whether you're in a 50-50 or 100% equities, whatever the suitable asset allocation is for you, if you had stayed the course, even during the tough times, uh you would you would be far better now.
• 20:33
  SPEAKER_02: George, I'll give you some numbers on that.
• 20:34
  SPEAKER_02: I just happen to have it.
• 20:35
  SPEAKER_02: You know, it's something that I I think a lot about and talk a lot about.
• 20:39
  SPEAKER_02: I've done a ton of research on this.
• 20:40
  SPEAKER_02: So let's just say you have a million dollar portfolio of January 1st, 2020.
• 20:45
  SPEAKER_02: COVID comes along.
• 20:46
  SPEAKER_02: Uh and we saw this, like clients were bailing out of the market right at the bottom.
• 20:50
  SPEAKER_02: And and you know, the problem was it was such a severe and sharp downturn.
• 20:55
  SPEAKER_02: If you did get out of the market, you were probably close to the bottom.
• 20:57
  SPEAKER_02: The silver lining on that is if you were wavering on it and you know didn't bail out, maybe it kind of started to bounce back before you made the decision.
• 21:03
  SPEAKER_02: But nonetheless, like people were doing this, and I think a lot of people were were that didn't were tempted to do so.
• 21:09
  SPEAKER_02: Not to say that you know people were bailing out and never got back in, but it's it's hard.
• 21:13
  SPEAKER_02: Like, when do you get back in?
• 21:14
  SPEAKER_02: So you know the market goes back up and then you're waiting for it to go back down to get a good entry point, right?
• 21:19
  SPEAKER_02: It's investing, I think, um, underappreciated that it's hard when things are good too, because when things are good, you're waiting for the negative part to come, right?
• 21:27
  SPEAKER_02: And when things are bad, you're you never expect it to get good again.
• 21:31
  SPEAKER_04: Yeah, and things can get scary pretty fast.
• 21:33
  SPEAKER_04: Even 08, you know, those who stayed the course really benefit because there was a lot of growth that took place starting in 2009, 10 and and ramping up.
• 21:42
  SPEAKER_04: But it certainly does get scary, and there's nothing wrong with minor adjustments, but you know, taking drastic measures is uh and that's why we revert back to the plan when those times do happen.
• 21:53
  SPEAKER_04: Because staying the course you know is really going to be a benefit to them for their financial picture, for their future income.
• 22:00
  SPEAKER_04: Okay, great.
• 22:01
  SPEAKER_04: Thank you.
• 22:02
  SPEAKER_04: And number five, the fifth module is asset location.
• 22:06
  SPEAKER_04: I think this is a great one, because a a lot of investors might not realize that, hey, there there's really a tax-efficient way to position my investments.
• 22:13
  SPEAKER_04: Maybe I should, you know, be on the equity side for the taxable account.
• 22:19
  SPEAKER_04: You utilize a little more fixed income in the tax-advantaged accounts.
• 22:22
  SPEAKER_04: And this can be circled around their their current tax situation, but I think that can really add some value as well, avoiding taxable ordinary income in taxable accounts where their you know their income is might be substantial to begin with.
• 22:38
  SPEAKER_04: Thoughts on that, Mike?
• 22:39
  SPEAKER_02: Yeah, I think you you laid out one of a series of many, many questions that need to be answered when you're implementing a portfolio.
• 22:46
  SPEAKER_02: We talked about stocks, bonds, cash, rebalancing, you're using index or active, high cost, low cost.
• 22:53
  SPEAKER_02: But then it's okay, unless you have all of one type of asset, right, unless you only have an IRA, or let's say you have no retirement accounts and you only have a taxable registration, which is you know, very, very, very few clients only have one type of account.
• 23:07
  SPEAKER_02: Then it's like, okay, well, if I'm doing 60% stocks and 40% bonds, like where the heck do I put these things?
• 23:12
  SPEAKER_02: Which account do I buy what in?
• 23:14
  SPEAKER_02: And there and there's just a tremendous, tremendous amount of complexity in those decisions that again, we could spend a whole hour talking about, well, if you know, I need fixed income, should I use municipal bonds here, not pay taxes, right?
• 23:26
  SPEAKER_02: Or should I use taxable bonds here?
• 23:28
  SPEAKER_02: And you know, if I'm retire, if I'm you know, retiree versus somebody who wants to leave a lot of assets, you know, into my estate, or you know, if I have high social security income relative to my spending needs, does that change it?
• 23:40
  SPEAKER_02: So tremendous amount of complexity, but a tremendous amount of value.
• 23:43
  SPEAKER_02: I think most clients don't really even think about it until it comes time to make that decision.
• 23:48
  SPEAKER_02: You're like, oh, it's I'll I'll buy this, I'll buy some stocks, I'll buy an index fund.
• 23:51
  SPEAKER_02: How hard could it be?
• 23:52
  SPEAKER_02: And you're like, ooh, you know, where?
• 23:54
  SPEAKER_03: Right.
• 23:55
  SPEAKER_02: Where am I gonna where am I gonna buy that?
• 23:57
  SPEAKER_02: So again, and and things these things change over time, too.
• 24:00
  SPEAKER_02: Like you as an advisor, like you, I'm sure, you know, as I've gotten to know you, like you're on top of this.
• 24:06
  SPEAKER_02: As things change with legislative issues and new bills are passing, and you know, new types of accounts coming out for you know for children and planning and stuff, it's like you gotta be on top of that, know where to put all these assets and how all the pieces fit together.
• 24:18
  SPEAKER_04: Things change drastically from year to year.
• 24:21
  SPEAKER_04: And you know, asset location, I think, is one way to maximize net returns for clients.
• 24:27
  SPEAKER_04: So all of the things that you just talked about is very important in someone's situation.
• 24:32
  SPEAKER_04: And that's part of what an advisor does and what what what an advisor should do.
• 24:37
  SPEAKER_04: So uh having those conversations every year to forecast what income is gonna be, where some capital gains might come from, where some ordinary income might come from, uh what bracket are they ending up in, what room do they have left in that bracket to maybe maximize some additional income via a Roth conversion, which is one of the things we're gonna talk about next.
• 25:03
  SPEAKER_04: That kind of leads us into the sixth module, which is tax-efficient retirement strategy.
• 25:08
  SPEAKER_04: This is really the drawdown phase.
• 25:11
  SPEAKER_04: And then one of my more enjoyable ones as well, you know, helping someone determine when they should take Social Security.
• 25:18
  SPEAKER_04: Are they gonna have some years where their taxable income is gonna be lower, maybe right before their RMD starts?
• 25:25
  SPEAKER_04: Is there an option to do some Roth conversions and maybe set that aside for legacy planning?
• 25:31
  SPEAKER_04: I think all of that comes into play and really, you know, comes into the wealth transfer conversation as well in estate planning.
• 25:39
  SPEAKER_04: But I'm sure you guys have had some research on that.
• 25:41
  SPEAKER_04: What what's the the opinion there?
• 25:43
  SPEAKER_02: Yeah, that's right.
• 25:43
  SPEAKER_02: And again, and again, you're you're raising like three or four points and questions that you just brought up of 100 that need to be addressed.
• 25:50
  SPEAKER_02: It's just hyper, hyper complex.
• 25:52
  SPEAKER_02: I'll also add there I think are two levels to this that are psychological in nature.
• 25:57
  SPEAKER_02: And you you mentioned it's one of the most enjoyable parts of your job, but I also think that it's really difficult for individuals who spend their whole life saving and investing.
• 26:07
  SPEAKER_02: There's some level of attachment to it, right?
• 26:09
  SPEAKER_02: You start to get attached to the portfolio and you like to see it grow.
• 26:12
  SPEAKER_02: And then, you know, maybe not every retiree is just kind of suddenly just gonna stop and and switch over to retirement, but some are.
• 26:19
  SPEAKER_02: And it's like almost giving them permission to say, hey, you can start spending this down, you can enjoy the fruits of your labor now, right?
• 26:25
  SPEAKER_02: Like I got you.
• 26:26
  SPEAKER_03: Yeah.
• 26:26
  SPEAKER_02: Uh you're on track, you're not gonna run out of money.
• 26:29
  SPEAKER_02: It's like you can take the vacation, right?
• 26:30
  SPEAKER_02: You can buy the car, you can maybe you get to fly first class, right?
• 26:33
  SPEAKER_02: When you take the vacation.
• 26:35
  SPEAKER_04: That you bring up you raise a good point.
• 26:37
  SPEAKER_04: That is a real challenge for for some folks.
• 26:40
  SPEAKER_04: Um, just letting them know, hey, you can spend this money instead of uh maybe I should keep delaying and delaying.
• 26:48
  SPEAKER_04: Uh but no, that's uh you know, one of the things that I enjoy telling someone, but it it doesn't always go through.
• 26:56
  SPEAKER_04: So but real important conversations.
• 26:59
  SPEAKER_02: Yeah, and then the other element of that too, I think the psychological issues, you know, I'm saving, right?
• 27:05
  SPEAKER_02: I'm investing in my retirement accounts.
• 27:07
  SPEAKER_02: Here I am, it's retirement.
• 27:09
  SPEAKER_02: Where am I going to spend from?
• 27:10
  SPEAKER_02: It's like, of course I'm gonna spend from my retirement accounts.
• 27:12
  SPEAKER_02: And when we actually look at the numbers, though, it's like retirement accounts are are you know very beneficial because they're tax advantaged, right?
• 27:19
  SPEAKER_02: Whether it's you know you're using pre-tax money that's growing, you know, bigger than it would be if you know you paid the taxes ahead of time, or in the case of Roth accounts, you're using after-tax money and then you don't pay taxes on it when you take it out.
• 27:30
  SPEAKER_02: And so our research has shown that actually spending from the non-retirement accounts first might derive you a great uh a great deal of value that's that's you know pretty discrete and quantifiable.
• 27:41
  SPEAKER_02: And again, it's another one of those areas where for retirees, just the value of figuring out the sequencing of where you spend from and how that ties into social security.
• 27:50
  SPEAKER_02: You mentioned Roth conversions.
• 27:51
  SPEAKER_02: Again, it's just a hyper complex decision to make saying, hey, like you said, maybe you have a year, maybe it's you know you have a period of time where you've stopped working, but you haven't started claiming social security yet, and so you have lower years of income.
• 28:03
  SPEAKER_02: You know, you're gonna take some of those assets and conduct a Roth conversion, right?
• 28:06
  SPEAKER_02: Which means accelerate the taxes on it so you don't have to pay them later.
• 28:09
  SPEAKER_02: Figuring out the sequencing of all those things, uh, I think for a lot of retirees probably justifies the advice fee alone.
• 28:15
  SPEAKER_02: That's kind of a uh theme of all of this, and I'm not trying to say, hey, this is the exact amount of value that an advisor can add, but there are like five or six different areas where just that one thing alone probably justifies the fees that advisors pay to their clients, or I'm sorry, that clients pay to their advisors.
• 28:32
  SPEAKER_02: And then you start to put them together, and and again, like also none of these things are actually in isolation, although we're kind of going through them sequentially.
• 28:40
  SPEAKER_02: It's like all of them tie to each other.
• 28:42
  SPEAKER_04: All of them tie, yes.
• 28:43
  unknown: Yeah.
• 28:43
  SPEAKER_02: Spending down in retirement ties to behavioral coaching.
• 28:47
  SPEAKER_02: Asset location ties to spending down in retirement, because hey, you might have uh you know all bonds in one of the accounts, and maybe that's the place that would be most tax efficient to spend from, but also like you have a really long time horizon, so you you know want to keep some equities in the in the account too.
• 29:02
  SPEAKER_04: This area alone could be about a two-hour podcast because there's a lot of balance, you know, especially when someone has you know after tax savings, they have Roth savings, they have pre-tax savings.
• 29:15
  SPEAKER_04: Okay, what do I draw down first?
• 29:16
  SPEAKER_04: How do I how do I best draw this down?
• 29:18
  SPEAKER_04: Um, how do I take into consideration my beneficiaries?
• 29:22
  SPEAKER_04: You know, what else do I need to take into consideration as far as uh Social Security?
• 29:26
  SPEAKER_04: Right, RMDs, yeah, RMDs, Social Security taxation, Medicare brackets.
• 29:30
  SPEAKER_04: So um so much there that goes into this conversation and recommendations that uh yeah, this could really be a a two-hour podcast alone.
• 29:40
  SPEAKER_04: Um but what I think a lot of people you know the the the next one really is one that uh uh when I first looked at it, I was like, you know what?
• 29:48
  SPEAKER_04: I think a a lot of investors may grapple with this.
• 29:51
  SPEAKER_04: And this is really about total return investing versus income investing, because I'm sure there's a lot of people out there and this might have worked well years ago in the past where dividends from from bonds and dividends from stocks were were more higher yielding in a at a point in time, and maybe those dividends could cover retirement income.
• 30:10
  SPEAKER_04: But today not so not so much the case.
• 30:12
  SPEAKER_04: Um what are your thoughts on total return investing versus investing for dividends?
• 30:17
  SPEAKER_02: Yeah, I think you you explained it nicely, and I'll just add similar to the last uh conversation there, the emotional element of what like you said, I think the traditional thought was hey, I'm gonna build my let's just say million-dollar portfolio and I'm gonna get four percent a year in my bonds and dividends, and that's what I'll spend, and you know, I I'll maintain my million-dollar portfolio, hopefully.
• 30:37
  SPEAKER_02: Right?
• 30:37
  SPEAKER_02: Well, and so that would be that would be what's called income investing.
• 30:40
  SPEAKER_02: And so what's happened is that dividend yields have come down, you know, fixed income yields while higher today than they've been over the last 10 or 15 years are still like pretty historically low.
• 30:52
  SPEAKER_02: And so for the vast majority of clients, unless you're actually tilting the portfolio towards more income generating assets, right?
• 30:59
  SPEAKER_02: Like, which would mean moving away from a broad index and and concentrating your assets in dividend payers, for example, or taking on more risk in the fixed income portfolio by you know investing in longer-term bonds or or lower credit quality, right?
• 31:14
  SPEAKER_02: Higher yielding type bonds.
• 31:16
  SPEAKER_02: And I think that's what most investors, certainly most retirees, are doing left to their own devices.
• 31:22
  SPEAKER_02: And it's not to say that that's the right or wrong strategy per se.
• 31:26
  SPEAKER_02: It's just that there are really relevant risks that are often underappreciated by doing that.
• 31:32
  SPEAKER_02: Like tilting towards dividend stocks, you're probably going to be really concentrated in a small number of companies that might not represent the index.
• 31:39
  SPEAKER_02: It might, you know, dramatically under overperform, which is exactly what we've seen in the last few years.
• 31:43
  SPEAKER_02: We've seen big-time underperformance from high dividend payers, right?
• 31:47
  SPEAKER_02: Or, you know, I and I this is the the area that I think is um, I'll say the word dangerous, right?
• 31:53
  SPEAKER_02: It's not inherently dangerous, but I think it's dangerous if you're doing it without realizing the risks, is doing that on the fixed income side.
• 31:59
  SPEAKER_02: So, hey, instead of my broad fixed income portfolio that's supposed to be a ballast to me when equity markets turn around, right?
• 32:07
  SPEAKER_02: It's supposed to be the safe part of the asset.
• 32:09
  SPEAKER_02: If you're taking on more risk there, you know, in a in a crisis, for example, like high-yield bonds are going to perform more like stocks than they are going to perform like high-quality government bonds.
• 32:18
  SPEAKER_02: And so while doing that to get that extra income, you might lose some of the actual role of the bond in the first place, which was to protect you against the equity downside.
• 32:26
  SPEAKER_02: And so, again, another area where having someone like yourself is piecing the puzzle pieces together of here's how the stocks and bonds fit together, here's how the yield fits together, and then back to what we just talked about, the withdrawal strategy.
• 32:39
  SPEAKER_02: It's like, hey, you don't need you don't need 4% from the portfolio because we're going to have a tax-efficient portfolio and we're going to execute planning strategies that are going to allow us to be really tax efficient when we sell down some of those assets, and you'll have a safer portfolio, a higher returning portfolio, you'll pay less taxes and have more income all at the same time.
• 32:58
  SPEAKER_04: Aaron Powell You mentioned some great considerations, especially that relate to today's market with credit spreads being so tight.
• 33:05
  SPEAKER_04: For someone who wants to load up on higher yielding bonds, you know, if the market does turn, you know, those those credit spreads could certainly widen, you know, hurt that fixed income return.
• 33:17
  SPEAKER_04: So very, very important to understand those differences, very key.
• 33:22
  SPEAKER_04: And rounding out the last but not least module, tax lost harvesting, this is a great one because um, in my opinion, you know, helping someone avoid taxes on capital gains makes their tax time a little bit easier.
• 33:40
  SPEAKER_04: So it's something we keep an eye on, and uh, you know, it definitely helps uh the tax bite at tax time.
• 33:47
  SPEAKER_04: So but thoughts there, Mike?
• 33:49
  SPEAKER_02: This is one of those things that uh I think technology has really enabled us to get a lot better at.
• 33:53
  SPEAKER_02: I look back 15, 20 years ago, taxless harvesting.
• 33:56
  SPEAKER_02: My goodness, you had to you know track down years of statements, right?
• 33:59
  SPEAKER_02: You're you know, I can see you hear you laughing.
• 34:01
  SPEAKER_02: It's like you have to track down like years of statements to figure out what in the world did I pay for this.
• 34:06
  SPEAKER_02: My goodness, like is it even at a loss, right?
• 34:08
  SPEAKER_02: Like if it is at a loss, I'll sell it.
• 34:09
  SPEAKER_02: And then it's like, what do I buy instead?
• 34:11
  SPEAKER_02: Well, you know, now most advisors are going to have some sort of automated, you know, software type solution, something that we do at Vanguard as well.
• 34:19
  SPEAKER_02: Or just looking at it like on a day-by-day basis and say, hey, like, can we realize a loss here?
• 34:25
  SPEAKER_02: You know, maybe lower the tax burden for our clients.
• 34:28
  SPEAKER_02: But there are also the episodic downturns, right?
• 34:30
  SPEAKER_02: Similar to rebalancing.
• 34:31
  SPEAKER_02: It's like maybe you have a sharp uh downturn at some point, and maybe there's a position in there that, you know, things have evolved, the market's evolved, maybe have a better fund that you want to put there, and and you know, the market turns around, maybe it dips into the negative, and you can kind of like replace it with something else.
• 34:47
  SPEAKER_02: So just a lot of value to be added there, both in terms of the tax itself as well as just your ability to kind of like be a little more flexible with the portfolio.
• 34:56
  SPEAKER_02: Again, like I think we all have to acknowledge the portfolio you built 20 years ago is not what you would build today, and probably the one that you build today is not the one that you would build in 20 years.
• 35:05
  SPEAKER_02: And there's a lot of you know, with capital gains and inertia and things like that, it can be really hard to figure out a way to go back and and reconcile those two things.
• 35:13
  SPEAKER_02: So um, but again, access hard, I mean it's it's it's the numbers are what they are, it's worth a quite bit.
• 35:19
  SPEAKER_04: Yeah.
• 35:20
  SPEAKER_04: Mike, you've been really generous with your time.
• 35:22
  SPEAKER_04: I I have just a couple questions left.
• 35:25
  SPEAKER_04: Um one for my own personal, you know, what's the best way to communicate this value to clients?
• 35:30
  SPEAKER_04: And then two, is there anything you would change, add, or rewrite when it comes to the advisors alpha research?
• 35:38
  SPEAKER_02: Good questions.
• 35:38
  SPEAKER_02: So for the first one, how do you talk about that?
• 35:40
  SPEAKER_02: I you show them, show your clients, right?
• 35:42
  SPEAKER_02: Or you sit down with them.
• 35:44
  SPEAKER_02: I think traditionally, you know, the the communication between a client and advisor had really lived in the investment space.
• 35:51
  SPEAKER_02: It was like, hey, I have a thousand pages of account statements and reports, so let's let's spend all our time talking on that, because that's what we have.
• 35:58
  SPEAKER_02: I think you you have to lead with these other things.
• 36:00
  SPEAKER_02: You you start with like, hey, I know what's important to you, I know who is important to you, right?
• 36:04
  SPEAKER_02: I know what makes you tick and I know what keeps you up at night, and that's kind of how you communicate with your clients, and then show them how, right, that you're you're going about doing that.
• 36:12
  SPEAKER_02: It's like, here's how I'm going to help you achieve this goal, which is you know, let's just say retire so that I can spend more time with my family.
• 36:19
  SPEAKER_02: It's like, well, here's the portfolio we've built you, it's a means to an end.
• 36:22
  SPEAKER_02: Here's the financial plan, it's a means to an end.
• 36:24
  SPEAKER_02: The end itself is that time that you're gonna you're gonna have back with your family.
• 36:28
  SPEAKER_02: So I think that's how you do it.
• 36:29
  SPEAKER_02: And you know, if you're doing a taxos harvesting strategy, or if you're if you think it's a year in which, you know, maybe you did some work in the portfolio that led to better asset location, well, talk about it.
• 36:38
  SPEAKER_02: Show them.
• 36:39
  SPEAKER_04: That's great.
• 36:40
  SPEAKER_04: That is great.
• 36:41
  SPEAKER_04: I'm so glad we had this conversation.
• 36:42
  SPEAKER_04: Uh, first of all, for me, reviewing the eight modules has been a great refresher.
• 36:48
  SPEAKER_04: Uh, and I realize how forward-thinking it was at the time.
• 36:51
  SPEAKER_04: So uh just a great job.
• 36:54
  SPEAKER_04: And for our listeners, please feel free to reach out.
• 36:57
  SPEAKER_04: We want to hear from you, whether you're a retiree, pre-retiree, executive, or someone just entering the workforce.
• 37:04
  SPEAKER_04: Uh, these areas of value uh can bring a meaningful difference to your long-term investment success.
• 37:10
  SPEAKER_04: So we would love to hear from you.
• 37:11
  SPEAKER_04: Michael, before we wrap up, uh, you know, is there any other research that you're working on these days?
• 37:16
  SPEAKER_02: Always.
• 37:17
  SPEAKER_02: Um we're spending we're spending a lot of time right now just thinking through how AI is going to affect our industry and and working with individuals like yourself with a with a laser focus on how can we use this to help you drive better outcomes for your clients.
• 37:33
  SPEAKER_02: Um it's a really fascinating space.
• 37:35
  SPEAKER_02: So enjoying that, but stay tuned for more.
• 37:37
  SPEAKER_04: Awesome.
• 37:38
  SPEAKER_04: Looking forward to it.
• 37:39
  SPEAKER_04: Well, Mike, thank you again for joining me today.
• 37:41
  SPEAKER_04: And thanks everyone for tuning in to Financial Futures, a Measured Wealth podcast.
• 37:45
  SPEAKER_04: If you enjoyed today's episode, be sure to follow or subscribe on your favorite podcast app so you never miss an update.
• 37:51
  SPEAKER_04: Want to learn more or get in touch, head over to measuredwealth.net where you'll find prior episodes, helpful financial planning guides, and more.
• 37:58
  SPEAKER_04: You can also call us at 603-431-1444, or email at info at measuredwealth.net.
• 38:06
  SPEAKER_04: That is info at measuredwealth.net.
• 38:09
  SPEAKER_04: Thanks again for listening, and remember the future will someday be the present.