Hoosier Advisor

Back in 2016, I became convinced by several industry leading voices on the importance of establishing a blog to share your individual voice.  Up to that point, the notion hadn’t received the faintest of considerations as I had no desire to acquire a social media following.  While acquiring a social media following hasn’t emerged as a likelihood, I have come to realize the importance of sharing some analytical pieces and insight into how I think and work. Just maybe, one or two of them has been of some benefit to a coworker, colleague, or client.

It recently hit me that I launched into the blog with a deep dive into current positioning thoughts on bond ETFS.  Man, that is exciting stuff……for an uber nerd, but there aren’t too many of us uber nerds running around. What I failed to do was lay any biographical foundation outside of some professional info in the “about section”.  This isn’t a complete accident to a very private /deeply introverted individual. But we have been blessed at Financial Enhancement Group, LLC (FEG) to be growing at a pretty rapid clip over the last decade. Not just growth in terms of a strong investment market but also from a growing client base and an employee base to maintain the service levels to which our clients have grown accustomed.  In the past, I have truly enjoyed getting to know my coworkers on a close and personal basis, but for the most part now that just is simply not possible due to sheer number of people and their geographic dispersion.  To that end, hopefully a few of our new folks here will read and learn a little about their oddball advisor. That way you don’t have to bother me by asking any water cooler personal questions (Just kidding!)

The Path

The route that led me to finance wasn’t typical. It began on a rural family farm in East Central Indiana.  Fellow classmates that weren’t also from a farm family likely had parents earning a decent middle class living in the auto manufacturing industry that dominated the three closest cities – Anderson (GM), Muncie (Borg Warner), and New Castle (Chrysler).  [A quick side note for those of you not from the area to connect the dots to my blog’s logo, another common thread among those three cities is they contain 3 of the world’s largest and most historic high school basketball venues.  The famous Hoosier Gym from the movie “Hoosiers” is also in nearby Knightstown.]  But my eyes never got set on the farm or the factory.

You may be thinking at this point that it must have been a strong academic performance with high SAT scores and good grades that propelled me towards the business world. Nah – that wasn’t it either; our class graduated 78 kids and I am not really for certain that I cracked the top 30. I clumsily found my way to Indiana University (no joke, chosen primarily for access to the basketball tickets!). Eventually, though God led me to an economics class where finally something just clicked and turned on the proverbial light bulb to do well.  If this piece is running short on cliché: I can still remember the specific time I heard John Melloncamp’s “Rumbleseat” speak to me as I turned off 17^th street onto Jordan Ave…”I’m gonna stop putting myself down, I’m gonna turn my life around”.  That academic turn, a hard work ethic, and a curiosity in investing that started much sooner than college formed a combination that led me to FEG. 

Foundational Years

In my community, a typical farm son begins early and continues a transition that takes him from childhood to a fully functioning farmer himself.  A) On the job training is always there in front of you. B) The capital intense nature of the industry also lends itself quite well to family transitions, both for the sons to be able to enter with little capital and for the father to be able to exit and retire.  For the most part, it’s a good gig (though you’ll hear this from them). This transition was true for my brother but not so much for me.  I suspect my father knew this well before I did and along the way gave me enough room to find my own path.  By the same token – pursuing that individual path did not prevent the acquisition of a hard work ethic, both by observing it firsthand and by being required to help. Duties included picking up rocks in the field, cutting weeds, driving tractors to work the ground, scraping mud off equipment, bailing hay and straw, and shoveling shit…. just to name a few.

Variety and Different Gifts

A few key clues emerged along the way to reveal my lack of interest in farming. First, I am a total failure at many skills that most men have as secondhand nature.  I don’t know how to use most tools.  I don’t know how to fix stuff and even have difficulty concentrating on a YouTube “how to” video fully capable of demonstrating the fix it task. It’s nearly impossible for my brain to register, let alone master, any sort of manual or technical oriented skill sets.  Its just not the way I was wired.   Change the oil? Maybe on a good day. Difference between flat head and Philips? Thank you google for the assist on that one. At the risk of losing my man card (wife keeps it in her purse anyhow) I’m not even really that fond of getting my hands dirty so to speak. Another side note: this is at the top of a rather long list of stuff my friends bust my nuggets over, so it doesn’t bother me to say it here.  I also am not that fond of monotonous repetition of which there is plenty in farming like chisel plowing long row after long row in the fall, and certainly in those car factories nearby. 

The flip side of monotony and technical skill is a little variety and working in the abstract. These have lent itself well into the development of my role at FEG.  About 20% of my job is in the capacity of financial advising to a closely held group of friends, family and clients. Last year’s 4-part posts were about the satisfying aspects of that job as advisor, a job that I think is important in order to stay connected to the people for whom you are investing. But my primary job is in the capacity of Chief Investment Officer where I am responsible for overseeing the overall structure of our research, analysis and portfolio management. Some deep connections exist between early years on the farm and how I carry out the CIO role that I intend to share that with you over the next few posts.  Don’t worry though, the personal stuff is now behind us.  

Annuities…..A Call to Action

The annuity story is a powerful one.  It speaks directly to our basic primal needs of safety first.  After having met the safety requirements that our lizard brain so demands, the more advanced part of our brain has been educated to seek growth.  This combination is what creates the spot where annuities thrive. The problem is that far too often, people are lead to drastically overpay for this promise of possible growth with certain safety.  It’s just packaged in such a way that it is very difficult for the end investor to see what it is truly costing her.  Although it far too often means leading people to an uncomfortable conclusion, I still find it very satisfying to first help them work through and understand the annuity waters to which they were led, and then to do the best with whatever it was they have bought (or are considering buying) prior to me working with them.

Not all annuities are problematic

First, a little background is in order.  I use the term annuity here which really paints a large swath of products with too identical of brush strokes. I do not believe there is anything inherently evil with plain vanilla annuities.  In fact, my opinion is that they have an important place in generating retirement income – even more so than most of my peers.  Additionally, I think that role will continue as more and more people will be retiring without a traditional pension.  A traditional annuity serves a function that no other product can: it perfectly matches and balances the risks of outliving your money and your money outliving you.  Examples of annuities I am NOT referring to in this post are: a single premium income annuity, a low cost variable annuity in place for tax deferral only, and your straight forward fixed or equity indexed annuity products. Instead I am primarily referring to a) variable annuities that simply come with too many bells and whistles and b) most equity indexed annuities. These are the products that cause people to overpay in ways I have found that the average investor has difficulty in spotting.  [Quick hack for you: What if you don’t know which annuity is in front of you? Simply ask me. Or ask an advisor that is only compensated for investment advice.  For heaven’s sake, don’t ask a salesman].

Culprit #1

The first big scheme that cause investors to wind up overpaying for this promised land/holy grail of growth with safety is through misunderstood caps and allocation duties assigned to them within the product.  Caps refer to the limits on the amount of earnings the investor can earn in any given period.  Most investors easily grasp this concept and understand it as the fair exchange they are seeking in order to obtain protection.   To date, every equity indexed annuity contract that I’ve read is issued with the warning that the company will cap interest each year and this cap is subject to change at the discretion of the insurance company. In the ones that I have read, you know what the cap is in year one, but then it is up to the insurance company to set in the future. And I’ve yet to meet someone who trusted an insurance company enough to be at their whims for future caps on the investor earnings.  Yet they enter into this contract each time an annuity is bought.

As for the allocations, the investor will often be required to make a choice as to how the earnings inside of the annuity are earned.  The dynamics of how many of the investment options work can be complicated and lead to disappointing results.  The poster child of this for me is the monthly point to point.  The reasons why are too lengthy for an article (feel free to call me 800 – 928 – 4001 if you do need to know more) but from the ones I have seen are set up so that it is virtually impossible for the investor to make much of a positive return. A general word of caution here is that many investors don’t even realize they have been assigned the duty to make allocations among the strategies offered to them through the product.

Culprit #2

The second big way people wind up overpaying for annuities is that they simply don’t understand what they own and in turn how to actually monetize the benefits to which they are entitled. In fact, I have yet to find a specific individual who brought an annuity they had already purchased that could actually correctly explain what it is they own.  Not a single one!! All they remember is “Guaranteed 6%”.  In their minds, they can leave the policy alone and be comfortable with their guaranteed return. The problem is that the road that leads to that 6% isn’t the same road that is taken by basic investments.   Most often there needs to be some point where the product turns into an income stream in order to monetize these benefits.

In one case (true story) I spent hours reading a prospectus and product brochure but was still unable to determine just how the product worked. I have several securities licenses, a couple decades of industry experience yet it took some calls the issuing company to determine how the annuity actually worked. It frustrates me to imagine the investor who doesn’t have the luxury of being well versed in industry terminology and having experience that can help guide them towards their understanding of the product. In this specific case though, we were able to work together with the client and coach them on ways to get the most out of what they had already purchased. But this took considerable effort to understand and then to make the appropriate adjustments.

What now?

The product is not evil. The salesmen are not evil. In fact, I know a good one that uses them in the right ways that he believes in for his clients.  It is more of a symptom of a system that is convoluted.  Just think for a moment if you worked directly with a pharmaceutical rep instead of your doctor. You would be taking perceived advice from an inherently conflicted individual. There’s nothing wrong with the pharma rep at all, but you want to take advice from your doctor who is looking after your best interest. In this case, the annuity salesman is just that.  He is the equivalent of the pharmaceutical rep that understands his product.  He will most likely not have the knowledge of you like your doctor does to say whether or not you should actually take that product.

In practice, we rarely just kill off annuities that have already been purchased by clients before we were introduced. The surrender costs and foregone benefits associated with just pulling the plug are usually just too prohibitive.  But the work that we get to put into making sure and rescue the client to get the most out of the situation they are in is very gratifying and worthy of having been the final part in this series of stories that drive me to work each day.

Perhaps you have already been there. If so, you will know (and not just envision) how difficult it is to lose a loved one.  Having personally done so recently and with the pain still quite fresh, I can say that little can be done to prepare mentally.  For that part, I’ll just say I can’t imagine how difficult it would be without Jesus’ grace and love. Yet, on top of the emotional burden – at least one person close to the deceased will be handed the unpleasant financial and administrative burden that comes with disbursing possessions of the deceased. However, much can be done now for those future financial, medical and other matters.  This is what sets the stage for the third post of a four part series on the most satisfying conversations I have had with clients over my years in the business. The majority of my specific job is analytical and portfolio management related, but I wanted to devote a little space and time here to my role as l financial advisor.

This conversation, like the prior two, is specific and recent, but similar to so many others along the way.  In the investment advisory business, the central element of our job is making sure client assets are properly invested and maintained. At FEG, we extend beyond that central job in order to take a comprehensive view of finances. Partly because of the knowledge base of our team (one of our founders is a Certified Financial Planner (CFP), the other an Enrolled Agent (EA) and other specialties added throughout the years).  But mostly, we just believe that a comprehensive approach is the right thing to do.  One of those extensions to investing is working alongside and helping people make sure they are prepared and have WRITTEN plans should they die or even become incapacitated.

Please note that I am not a practicing attorney and therefore do not dispense legal advice. My role is simply to provide the format and direction needed to coordinate and achieve the legacy intentions for the client. I’m sure as you are reading this, these sound like simple and obvious steps to take. And for the most part they are.  In a conversation earlier this year, I heard what we hear so often: “I’m glad you mentioned this stuff, we have been meaning to get things updated but just haven’t gotten around to it”.  For the minority of you that don’t say something akin to this just know I always marvel at your preparation.

What made this such an enjoyable conversation for me isn’t as much about sharing wisdom (I let the attorney, with whom I have a great working relationship with handle part).  It is nothing more than taking a look beyond their investments and helping them compile financial inventory of sorts.   No brilliance is necessary, just a checklist and a willingness to talk about the uncomfortable.  Often that involves just sharing real life stories as examples of why plans either need written or updated. Such as:

-Having a wife in the hospital but no immediate grounds and authority to make critical health decisions

-Your children who get along so well now can be exposed to debate and solve matters without real good instructions. Time and again, this has led to poor outcomes between siblings.

-For some, it is an unexpected death from which we need to protect our families.  For others, it might just be the need to protect ourselves from our future selves!  Documenting wishes and executing plans is complicated and legally challenge once mental capacity begins to diminish. 

-Some of you may not have spouses or children to plan for, but what about pets.  These family members can also benefit from well-planned exit from this planet.  

All told, by investing just a few hours collectively in conversations with these lovely people, they were able to get the necessary plans in place for their family.  Working with a qualified attorney enabled these people to be prepared and to feel secured that their affairs were in order. These steps are skipped due to common snares like: (1) While the importance is acknowledged its priority is not (2) Estate planning is thought of as only for the wealthy, but is actually for everyone.  All I had to do on my end was direct, coordinate and participate in conversation.  . Often times, this isn’t a job -it’s a delight. It was a great feeling to leave the room knowing those folks were better prepared than when they arrived.  And I can’t believe they actually pay me to do this.

My last post was the first in a 4 part series of the most rewarding conversations I have had with clients while wearing my hat as financial advisor.  In it, I relayed the satisfaction that comes from connecting people to their assets and helping them get the most out of their savings.  Few things can replace the satisfaction obtained by instilling the confidence in people to spend their money in ways that truly bring them happiness (in this case – excusing them from annoying record keeping work).  This, part 2, will be all about optimizing the tax situation for the client, something that is an everyday part of just about any FEG team member.

A few years ago, I met a widowed lady who was nearing the point of drawing on the social security from her deceased husband at age 60.  While she came to FEG for investment advice and to truly have a fiduciary oversee her assets, one of the first orders of business for us was to look at her tax situation and the tax structure of her accounts.  In order to understand why this particular situation was so satisfying, you’ll need to be familiar with how social security is taxed. 

Social Security income can be taxed federally at anywhere from 0% to 85% of the total amount of benefits. For example, we’ll say your total social security benefits are $25,000.  Of that $25,000, somewhere between $0 and $21,250 will be added to the 1040 as income; it depends the amount of other income that shows up on your tax return.  The IRS refers to this as provisional income; which it calculates by adding up a recipient’s gross income, tax-free interest, and 50% of Social Security benefits. Once your provisional income exceeds $25,000 (as a single filer), social security becomes taxable. Once it exceeds $34,000, 85% of your social security benefits are taxed. In the case of this client, she was living off of savings she had stashed away and a modest pension so her provisional income for tax purposes was very low before age 60.  But introducing social security meant introducing another variable.

Any more provisional income, such as withdrawals from retirement accounts, would mean more of her social security benefits would be subject to tax.  Consider a scenario where she withdraws $10,000 from her IRA after social security benefits kick in.  This would mean not only adding $10,000 of income to the 1040, but also likely causing more of her social security to be taxable. In essence, this means that IRA withdrawals would be taxed twice!!  This notion bears worth repeating: the $10,000 IRA draw was likely going to be taxed federally at 10 or 15%.  Additionally, the $10,000 draw was going to push her provisional income up over the $25,000 and possibly another $10,000 more in social security benefits being taxed (also at 15% – or perhaps higher).  Minimally, the tax bill for a $10,000 withdrawal from her IRA during her social security era was going to cost $2,500 in federal taxes. This isn’t an issue for her if she does not need to withdraw any money from her IRA. It will, however, become an issue when she turns 70.5 and the IRS forces her to take money out of her IRA-called a Required Minimum Distribution.

Fortunately, we were able to apply some remedies.  It would have been great to have met her a year or two earlier and do even more, but it was still rewarding to work with her and save her what we could in future taxes.  The remedy was fairly straight forward and meant establishing a Roth IRA and taking some of her IRA dollars and putting it into that Roth. In the financial world, this is referred to as a Roth Conversion.  This conversion meant putting income on her tax return now, but would allow for tax free withdrawals later. But in her case of being in a very low tax situation at the time, a good portion of the dollars we converted from an IRA to Roth was done with zero federal tax implications! All told, rather than the $2,500 in future taxes we were forecasting in the example above – converting $10,000 from IRA into tax free Roth status carried a price tag below $500.

By simply shifting assets in the types of accounts she owned, we were able to shield her from future tax costs with very little impact today. Tax efficiency isn’t just for the ultra-wealthy, it is for everybody.  As this case will show it can be even more important to the financial wellbeing for those living a modest lifestyle. That, more than anything is what made this particular case help fuel my desire to keep coming back to do it again.

80% or so of my day job is that of portfolio manager. Spending most of a day alone, behind the computer with information to analyze fits my nerdy, introverted soul.  For proof, look no further than the majority of posts I have thrown up on this site. However, I do also very much enjoy working directly with clients and helping them maximize and have confidence in their finances.  Being an FEG advisor is about so much more than working towards better returns and lower risks; it is about helping people translate those assets into their lives and getting the most out of them.  Working directly with the investors is also critical in staying connected to who it is you actually work for and serves as a strong reinforcement as to why it’s all worth it.

The intent of this blog was never to be a high frequency contributor to financial dialogue as the world has no such shortage.  Instead, the goal was to share insight into some deeper topics as they arise, with a substantial chunk of those deeper thoughts usually center on the best ways to position fixed income exchange traded funds (ETFs).  Over the past several months I have done what I committed NOT to do when starting a blog and that is to fall so far behind on posting content.  Part of that is attributed to a particularly busy period, but it is also due not having any truly major changes to share. The equity moves have been spectacular, but after adding a good chunk of bonds last October, the strategy in fixed income has been to mostly sit on the hands.  However, I am going to be tossing up a 4 part series on some of the most satisfying conversations I have had with families while wearing the financial advisor hat over the years.

This first story is about a couple that I have had the honor of working for nearly 20 years. Last summer, we lost the husband during an unexpected illness, but not before I had the opportunity to harvest nearly two decades worth of rich wisdom from him.  This particular couple resembled a very common scenario that we at FEG have observed over the years. Having been savers nearly their entire life, they found it more than difficult to just flip the switch from saver to spender.  They had been living off of a pension, social security and a small portion of their required minimum distribution income as well; leaving most of their nest egg to grow.

Their children were pretty well established in life and their personal philosophy was that they did not need or want to leave behind a sizable inheritance. By mathematical definition, this means they needed to begin not only spending out of earnings but of principal as well. Otherwise, they would certainly remain on path for bequeathing said nest egg.  Yet, people who made their portfolio by saving month after month become hard wired for frugality. I’d show him graphs whereby their current path was leading towards leaving substantial assets behind.  He’d leave out meetings confident, ready and excited to find a newer motorhome, updated vehicles for him and/or his wife, or perhaps find some other adventure to spend money on.  But, eventually that feeling would fade, and would be dominated by the saving mentality within. “I don’t really need a new truck”, I heard him say on many occasions.

One other factor that this much more difficult was by only ever meeting with the husband.  This is very common where one spouse assumes financial responsibilities, and the other takes no interest. But for reasons like these and promoting the spending of assets, it can be super helpful to meet with both…at least some of the time.  Saving the nest egg took teamwork; and so will spending it down.  

We did have one break through that I will never forget.  One thing that always bothered him was keeping various records and documentation. At their age, they incurred plenty of medical expenses and were always on the verge of exceeding their standard deduction and qualifying for itemized deductions.  Yet, the record keeping it took to prove as much each year proved to be torturous.  We did some quick math and found out that keeping such records were likely to be saving him somewhere around $1,000 to $1,500 on his taxes. There, on the spot we came together with a conclusion: forget about it! What a great way to lose the saver mentality and live a little. While not necessarily going out and buying something, to him it was a freeing moment to realize he could afford to NOT save that extra grand or so on taxes.

Monetarily, it may not have been a giant victory – in terms of unleashing wealth to be used during life. However, the look in his eyes was all I needed to feel a major breakthrough and reminder of why this job is so rewarding.

In the interest of honesty and fairness, know that I wish I had written this post 13 years ago when building a home – or read it from someone else who had. Surely, there are plenty who had, but it wasn’t anything that hit my radar or went looking for. I say these things because it would have been far better to learn in advance from others’ familiarity as opposed to learning from my own experience. My suspicion is that some of these thought processes could help some young folks in my middle-aged shoes.

The financial aspects of buying (or especially building) a home is easily consumed by determining whether or not the monthly payment fits into the budget. Hopefully, consideration of an escrow payment for taxes and insurance are factored into that monthly payment for the mortgage. A recent Gallup poll found that only about one in three Americans actually write out their budget! We can stop here and say that if you aren’t a household that does, then know: a) you have tons of company, but b) getting your figures down on paper and tracked will go a long way to stacking the odds in your favor. Whether you have a formal budget or are just “winging it”, there’s a good chance that when first making the jump into home ownership that you are stretching the budget quite a bit to make it work. That’s okay and natural to have some overly positive assumptions on your future and growing incomes.

The problem is what we leave out in terms of future home maintenance and upkeep; we at least vaguely understand this concept. However, the sooner we bring this vagueness into the light – the better off we will be. It’s especially easy to keep these notions in the back of our mind when we are building because everything is likely brand new. Here are some ideas to bring out the concreteness of how the upkeep of a home will unfold.
The average furnace will need replaced after 15 to 20 years and air conditioners within 10 to 15, based on data from This Old House. Here are some other average appliance lifespans from Mr. Appliance Expert Alliance Repair:

• Refrigerator: 14 years
• Washing machines: 12 years
• Dishwasher: 12 years
• Microwaves: 8 years

These are just a few of the examples of the larger ticket items that wear down over time. Of course, you also have furniture, paint and carpet that will need updating as well. The punchline here is that over the course of 20 years, you will pretty much need to address all of these things. Before this strays into being a home improvement blog, here are some simple and practical financial steps.

Create a second bank account and as soon as possible, begin sweeping in these long-term costs of upkeep into it. You can do this with a separate savings account or even an investment account if you are starting early. Some banks make it easy to hold separate virtual accounts all under one umbrella (PNC Bank and Capital One both have great options). Simply come up with the best list you can of these repair or replacement items on a timeline of when you would expect to replace them, and then assign an estimated price tag of what the item would cost you in your area and in your situation. This list won’t be perfect – things will be missed, prices will be off and very few of your appliances will turn out to be average. But, by having a plan you are expecting the unexpected and preparing yourself for the inevitable large expense. By adding up all these items on your 20 year timeline, you can then estimate how much you could set aside each month to pay for your potential future repairs. Here is the kicker: the sooner you start, the more interest and earnings can work in your favor towards funding your goal! Yes, it’s a stretch to incorporate this second escrow-type account right off the bat when you have already stretched to get into the house. Just know, the earlier the better.

Many people are good savers and will establish a reserve of sorts to handle the unexpected. My recommendation is to compartmentalize these reserves to the best of your ability. You don’t want to be overly confident in your concreteness because you can’t account for everything in this sometimes cruel world, but I believe the thorough planning will give you extra confidence that you are saving the right amount.

Is the thought of dropping a couple hundred dollars each month into a reserve account overwhelming and just not realistic? Don’t despair, get creative. Maybe in your case, it’s as simple as dropping a quarter in a jar each time you use your washing machine – just like you would at the laundry mat. Adjust your thermostat and put a $5 bill in the jar. These are great reminders that there are some constant expenses to home ownership. Your $500 dishwasher doesn’t just die one day, it wears down a little each time you use it. In a sense, the money you are setting aside aren’t savings per se, it’s simply contemporaneously funding future expenses.

We don’t all have a 1950s expectation of living in the home we are buying for 20 years. I get that. But, if you do have some expectation for an extended stay, hopefully this will provide some food for thought to alleviate financial hurdles for your future self. I have built a simple spreadsheet to assist with this process and help estimate what we need to be putting away to save ourselves future heartburn. I would gladly share this with you…all you have to do is ask. Email me at aharter@yourlifeafterwork.com and please call if necessary to make sure your email didn’t get caught in spam (800) 928 – 4001.