Fiduciary Financial Advisors

Transcription – WCI – 282

Intro:
This is the White Coat Investor podcast, where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.

Dr. Jim Dahle:
This is White Coat Investor podcast number 282 – Fiduciary financial advisors.

Dr. Jim Dahle:
This podcast is sponsored by Bob Bhayani at drdisabilityquotes.com. He is an independent provider of disability insurance planning solutions to the medical community in every state and a long-time White Coat Investor sponsor.

Dr. Jim Dahle:
He specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. If you need to review your disability insurance coverage, or if you just need to get this critical insurance in place, contact Bob at drdisabilityquotes.com today by email [email protected] or by calling (973) 771-9100.

Dr. Jim Dahle:
Our quote of the day comes from my friend Bill Bernstein, who said, “If the long-term returns of the asset classes in your portfolio are different enough, the rebalancing bonus can be negative. This nicely makes the point that the real purpose of rebalancing is to reduce risk and that in the very long run, this will obviously reduce return.” Important point there for those of you considering rebalancing your portfolios.

Dr. Jim Dahle:
Thanks for what you do out there. You might be on your way to work, your way home from work, working out, doing chores around the house. I don't know what it is that you do while listening to the podcast, hopefully not operating, but everything else goes.

Dr. Jim Dahle:
But the reason you are a high-income professional, and I assume you are, if you're listening to this podcast is because you do something difficult, something that required a lot of training, something with a lot of risk, something that matters. Sometimes that's a thankless job.

Dr. Jim Dahle:
I had a guy come in on my shift yesterday morning, I guess it was, comes in in custody from the cops, they found him under the bridge with a bunch of stolen stuff and drag him in because he had claimed that he'd swallowed something in a bag and they're worried that it could get out of the bag and cause him problems.

Dr. Jim Dahle:
And he was in general not a very pleasant person to take care of, basically screaming in custody and trying to hurt everybody and in a spit bag and handcuffs and all that sort of stuff. And after discharging him, low and behold, came back into the ER 10 minutes later, having smashed his head into the front of the cop car and cut himself open, and didn't want me to touch him for anything.

Dr. Jim Dahle:
And honestly, he was capable of making his own medical decisions, but I had to do something because there was blood spattering everywhere, all over the cops, all over the other patients or the other prisoners at the jail, whatever.

Dr. Jim Dahle:
So I had to do something and I told him, “Well, we're going to hold you down and put a bandage on.” Boy, you'd think I would've been the worst person in the world for putting a Band-Aid on his cut. But sometimes people don't thank you for what you do and for what you put up with in your job. And I'm sure there's things that are just as unpleasant to do in your job as that was for us in our job that day. So thanks, if nobody else has told you that lately.

Dr. Jim Dahle:
All right. In case you're not aware, we're going to be talking a little bit about financial advisors in this episode. In case you're not aware, we have a list of financial advisors that we keep at the whitecoatinvestor.com. You go to whitecoatinvestor.com/financial-advisors. Or you can go to our recommended tab and you scroll down a couple of links and there it is. And these are people that have been with us. Most of them have been with us for years. And we get feedback on them from White Coat Investors that have used them. And if we get negative feedback, we take them off the list.

Dr. Jim Dahle:
Before we put them on the list, they actually have to fill out an application and you can read their application, what we ask them to be on that list. We do not let anybody on that list. Yes, they're all paid advertisers. That's how we make money. We got to make payroll like any other business. But we don't let anybody that just comes along and says “We'll give you some money” on that list. Those are all fiduciary fee-only advisors.

Dr. Jim Dahle:
There's lots of people out there that are like me, the do-it-yourself investors, we're hobbyists. We think this is interesting. We love doing it. We can't imagine paying a few thousand dollars a year to somebody else to do it for us. But if that is not you, that's okay because I think you're in the majority of doctors out there.

Dr. Jim Dahle:
And I think about 80% of doctors probably want and need a good financial advisor. And the best service I can do for them is to get them in contact with somebody like the folks on that list.

Dr. Jim Dahle:
I've been accused of being anti-financial advisor. I'm clearly not. I'm anti-bad financial advisor. I'm anti-overpriced financial advisor. I'm certainly anti-bad financial advice and bad financial service, but I'm not anti-financial advisor.

Dr. Jim Dahle:
So, today we're going to be talking a little bit about fiduciaries and financial advisors and what some of that stuff means. The best way to think of the word fiduciary is to think of it as a person that puts your needs ahead of their needs. That's what a fiduciary is. They have basically sworn a Hippocratic Oath if you will, that they will think about the patient before they think about their pocketbook. That's what a fiduciary is supposed to be. That's what the idea is supposed to be.

Dr. Jim Dahle:
And there are some financial professionals out there that have a legal fiduciary duty to you. If they are a registered investment advisor, they technically have a legal financial fiduciary relationship with you. Your lawyer has this relationship with you. Your accountant has this relationship with you. They're supposed to do what is right for you.

Dr. Jim Dahle:
Anybody who's gotten a CFP supposedly has a fiduciary duty to you. Now, that's not actually the case in practice all the time. But you can make a complaint to the CFP board if somebody doesn't treat you that way. But from a legal perspective, you could take somebody to court if they put their needs ahead of your needs.

Dr. Jim Dahle:
Now, there are a lot of people out there who call themselves financial advisors who don't actually have a fiduciary duty to you. They operate under a lower standard, often called the suitability standard, meaning they only have to decide that something is suitable for you, not the best thing for you. Now, what the difference is between those two, I have no idea, but it's clearly a lower standard and you would not be able to take that person to court because they didn't give you the very best product.

Dr. Jim Dahle:
The classic thing here is a mutual fund salesman. Some representative for a mutual fund company or a stock broker that swaps you in and out of stock, swaps you in and out of these high-priced, commissioned, or loaded mutual funds, or perhaps an insurance agent. That's right. Insurance agents don't have a fiduciary duty to you. They're not financial advisors. They get paid a commission when you buy an insurance policy. They are technically commissioned salesmen.

Dr. Jim Dahle:
Now, the best ones, like the ones we have on our insurance agent list at the White Coat Investor, none of them are broke and struggling to put food on the table. They're going to do what's right for you. But they do want to sell you a disability or life insurance policy. We don't keep them on that list, if they sell you the crappy ones that we don't think you ought to have, like whole life insurance policies and that sort of a thing. But they do not have a fiduciary duty to you. Just like I am a blogger, I am a podcaster, I am an author. I have no fiduciary duty to you either.

Dr. Jim Dahle:
There are people that do what's right. Whether they have a fiduciary duty or not. There are people who don't do what's right even when they have a fiduciary duty, but it's still something I would expect to see in someone I was willing to pay thousands of dollars to be my financial advisor. I would expect them to have a fiduciary duty to me. And I would certainly ask that and get it in writing that they're going to act as your fiduciary when you engage them for services. So I hope that's helpful.

Dr. Jim Dahle:
If you need to learn more about financial advisors, what I think about them, etc, you ought to go to a page on the website called “What You Need to Know About Financial Advisors”. And it's probably got, looks like 20 different posts about financial advisors that have done over the years. Things to ask when you hire them, ways some of these people think about you. Just being an informed consumer when you go to hire a financial advisor.

Dr. Jim Dahle:
I hope that's helpful to you. Let's take our first Speak Pipe question. This one is about as you might imagine, the fiduciary standard.

Casey:
Hi Jim, this is Casey, the Air Force periodontist. Although I don't use a financial advisor, my wife would probably need the services of one if I ever pass away earlier than desired. And I'd very much want her to hire one who is sworn to a fiduciary standard.

Casey:
So on that note, I'm curious to know how the fiduciary standard is enforced. Is there a government agency or a private organization like the American Bar Association for lawyers that adjudicates complaints? If a client files a complaint, how is it investigated, and who actually investigates?

Casey:
I have to wonder if any client has actually ever successfully claimed that a financial advisor who swore to the fiduciary standard actually did not act in the client's best interest. Does the client win back money in a lawsuit? It seems very grey. And although I've heard dozens of times about the importance of hiring an advisor who's a fiduciary, I've never heard anything about how this fiduciary responsibility is truly enforced. I’m just curious. Thanks, Jim.

Dr. Jim Dahle:
All right. Let's talk about fiduciaries and what you do when somebody is not a fiduciary. And guess what? There's a whole lot of parallels to malpractice when it comes to fiduciary duty. What do you do? You hire an attorney and you sue them. Yes, you can complain. You can complain to FINRA and the SEC and you can complain to the CFP board and you can blast them on Google reviews. You can send an email to the White Coat Investor that somebody on their list didn't do what was right to you. You can do those sorts of things.

Dr. Jim Dahle:
But for the most part, this is a legal thing. This is governed by tort law, just like malpractice is. And of course, it's state-specific. But in order to collect against somebody who had a fiduciary duty against you, you basically have to meet four elements. And if you know anything about asset protection, these are going to sound very familiar.

Dr. Jim Dahle:
The first one is that the defendant was acting as a fiduciary to the plaintiff with respect to the subject matter involved. Were they really a fiduciary? If you got financial advice from an insurance agent or something, they're not a fiduciary, so you're not going to meet that criteria. But if they're a registered investment advisor, they held themselves out as a fiduciary and they were giving you financial advice and performing financial services for you, yeah, they had a fiduciary duty and they're going to meet that requirement.

Dr. Jim Dahle:
The second one is that the defendant breached the fiduciary duty owed to the plaintiff. In malpractice, this is that they didn't meet the standard of care. But when it comes to fiduciary duty, it's that they breached the fiduciary duty. They sold you something that enriched them and didn't help you, or they just gave you bad advice.

Dr. Jim Dahle:
The third requirement is that you suffered an injury. And typically this means some sort of financial loss. If they give you bad advice and it didn't hurt you, you can't sue them for giving bad advice. You have to actually be hurt by it.

Dr. Jim Dahle:
And then the fourth element is that the breach of their fiduciary duty actually cause your injuries. There has to be causation. And if you have those four points, you have a case against that fiduciary and you can sue them for your losses. I don't know that you can get pain and suffering. I don't know that you can get attorney's fees, but you should be able to sue them for your losses.

Dr. Jim Dahle:
And guess what? Just like doctors carry malpractice insurance, real financial advisors carry insurance against claims like this. And so, you're not necessarily getting the financial advisor's money. You're getting the insurance company's money when you successfully prosecute this sort of a lawsuit.

Dr. Jim Dahle:
Now, does it have to go that far? No, it often doesn't. You complain. You're like, “You hurt me. You gave bad advice and I lost $80,000.” Maybe they'll make up that $80,000 to you. But if it's some tiny little business, they might not have $80,000 without going to the insurance company. So you may end up having to, at least, present a claim to the insurance company if you don't go the full lawsuit sort of route.

Dr. Jim Dahle:
But yeah, you can do complaints. You can do complaints to FINRA and the SEC, and those show up when people search their ADV kind of documentation, ADV2 documents there on those sites.

Dr. Jim Dahle:
But let's be honest, most people hiring a financial advisor aren't smart enough to go and do that. So just a complaint may not go that far. You may actually have to take them to court. So if it's some tiny loss, it's not going to be worth your while to do that. If they lost hundreds of thousands of dollars, it probably is worth going out and getting an attorney and suing them for it.

Dr. Jim Dahle:
That's basically the way the fiduciary duty works, and of course, state tort laws govern all of that. I hope that's helpful, Casey.

Dr. Jim Dahle:
All right. Let's take our next question from Jake about the TSP.

Jake:
Hello, Dr. Dahle, and thank you for everything that you have for me and the rest of the White Coat Investor community. Five years ago, I was deeply in debt going through a divorce, and saw no way out of my financial situation. Through your coaching, I am out of debt, financially comfortable, and wiser than I deserve. Sincerely, I wish you a heartfelt thank you. You have changed my life.

Jake:
Regarding my question, I am in the military and I'm due to deploy to a combat zone in the late part of 2022 and into 2023. I am allowed to contribute to the Army's 401(k) known as the Thrift Savings Plan or TSP more than the annual effective deferral limit of $20,500 for 2022 or $21,500 for 2023 for the entirety each year. I hear that there's an option to also contribute the maximum annual additional limit of $58,000 for 2022 and $61,000 for 2023.

Jake:
Can I contribute the whole sum, or can I only contribute it for written amount for the time I'm deployed? If I can contribute to the annual additional limit, would it make sense to sell taxable assets in my Vanguard account so that I can maximize my TSP contributions?

Jake:
Since I will effectively have no tax burden while deployed as most, if not all of my W2 income will be tax-free, it seems like any tax gains would be minimal as my taxable income will be quite low. Moreover, I would be effectively tax loss harvesting any losses since I would be taking them out of VTSAX and turning them into TSP funds, which is basically the same thing, right?

Jake:
It seems like converting taxable losses to tax protected assets has no down sides, but I wanted to make sure I wasn't doing something foolish. As I mentioned, I may be wiser than I deserve, but I'm certainly not wise yet. Thank you again.

Dr. Jim Dahle:
Subject near and dear to my heart. First of all, Jake, thanks for your service. It's been my pleasure to serve you and you have an opportunity to serve us during your deployment. So, I give you condolences on being deployed. It's not the most fun thing in the world, but I do appreciate you doing it. So thank you for doing that.

Dr. Jim Dahle:
I deployed for about four and a half months at the end of 2007 and the very beginning of 2008. And I had this exact same question. I wanted to take advantage of all the possible benefits I could get while I'm deployed. And there's a lot of benefits. Some of your income is now tax-free when you're in a combat zone.

Dr. Jim Dahle:
And there's another program called the savings deposit program. I don't think it's gone away. Let's make sure it's still there. It's still there, you can put up to $10,000, same limit as it used to be. You can put $10,000 into this savings deposit program, this SDP, and they basically pay 10% on it. And I think it's 10% the whole time you're deployed and for like three months after you come home. So, it's guaranteed 10%. This is a great return. You can only put $10,000 in there, but you ought to put $10,000 in there and make a few hundred dollars while you're deployed. So that's something you should take advantage of.

Dr. Jim Dahle:
As far as the TSP goes, there's some cool things you can do while you're deployed. First of all, you're probably not spending as much, at least if you're single while you're deployed, because there's nothing to spend money on. So you're able to save more while you're deployed. You get paid more while you're deployed. You may get hazard pay, et cetera. Your pay is more tax-free than it otherwise would be. And so, those are all great benefits of being deployed that have nothing to do with what your question really is and make sure you take advantage of all of that.

Dr. Jim Dahle:
As a general rule, the only difference with the TSP when you're deployed is that you're able to contribute more, and this assumes you're under 50, you're able to contribute more than your $20,500. Now, that $20,500 can go into either the tax-deferred part of the TSP, which probably isn't the best place to put it while you're in the military, especially in a year that you're deployed and you're paying less in taxes anyway.

Dr. Jim Dahle:
I think I paid like 5% in taxes the year I deployed. It was really a low percentage of my income. You probably want to put it in the Roth side. So that $20,500 for the year you deployed, you want to get into the Roth side. And you may want to do that before you actually deploy. If you can get all $20,000 in before you deploy, because you don't deploy till May or September or whatever of the year, that's a good thing to do.

Dr. Jim Dahle:
Then once you are deployed, you can put additional money in the TSP. These are after-tax contributions. They're not tax deferred. They're not Roth, they're after-tax contributions. And you can put in up to a total contribution that year of $61,000. So if you put in, this is for 2022, it'll go up for 2023, probably significantly given what inflation has been this year. But basically, that leaves, what? $40,500 you can put in after tax if you've already maxed out your $20,500 contribution. Maybe a little bit less, because you get a match now. Subtract the match too from the $61,000. And the difference there you could put in as after-tax contributions.

Dr. Jim Dahle:
Now, are after-tax contributions awesome? Not really. They're not awesome. And the reason why is when that money comes out, it will be tax-free. You get to take the basis out tax-free, but any earnings on that money are fully taxable, just like the earnings on the tax-deferred portion of the TSP.

Dr. Jim Dahle:
So, just putting that in there and having after-tax investments, yes, it gets some asset protection. Yes, you've got more for retirement. Those are good things, but this is not like the world's best retirement account because of the taxation on it, because it's still taxed fully.

Dr. Jim Dahle:
What most people try to do, that have done this, one or two deployments while they're in and they've made a bunch of after-tax contributions is when they get out, they try to isolate that basis and convert it to a Roth.

Dr. Jim Dahle:
That's what I did. When I got out of the military, I rolled almost all the money out of my TSP into an IRA. And then I rolled all the tax deferred money, there was no Roth TSP when I was in. I rolled all the tax deferred money back into the TSP, leaving behind all that tax-exempt money. And the reason I was able to do that is because the TSP doesn't accept after-tax money into it on a rollover basis. When I rolled money in, it had to be the tax deferred money that went in.

Dr. Jim Dahle:
And then I took all that basis I had, all that tax-exempt money and converted it tax-free to a Roth IRA. Essentially the year I got out, I got an extra $40,000 or whatever it was. I don't think it was quite that much into a Roth IRA.

Dr. Jim Dahle:
So it was a good thing for me. Hopefully, you can do that. It's not awesome if you're in the military for 20 years and you got all this after-tax money in there. It's not necessarily even better than your taxable account. You're probably in the 0% long-term capital gains bracket, the 0% qualified dividend bracket. A taxable account is not a bad thing for somebody at your income level most of the time when you're a military doc, but it is good to get more money into retirement accounts, especially if you expect your income to go up later.

Dr. Jim Dahle:
I hope that's helpful to you. And obviously, anytime you can book a tax loss, that's pretty much a good thing. So if you've got to live off your taxable investments while deferring more money into the TSP, that's not a bad thing to do, especially if you got a plan down the road to convert that money to Roth money. And then you can use some of those tax losses also against your income up to $3,000 a year. That's not a bad thing. I hope that's helpful to you.

Dr. Jim Dahle:
All right. Our next question is talking about loan repayment and loan forgiveness. Let's take a listen to this question from Joanne.

Joanne:
Hi Jim. It's Joanne, I'm a family medicine doctor from the Pacific Northwest area. I'm more just clarifying for your edification that I live in Oregon and like many state loan repayment programs I'm only getting $100,000 over three years from my state.

Joanne:
In my case, I had about $300,000 in loans. I've paid off $100,000 of them from some combination of the loan repayment and my own work, but I still owe $200,000 and about $150,000 of that is going to have to be of my own money. So more just FYI, this is a common misconception that once you get a loan repayment program, it's always paying all of it. It's not, at least in Oregon's case. Okay. Thanks. Bye.

Dr. Jim Dahle:
All right, Joanne, thanks for calling in with that clarification. Absolutely, you're right. A loan repayment is not the same as having all your loans forgiven. Now, if you owe $80,000 and the state is offering $100,000, that's going to take care of all your loans. If you owe $200,000 grand and the state is only taking care of $100,000, that's not going to cut it.

Dr. Jim Dahle:
Keep in mind too, there's a lot of people that are in PSLF qualifying jobs that are also getting loan repayment. So you get loans repaid, loans repaid, loans repaid, loans repaid and then the rest gets forgiven via public service loan forgiveness.

Dr. Jim Dahle:
This recent forgiveness that the Biden administration has run out, for instance, that is an addition to all of these programs. Even if you were getting your loans repaid by an employer, by a state, or whatever, you would also still qualify for that $10,000, assuming your income was low enough to qualify for it. They're all separate programs. You got to understand how they all interact there together.

Dr. Jim Dahle:
If you're having trouble, by the way, understanding your student loans, coming up with the right student loan plan, spending a few hundred dollars may be well worth the time and cost of doing so.

Dr. Jim Dahle:
Our recommended vendor for that is studentloanadvice.com. This is a White Coat Investor company. And if you go there, you can for a few hundred dollars, have somebody go over in detail your student loan plan, explain all your questions to you.

Dr. Jim Dahle:
I think you get 12 months now of email follow-up questions after that one-hour session, all for the same price, and make sure you're actually in the right income-driven repayment program. Make sure you're actually qualifying for all the forgiveness that you qualify for. Make sure you're filing your taxes in the right way, and using retirement accounts the right way, those sorts of things to maximize your student loan situation. So check that out at studentloanadvice.com if you need help with that.

Dr. Jim Dahle:
All right, let's talk about some muni bond funds. This is a great question. I like this question.

Speaker:
Hi, Dr. Dahle. I have a question about the pros and cons of a state-specific municipal bond fund. I am currently considering purchasing a state-specific muni bond fund for the state that I live in for my taxable account, obviously, for the benefit of not having that part of my portfolio taxed to either the federal or state level.

Speaker:
One obvious downside is the lower amount of diversification compared to a broad muni bond fund, for example, but I'm wondering how much to consider another potential downside related to the uncertainty of my longevity in the state that I currently live in.

Speaker:
If I were to buy a state-specific muni bond fund, but then eventually move to another state, that lower diversification then becomes an uncompensated risk since I'll now have to pay state taxes on those funds, but still have the lower diversification.

Speaker:
Now on top of that, this purchase will again be in my taxable account. So there would be tax consequences to get out of this holding in this situation. I'm wondering what your thoughts on that are and if there are other downsides that I'm not considering. Thanks so much for everything.

Dr. Jim Dahle:
All right. Great question. State specific muni bond funds. Yeah, there's a lot of problems with them. The first problem is you may not be able to find a good one. I'm not using a Utah state-specific muni bond fund. I use the Vanguard general one. I think it's their intermediate-term fund, or I go back and forth occasionally tax loss harvesting with their municipal bond index fund, whatever they call it, their two ETFs there, or two funds there rather. I think I'm using the funds in my taxable account. It doesn't matter too much, so that I swap between.

Dr. Jim Dahle:
But basically, I'm using a general fund. I'm not using a state-specific one because I've never found one for the state of Utah that I thought was as good as the ones the Vanguard runs.

Dr. Jim Dahle:
Now, Vanguard has like four state-specific ones. So if you're in one of those four states, you may want to use the Vanguard state-specific muni bond fund. You may be willing to use one from another company as well in your state, especially if you're in a really high-income tax state. You're in California, you're in New York, something like that.

Dr. Jim Dahle:
But the downsides are, they're difficult to find. They often cost more, especially if you're having to go to somebody besides Vanguard to get the product. You have the lack of diversification, which you noted. Now you've only got bonds in one state. So if there's actually a muni bond default, your chances of having that effect a significant part of your portfolio are much higher.

Dr. Jim Dahle:
So those risks are well known and you may decide that the additional tax savings on not having to pay state income tax on that bond interest either is worth those risks or you may decide it's not. It's up to you.

Dr. Jim Dahle:
If I were you, I might do both. I would have some in the state-specific bond and some in a general fund. But you're concerned that you might move away. I think that's a non-issue. I don't think it really matters. You're worried that, “Oh, no, I've been in this fund for four years and now I got to sell it when I move to another state.”

Dr. Jim Dahle:
Well, what you don't appreciate, probably because you haven't been invested in these vehicles very long, is that they don't go up in value. If you look at the muni bond price for a share of the fund 10 years ago, and you look at it today, it's about the same. And the reason why is the return all comes from the income. It's all coming from the interest on the bonds. That's the return on a bond fund.

Dr. Jim Dahle:
They really don't go up a lot in value. They go down a little bit, they go up a little bit, but for the most part in the long run, you don't expect a ton of appreciation. It's not like a stock fund where you buy it at $10 and 20 years later, it's now worth $40 a share, and you got to pay a whole bunch of capital gains. You probably aren't paying that much in capital gains even if you've held a bond fund for a number of years. They just don't appreciate that much.

Dr. Jim Dahle:
So in that respect, they're very tax efficient. Obviously they have lower returns than a stock fund does. But they're very tax-efficient places to invest. Not only are you unlikely to pay any significant capital gains, but all your interest is protected from federal and possibly even state income tax. I hope that's helpful to you in evaluating your best option for a state-specific muni bond fund.

Dr. Jim Dahle:
It can also be a little harder if you actually have a time like this year. This year I actually tax loss harvested my muni bond fund, because when rates went up, it did go down significantly in value. So I swapped them a couple of times between a couple of funds.

Dr. Jim Dahle:
But if you are in a state-specific fund, that's harder to do because now not only do you have to find one good fund, you got to find two good funds that you're willing to hold for the long run. When you tax loss harvest, you really want to have two good funds because if you switch over to that other one and then it goes up significantly in value, you're not going to want to switch back to the original one. So you need to have two good low-cost, well-managed funds that you're willing to hold for the long run anytime you're doing tax loss harvesting.

Dr. Jim Dahle:
All right. Let's take a question from Elizabeth about some retirement questions.

Elizabeth:
Hello, and thank you both for providing this forum for our evolving education and financial literacy. I'm an early career physician and while working on getting my own finances optimized, I'm also looking over my mother's finances. She will retire in 2023 at age 69 and plans to primarily live off social security and her retirement portfolio, which is about $500,000 currently, most of which is in a brokerage trust account from my late father.

Elizabeth:
This account has a 1.25% advisory or management fee and a 72% allocation in only 50 individual stocks, which was shocking to me to discover. And I want to support my mother in moving away from these fees while also optimizing her investments with the plan of my filling in to support her when financially needed.

Elizabeth:
Could you discuss, one, some options for transitioning away from individual stock holdings in this climate and with this proximity to retirement? I imagine moving to index funds first would help to reduce taking a big hit. And two, if you could outline any strategies for retiring in this market in terms of cash bond and equity allocations. What would be a reasonable strategy for my risk-averse and imminently retiring mom?

Elizabeth:
And three, if possible, if you could comment on any red tape I might need to be aware of for moving a trust brokerage account, knowing that all of us are in agreement, all the trustees. Do we need a lawyer for this? Thank you so much.

Dr. Jim Dahle:
Okay. I'm not entirely sure what's going on. It sounds like this money is in a trust and the trustees are maybe not your mother. She's just the beneficiary of the account. I'm not sure why that was set up for asset protection purposes or because your father didn't trust her to do the money right. I don't know exactly what's going on there. I was surprised to learn it was in a trust rather than just in a brokerage account.

Dr. Jim Dahle:
But at any rate, it doesn't matter all that much when everybody's in agreement about what should be done. A brokerage account that's owned by a trust or a brokerage account that's owned by an individual, it can all be moved to a new brokerage account. If you're at some hideous high fee, high turnover kind of place, and I don't want to name names out there, but if you're at a lousy place, you ought to move the money to a good place.

Dr. Jim Dahle:
So what that often means is rolling money over to Fidelity or Vanguard or something like that. It's not that you can't put together a good portfolio at other places, but often it involves buying iShares or Vanguard or Fidelity kind of funds or ETFs in order to do that.

Dr. Jim Dahle:
As you know, I'm not a big fan of individual stocks. I'm not a big fan of taking somebody that is apparently very risk averse and putting them in a 72% stock portfolio. So I don't think whoever has been doing this is doing her a service. I think they're probably maybe even breaching their fiduciary duty. I don't know if that is worth a lawsuit or anything about it. Maybe just worth moving the money away.

Dr. Jim Dahle:
Certainly a 1.25% AUM fee is on the high side. Now, is that a crazy amount to pay for a $500,000 portfolio? No, that's only $6,000 a year. That's certainly within the range of what I think is reasonable to pay for good financial advice and service. But it doesn't sound to me like that's necessarily what she has been getting.

Dr. Jim Dahle:
Most likely somebody there is picking stocks and probably underperforming the market with those stocks. You can go back and look at the performance over the last few years, compare it to say, a total stock market index fund. And I'll bet you'll find out that it's been underperforming, but that's not necessarily true. Maybe there's a genius there who's been whooping the stock market like crazy with these 50 stocks. I don't know. So you can look at that and decide if you want to move away.

Dr. Jim Dahle:
Given that this is a taxable account or seems to be a taxable account, there may be tax consequences to changing the portfolio. While she may prefer, at least once she becomes educated about it, she may prefer to be in index funds. It may not be worth the tax consequences of switching there.

Dr. Jim Dahle:
Maybe only 10% of this portfolio is basis. And so everything that gets changed, she's going to have to pay significant capital gains taxes on. If that's the case, you may want to build around what's already in there. Certainly, if there's anything with a loss that you don't want to hold long term you can sell. Anything without much of a gain that you don't want to hold long term you can sell. If you're able to book some losses, they can offset some of the gains. If she's in a very low tax bracket, it may be no significant tax consequences. She may be in the 0% capital gains bracket. So there may be some good opportunities there to realign even a taxable portfolio to what she would rather own.

Dr. Jim Dahle:
But the thing to do at first is figure out where you're going, where you want to be. And that means coming up with goals and an asset allocation and then individual investments that you would like to be in. The basic financial planning process. And if there needs to be a financial advisor involved, getting a good financial advisor who gives good advice at a fair price is going to be an important part of this process.

Dr. Jim Dahle:
Now, I can't tell exactly what's going on. If you'd told me this was her personal brokerage account, the first question I would've asked is what does she want to do? Because you can't force this sort of thing on a parent. There are a lot of parents out there who are going to stick with their stock broker that they've had for 30 years, even though he is double charging him for terrible service.

Dr. Jim Dahle:
And you know what? A lot of people don't take advice from people whose diapers they used to change. So, be careful with those personal elements here. But if this really is in your control, making some changes is probably appropriate. Certainly looking more closely at what's been going on there. This $500,000 might not seem like a lot of money to a lot of White Coat Investors, but this is her life savings. And the only other thing she's got are those social security payments. So, it should be carefully managed. Fees should be minimized and you ought to do what you can for her.

Dr. Jim Dahle:
Keep in mind if you're stepping in and acting as her trustee in this trust, that you have a fiduciary duty to her to do what's right for her. So make sure that you're educated enough to make sure you're doing what's right as you make those changes. I hope that's helpful.

Dr. Jim Dahle:
All right. Here's a question that came in on email. “Several months ago, I thought I heard you say on your podcast that you rent your primary residence to your LLC for less than 14 days a year.” Actually, we do it for precisely 14 days a year. “That income does not have to be reported as a taxable income, but can be deducted on the LLC side.” That is true. That is not taxable income to me personally and it is a tax deduction for the business.

Dr. Jim Dahle:
“So say you rent your own home to your LLC for $400 per day for 15 days. Does this mean $6,000 in tax-free income?” Well, no, not exactly. We've been talking about 14 days a year and now you threw out 15 days. At 15 days, it becomes taxable income to you personally. You can only rent it out for up to 14 days and have it be tax-free income to you personally. So if you had said 14 days, that would be true. You'd have $5,600 in tax-free income.

Dr. Jim Dahle:
“Can you elaborate a bit on this?” Sure. “What are the logistics and steps involved to do it correctly?” Okay. Step one, have a real reason to rent your house to your business. Now, we have a real reason here. The White Coat Investor headquarters is our house. There's no other building. White Coat Investor doesn't own any other building. 15 people work here. We have meetings here. We have a conference room. We have this recording studio that I'm sitting in right now. This is in my home. So it's very reasonable for my business to rent this space from me personally, and to pay me rent for it.

Dr. Jim Dahle:
So, why do we do it for 14 days a year and not for 250 days a year? Because it would be money coming out of one pocket and going into the other. The deduction I would get on the business side, I would then have to pay taxes on the personal side. So, it doesn't make sense for me to do it for 200 days a year, but for 14 days a year, it sure as heck does make sense. So that's what we do. 14 of the days a year that the business uses the house it rents it from the house or from us personally.

Dr. Jim Dahle:
So, how do you determine a fair price to rent it for? Well, that's pretty easy. You just go look at the comparables and what are the comparables? Well, I go look for other houses that are like mine on Airbnb or on VRBO. Look at about the average for houses like mine. And mine's a pretty nice house since our renovation. So that's a pretty high price. And then you take that amount. You document it, you print those out to show if the IRS ever audited on this point where you got that price from, and that's what I charge the business.

Dr. Jim Dahle:
And we have a contract between the business and us personally that's signed, that is there, sitting in the tax file in case we ever get audited on this point, that shows that's what we were doing, renting the house from us personally, the business was renting the house from us personally. Those are logistics and steps involved. And then it just goes on the books of the business as an expense. And so, it never shows up as business income.

Dr. Jim Dahle:
So I hope that's clear how that works. Obviously you need to have the contract in place. You need to be able to justify the price. You need to justify the purpose of the rental. In our case, we have that many meetings here a year. And so, it's easy.

Dr. Jim Dahle:
Now, is this a smart business move for our business? Is this smart to rent out this fancy pans house in order to have a meeting? Maybe not. Maybe we go to the library and have a meeting. In one of the conference rooms, it cost us nothing to rent. Maybe we could get a cheaper place downtown to have our meetings.

Dr. Jim Dahle:
But the IRS does not require you to make smart business decisions. It just requires you to make reasonable business decisions. And so, that's what we do and we'll probably keep doing it as long as we own the White Coat Investor. But the key is to have that proper documentation in case of an audit.

Dr. Jim Dahle:
All right, let's take another question off the Speak Pipe. This one's about dollar cost averaging and lump sums.

Speaker 2:
Hi there, Dr. Dahle, thanks for all you do. My failing medicine practice was bought out by private equity and I got a very low seven-figure amount. And I was wondering, I know I'm supposed to invest this according to my investment plan, but there's an age-old question, should you just take it out all-at-once or dollar cost averaging? I wonder, what would you do in such a scenario? Thank you.

Dr. Jim Dahle:
Yes. I think you should invest it according to your investing policy statement, just like you said. That's why you have an investing policy statement. It tells you what to do, whether you got $5,000 to invest from your income this month, whether you got a $50,000 inheritance, whether you got a million dollars from the sale of your practice. I do the same thing. I take that money and I put it into my investments, according to my investing plan.

Dr. Jim Dahle:
Now, that starts making people nervous when it's a large amount, I fully understand that and they start going “Well, what if the market drops right after I put the money in?” And that is a possibility. In fact, that happens about a third of the time. The other two-thirds of the time, you're just really happy you put the money in, because it goes up after you put the money in.

Dr. Jim Dahle:
But here's the way to think about it. If you choose not to put it all in at once, that's called dollar cost averaging and you decide you're going to dollar cost average it over three months or over six months, or over 12 months. This is a little bit of a psychological crutch against regret in case the market goes down right after you put it in.

Dr. Jim Dahle:
But eventually, three months from now, six months from now, 12 months from now, whatever it is, you're going to be fully invested, just like you would be tomorrow, if you fully invested it.

Dr. Jim Dahle:
So how do you know that it's going to be better to be fully invested a year from now than it is to be fully invested tomorrow? You don't. You can't predict the future. You don't have a functioning crystal ball. The right move is to just lump sum it in. So when you get money to invest, I suggest you invest it. Is that harder to do? Yes, it is sometimes. Do I recommend you look at how much money you lost the very next day as the market does this normal day-to-day fluctuations? No, I do not. In fact, I probably wouldn't go back for a few months after putting that sort of a sum of money in there.

Dr. Jim Dahle:
But I assure you that that is the right academic move, but keep in mind, you're going to be wrong a third of the time. A third of the time the market will go down after you put it in. Since I don't know what's going to happen over the next month or year, I can't tell you which one of those two to do. But I would bet on just putting the money to work when you get the money.

Dr. Jim Dahle:
If you don't feel comfortable doing that, what it suggests to me is that perhaps your asset allocation is a little bit too aggressive. So, maybe what you ought to do is dial back your asset allocation a little bit until your regret of possibly losing money is equal to your fear of missing out on gains. When your fear of missing out on gains is equivalent to your fear of losing money, you know you got your asset allocation about right.

Dr. Jim Dahle:
And in this case, it sounds like you're more worried about losing money than you are about missing out on future gains. So maybe your asset allocation is a little too aggressive and you ought to dial that back a little bit. I hope that's helpful.

Dr. Jim Dahle:
All right. This episode was sponsored by Bob Bhayani at drdisabilityquotes.com. One listener sent us this review. “Bob has been absolutely terrific to work with. Bob has always quickly and clearly communicated with me by both email and or telephone with responses to my inquiries usually coming the same day. I've somewhat of a unique situation and Bob has been able to help explain the implications and underwriting process in a clear and professional manner.”

Dr. Jim Dahle:
Contact Bob at drdisabilityquotes.com today. You can email [email protected] or you can call (973) 771-9100 to get disability insurance in place today.

Dr. Jim Dahle:
All right, don't forget we talked a lot about financial advisors today. We have all kinds of recommendation pages at the White Coat Investor. If you go to the homepage at whitecoatinvestor.com and look under the recommended tab, you'll see all kinds of stuff.

Dr. Jim Dahle:
We have student loan refinancing companies, physician mortgage loan companies. We have insurance agents that hundreds of White Coat Investors have used. We have financial advisors that have been vetted so that they give good advice at a fair price. We introduce you to some real estate investing companies there.

Dr. Jim Dahle:
We've got burnout coaching, we've got student loan advice. I mentioned that earlier on the episode. If you're trying to put a practice plan in your practice, we've got a page on retirement accounts. We put HSAs on that same page. If you're looking for contract review services or other legal services, we have a page for that. Someone to help with your taxes. It's there. If you're looking for a realtor, we've got that option. And then we've got some other stuff that might help you make money like some surveys and some credit cards. That's also under that tab.

Dr. Jim Dahle:
So if you've never checked out that recommended tab at whitecoatinvestor.com, I highly recommend that you spend some time there to get connected to the good guys in the financial services industry.

Dr. Jim Dahle:
All right, thanks for those who are leaving us five-star reviews and telling your friends about the podcast. The most recent one came from TheRealShecky, who said, “Trusted. White Coat Investor is the trusted leader in physician financial education. Not only have I found all things WCI to be helpful, our residents also get indoctrinated into the world of personal financial learning, though a surprising number are already well-informed much more than I ever was in training. Very highly recommended. It should be required listening and reading.” Thank you, TheRealShecky for that review.

Dr. Jim Dahle:
Keep your head up, your shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor podcast.

Disclaimer:
The hosts of the White Coat Investor podcast are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.