MIKE: Good morning, everyone. This is Mike Decker, Brian Decker and our special guest, Ben Koval. We’ve got a special day today. We are recording this in our new Seattle office, which is absolutely gorgeous, Two Union Square, 42nd Building. And as we record this, we’re looking over, and guys chime in, the Space Needle, you can see Alki Beach. I mean it’s an incredible view.
BRIAN: It’s the 42nd Floor, Northwest Corner. So we have a panorama view of Elliott Bay, Space Needle, the Olympics, the Cascades. It’s just spectacular.
MIKE: So as a quick round of introductions, Brian Decker, who’s a licensed fiduciary, planner, who works mostly out of Kirkland, but also comes over to Seattle as well. And then Ben Koval, who’s also our head planner over here in Seattle. And so for those callers that call in, when we extend those offers, just a quick heads up and we’ll have two or three today, you will have the opportunity to either choose if you want to go to Kirkland or Seattle.
MIKE: And a quick shout out to Kirkland, John Switzer, an incredible planner over there, we want to recognize him as well. And he’ll be on the show soon. So we’ve got a lot of financial news going today. So we’re going to dive right into it. Brian, what do you have for us?
BRIAN: All right, so at Decker Retirement Planning we always want to start the show with news and updated information. And to lead the news, it’s regarding the Border Tax, the Border Adjustment Tax, the BAT. On Trump’s tax reform, his economic and treasury cabinet ministers said that they are not going to go forward with the Boarder Adjustment Tax, the BAT. The idea was to help, well here’s how the Border Tax works.
BRIAN: The business that imports goods from outside the United States would not be able to deduct the cost of those goods from their corporate tax returns, but companies that export products to other countries would not count as income the revenue received from the exports. In other words, there’s an incentive in the corporate tax structure for businesses not to import, but to export. The hopeful effect of this measure is to encourage exports and discourage imports, which is in keeping with President Trump’s objectives.
BRIAN: It also helps to propose lower corporate income tax rates that bring the United States more in line with other developed countries. This plan, the Border Adjustment Tax, would cause prices for everything imported to rise sharply, think 20 percent, increase on much of what you buy at Wal-Mart or Amazon or the importers will go out of business or both. The problem with global deals, now I’m going to switch over to talk about the TPP, NAFTA, TTIP, etcetera.
BRIAN: The problem with global deals like TPP and its US European counterpart, TTIP, is that while they may be good for economies as a whole, citizens will find that quote unquote good to be very unevenly distributed. Retail is mostly imported goods. So retail will see the Border Tax triple and profit margins squeezed unless they create these goods in the United States. Manufacturing, regarding the Border Adjustment Tax, the BAT, 80 percent of manufacturing jobs that have gone away in the last 20 years have been displaced by technology, no offshoring.
BRIAN: That trend is not going to stop any time soon and those jobs are not coming back. Please note that we are now manufacturing more than ever, more than we ever have, just with dramatically fewer people. So with IT and robotics, that trend will continue. John Malden [PH] is a brilliant guy, we get a lot of his stuff, his view of the BAT is quote I’m afraid that this Border Adjustment Tax, if implemented, would throw the world into global recession. That’s pretty…
MIKE: That’s a pretty bold statement.
BRIAN: Yeah. And that’s one of the reasons why they’re going to make some adjustments to the BAT. All of the wonderful tax cuts and beautiful plans that are being proposed along with the BAT would not be enough to keep the United States from participating in that recession, a global recession, as well. Also, it likely violates the WTO, the World Trade Organization rules. The European Union is already preparing its litigation. President Trump has talked of possibly leaving the WTO, which might not be all that bad, a move though would set off a complete reworking of how global trade is done.
BRIAN: That process could spin out of control very quickly. And remember, while the United States may be the largest player at the WTO, we’re only 25 percent of the global economy. The rest of the world might just say let’s see what we can do without the United States and go ahead and create our own reserve currency so that we don’t have to depend on the United States injecting massive amounts of dollars into the global market. America may be first, but there’s a lot of countries around the world that think they are second or third and they have nationalist movements of their own.
BRIAN: Volatility that would surround the United States departure from the WTO might be quite impressive. Global markets would absolutely, I hate to use his word collapse, sounds a little scary, and the Trump bull market would quickly morph into the Trump bear market. When Trump entered his presidency at the end, this is a very important point, some people are paralleling the changes of the Trump administration with the changes of Reagan’s presidency, but there was a huge difference. Trump entered his presidency at the end of a long tepid expansion where the markets are up 150 percent and trading at record levels.
BRIAN: Reagan started at the end of a 40 percent stark market drop and at the end of an economic recession. Trump takes over after nine year market expansion, the market is at all-time highs and peak valuations. So implementing at Border Tax is estimated to raise 1.2 trillion in tax revenue over ten years and may or may not be able to push the economy and the stock market in the ways that people are expecting.
BRIAN: Many economists are making several arguments in favor of something like the BAT, the Border Adjustable Tax System. Number one, it would align itself more closely with the VAT System that’s in most of our trading partners where exports are not taxed, but imports are. And number two, Border Adjustments reduce the incentive to manipulate transfer prices by shifting to lower tax jurisdictions based on tax policy alone.
BRIAN: And number three, Border Adjustments reduce the incentive to shift profitable production, this is huge, abroad simply for tax benefits and lower tax jurisdictions commonly known as Corporate Inversions. Number four, proponents argue that Border Adjustments are not trade policy, but rather create a level playing field between domestic and overseas competition. And finally, number five, Border Adjustments do not distort trade as exchange rates should react immediately to offset the impact of these adjustments.
BRIAN: So with regard to the Border Adjustment Tax for tax reform from the Trump administration, at Decker Retirement Planning we are just passing on the news that major adjustments have been announced just yesterday and we should see and want our Decker Talk Radio listeners to know that there will be many edits that have to be made before the final comes out.
BRIAN: Second topic, let’s talk about the stock markets. At Decker Retirement Planning in Kirkland and in Seattle, our clients have downside protection on their risk money, which we’ll talk about in a minute. As a matter of fact, we’ll bring in to talk a little bit about that. But I want to talk about something that David Rosenberg identified as ten reasons to be cautious about the current markets.
BRIAN: Number one, sentiment. Bullish Sentiment is at 75 percent. The definition of a market top is when everyone’s in. When everyone’s the most optimistic and their cash is fully invested. There’s no more fuel, the car runs out gas, and the trend changes. So Bullish Sentiment is at 75 percent. That’s very high historically. Number two, Rosenberg says that the New York Stock Exchange put-call ratios at point eight. Point eight means that for every put, I’m sorry, for every put there is one point two calls.
BRIAN: So in other words, the ratio of upside expectation is 20 percent higher than the downside expectation. Normally, we see more negative sentiment and we see a put-call ratio of 1.2 or higher. We’re at point eight. Number three, CBO Equity Volatility Index, which is the VIX, is at 11 and a half. In 2008, the VIX hit 80. The VIX is a volatility index that goes up when the markets go down and stays low when the market’s trending higher. So a VIX of 11.5 is historically extremely low.
BRIAN: The S&P 65 day rolling volatility is at a record low. This typically occurs ahead of a market corrective phase. Number four, the Market Vane Bullish Sentiment of 68 percent, along with bullish sentiment of 75 percent, is also an indication that people’s expectation are extremely optimistic. Number five, the price earnings ratio, price of the market divided by earnings on the S&P are 18 times and trailing is at 21 times. There’s only been two times higher than the current price earning ratio’s been higher.
BRIAN: One is in 1929 and the second time is in 1999 at the peak of the technology bubble. Number six, Investors Intelligence Sentiment, another sentiment reading, is 62 percent bull, 17 percent bears. Number seven, the 14 day Relative Strength Index has moved to 77.4, which is wildly higher than the 70.0 level and is way in the overbought threshold.
BRIAN: Number eight, the S&P 500 is now gapped up eight percent above its 200 day moving average, another sign of an overextended stock market. And number nine, earnings expectations. With the markets going up you would think in a healthy way that these earnings expectations would be ratcheted up. They’re not. They’re going down. Earnings expectations have lagged market price action. In fact, according to S&P Capital IQ Data, earnings per share projections for 2017 have actually dipped to 130.31 from 131.02 three months ago.
BRIAN: The S&P, and here’s the final, the S&P has already climbed above year end targets for well over half the Wall Street strategists out there. So the Barron’s Roundtable of experts gather in November to make their projections for the S&P one year out in calendar year.
MIKE: Keep going.
BRIAN: Half of those Wall Street strategists are saying that the one year targets for the markets have already been hit. Since 1945, stocks have risen in both, I want to talk about downside protection that we do at Decker Retirement Planning and have Ben talk about this, I want to add a bullish, today’s the last day, we know we prerecord this, so today is the last day of February.
MIKE: As the recording is.
BRIAN: As we’re recording this. In the 42nd Floor of the Northwest Corner of Ben’s office. In the Two Union Square Building. Since 1945, this is an amazing statistic, when stocks have risen in both January and February, that’s happened 27 times since 1945, in every one of those years, 27 out of 27 times the market has ended in the green, and get this, for an average total return of 24 percent.
BRIAN: Now year to date, the markets are up about five percent. That’s an impressive streak. We have 19 percent left. So I’m giving you both sides of the equation. There’s an expectation that the markets will go higher because it has historically when January and February’s been positive. But we are starting from very high levels, we we’ve talked about, with David Rosenberg’s level.
BRIAN: So Ben, chime in here on how in the planning that we do for our clients, when you have a client come in with all of their money at risk, which you see almost every time, isn’t that right?
BEN: Yeah, absolutely.
BRIAN: Okay, so these are people that retired over 55, they’re in retirement, and their banker and broker has how much of their money at risk?
BEN: Well, it’s a hundred percent. It’s all in that pie chart. I mean all the people that, 90 percent of Americans are using this pie chart and that’s where all of their money’s at risk, 100 percent of it.
BRIAN: And why is that? Why is all of their money at risk?
BEN: Well, there’s a very common sense answer to that is because the bankers and brokers get paid on the money that you have at risk.
BRIAN: Okay. So if I’m at risk and I’m in retirement and it makes no sense to me, it makes no sense to me being 55 and older of having my largest net worth of accumulated assets out there all at risk, the banker and broker is telling me to buy and hold and ride it out because that’s how he gets paid?
BEN: Well, yeah. And that’s all he knows, too. I mean these guys aren’t bad people, it’s just what they’re trained on.
BRIAN: Right. Okay. So at Decker Retirement Planning, we are trained differently. We have a distribution plan. Typically Ben, I’m not asking for specifics, but typically when a client comes in who’s retired how much of their money, and I’m gonna, this is kind a teaser for listeners at Decker Talk Radio, how much, number one, typically of their client money is at risk when our planning is done?
BEN: Right around 25 percent.
BRIAN: Okay. How much of their money typically is in growth?
BEN: Right around 80.
BRIAN: Eighty percent. So 25 percent is at risk, but 80 percent of their money is at growth.
BEN: Mm-hmm.
BRIAN: I would even say it’s probably 85, 90 percent. The money that we don’t have at growth is in money market accounts, emergency cash, but everything else is growth.
MIKE: Wait, I need to clarify those statistics. Is there some crossover there, because you said 25 percent, then you said 80 percent?
BRIAN: Said this on purpose.
MIKE: Okay. Then you hook, line and sinkered me.
BRIAN: Principal guaranteed on 75 percent, 25 percent at risk, but their growth, the money that’s at growth is probably 85 percent. So let’s say this differently.
BRIAN: Ben, what’s the average rate of return of our safe money? What would you say is the average return in the last ten years of our principle guaranteed accounts?
BEN: In the last ten years? Right around seven percent.
BRIAN: Okay. Now on…
BEN: That’s pretty good.
BRIAN: That’s really good.
BEN: That’s notable right there. I mean seven percent.
BRIAN: Okay. What is the average return of our tax free principle guaranteed money? What would you say that that’s around?
BEN: That’s around six, seven percent.
BRIAN: Tax free.
BEN: Tax free.
BRIAN: Okay. What is the rate of return in the last 16 years of net of fees of our risk managers?
BEN: And this is what I love talking about here because, you know, 90 percent of Americans have a one-sided approach to their risk money. If the markets are going up then they make money, if the markets go down they lose money. Our two-sided models have averaged in the past 16 years net of fees 16 and a half percent.
BRIAN: Did they lose money in 2000, ’01 and ’02 when people lost 50 percent of their money in the tech bubble?
BEN: They did not. And they did not lose any money in 2008 either.
BRIAN: Collectively.
BEN: Collectively.
BRIAN: Okay. Well, wait a second. When the markets doubled from ’03 to ’07 did they double?
BEN: Well, yeah, because we tracked the S&P. Our models tracked the S&P in the good year.
BRIAN: Okay. And when the markets went up 150 percent from March of ’09 to present, did they track the S&P on that gain?
BEN: Yeah. Absolutely.
BRIAN: Okay. So from January one of 2000 what are the numbers, what are the S&P numbers with dividends reinvested, if you had 100,000 in the S&P to today, what would you say?
BEN: You’re looking at an annualized four and a half percent growth. So 100,000 in 2000 is about a little over 200,000 dollars in 2016.
BRIAN: Okay. So about a double.
BEN: Yeah.
BRIAN: A hundred thousand net of fees invested in our models, the ones that we use today, how much does it grow to today?
BEN: Over 900,000 dollars.
BRIAN: Okay, and the difference is, what would you say the difference is? Is it just about not losing money?
BEN: That’s exactly it is that these models just didn’t take the big hits. There were no homeruns with the models that we use. They were just able to track the S&P on the good years and didn’t take the hits in the bad years. So when you have the combination of compounding interest and growth then it makes a really big difference and you can see that in those numbers.
MIKE: So but back to my question, there’s a lot of investment advice out there and there’s a lot of bankers and brokers and financial planners, why isn’t everyone doing this?
BRIAN: Ben.
BEN: That’s a fantastic question. You know, honestly, Mike, I get that question more often than anything else. There’s really good reasons why these aren’t widely spread. And the first reason is, we’re kind of backing up to how the organization is set up is we at Decker Retirement Planning are independent so we don’t have any big corporate governance telling us what we can and cannot recommend to our clients as investments. And, you know, big banks and brokerages don’t have that autonomy. So we can use literally the best out there. And that is what we do.
BEN: And so one reason that this isn’t widely spread is because two of the managers that we use are no load mutual funds. And so with no load mutual funds there’s no commission, no securities commissions that are involved with that. So what broker do you know, Mike, that’s going to come in and offer you no load mutual funds where they get paid nothing on it?
MIKE: Not a very…
BRIAN: That’s not gonna happen.
MIKE: Yeah. It just doesn’t make sense.
BEN: Yeah. And so it doesn’t happen for that one reason. You’re only going to find these managers in the office of a fiduciary, which is what we are. And so that’s the number one reason. Number two is that bankers and brokers will put their careers on the line when they offer you a solution that tells you what and when to buy, sell or go get cash and so.
BRIAN: Now you don’t need them.
BEN: You don’t need them so why are they going to…
BRIAN: Why didn’t they tell you that?
BEN: Why they didn’t tell you about that? The third reason is that…
BRIAN: And this is the biggest one of all, in my opinion. This is where the bankers and brokers require their sales people to use the asset allocation pie chart.
BEN: Yeah, and that’s for legal reasons. It’s so that they’re not liable in case something goes wrong. You know, when you go and you meet with your banker and broker they have you fill out this risk questionnaire and at the end of it it spits out this pie chart for you and once you sign off on that you created it. You can no longer sue them. And so liability is one reason why you’re not going to hear about them.
BEN: And then the final reason that you’re not going to hear about this, these models, is because a lot of these banks and brokerages have…
BRIAN: No, I think it’s the mutual funds.
BEN: Oh the mutual funds have the idea of creating hundreds of funds together, billions of dollars in assets. So truthfully, they’re not overly concerned about the ten to 12 managers that you really need.
BRIAN: Right.
BEN: And so that’s a big problem. That’s why these aren’t widely spread and why you’ll see them here in our office.
BRIAN: Ben, I think you nailed it. So that’s why not everyone is doing this.
BEN: Can I, I got another question though. The asset allocation pie chart that we were talking about, that does work, but and we’ve said this in the past, it worked for the younger generation, correct?
BRIAN: Right. Right. Someone in their 20’s, 30’s or 40’s when they have an income stream coming in from work, they can take those hits like 2008 and they can ride it out and they’re perfectly fine.
BEN: So for a silly analogy, if you’re using the asset allocation pie chart in retirement, is it kind of like putting the square peg in the round hole?
BRIAN: Yeah.
BEN: It just doesn’t really fit.
BRIAN: Right.
BEN: What you’re trying to do.
BRIAN: And Ben, Ben said it well, these guys aren’t bad people, they’re just trained under an accumulation mentality, they’re not trained in a distribution mentality that’s key and so critically important in retirement. Okay, so Ben, let’s talk more about the risk model.
BRIAN: So you’re saying that 25 percent of the money is at risk. How do you decide what models to use?
BEN: Well, we’re very mathematical here at Decker Retirement Planning. So we go out to Morningstar Database, we go to Wilshire to find the best mutual funds and money managers out there and we’re looking for one thing, we ask one question every quarter when we look at these managers, which is simply who net of all fees is beating us?
BEN: And, you know, typically we have, you know, 50 or 60 managers come back that are legitimately beating us, but they typically fall into one of four categories. One is that they’re beating us, sure, but they’re close new investors. So we can’t use them. Another category is that they are hedge funds. And simply put, we are never going to put client money in a hedge fund. Too volatile and they just don’t work very well, especially in retirement. Number three, the per count minimum is three million dollars or more. I can’t diversify somebody if it’s three million dollar count minimum. So we don’t use those.
BEN: And the last one is they’re high beta funds, which means they have very high volatility. In the good years they do very, very well, in the bad years they do very, very bad. And truthfully, when I’m talking about retirement funds I don’t want to have to tell you that…
BRIAN: Your account just lost 70 percent.
BEN: Something we just, yeah, something I recommended to you just lost a lot of money. This is too important. This is way too important to have that type of volatility.
BRIAN: Okay, I want to stay on this topic for a little while longer. So in the training that we’ve, in what we see come into the office, if someone is working at XYZ, well I’ll just say it, if someone’s working at Oppenheimer, what kind of mutual funds are they going to have?
BEN: Oppenheimer.
BRIAN: If someone’s working at Merrill Lynch, what kind of mutual funds are they going to have?
BEN: It’s Merrill.
BRIAN: Or Bank of America, right?
BEN: Yeah.
BRIAN: So if you’re expecting your best interest to be followed by a salesman, that’s proof right there that your selection of risk managers didn’t go farther than the financial advisor’s pocketbook.
BRIAN: They’re incented to use in-house mutual funds. And that’s when we do our studies Merrill Lynch, Bank of America and Oppenheimer funds are nowhere near the top of the list when it comes to net of fee performance.
BEN: Well, I would just say I love Toyota, great company, but if I walk in saying to a Toyota salesman, “Hey, what’s the best vehicle I should have given this criteria,” you’d be crazy to think he’s going to recommend anything else besides Toyota products.
BRIAN: Right.
BEN: Well, and this goes back to something that we mentioned earlier and which is very important when you’re talking about your retirement and the funds that you have is you need to be working with a fiduciary who is independent. The fact that we don’t have any corporate structure telling us what we should or should not recommend is key. It means we can literally give you the best investments out there.
BRIAN: Okay. Let’s stay on this for just a little while longer. You’re saying that we go to the Wilshire Database, largest database of money managers and mutual funds in the country, and then we use the Morningstar Database and we look at the top performing managers.
BRIAN: Now we get some shenanigans. What about people that have fantastic numbers and they started in 2009, would you use those?
BEN: Absolutely not.
BRIAN: Why?
BEN: Well, we’re talking about retirement funds and we’re expecting the next 12 to 18 months to be very difficult in terms of another market correction. And so any of the money managers and mutual funds we use, they have to have actual real data from a down market.
BRIAN: Okay.
BEN: And many of our managers have data from two down markets. We want to make sure that they do have preservation of capital in down markets.
BRIAN: But what is they say that they’re good and they show you a back tested and hypothetical performance?
BEN: Well, that’s good for them. However, that’s not real. Hindsight’s 20/20.
BRIAN: Right. So at Decker Retirement Planning in Seattle and Kirkland we don’t use hypotheticals. Okay, here’s another one. What if, well, I’m going to move on. How, explain how, are these individuals or are the computer programs?
BEN: Oh that’s a great point, Brian. No, we don’t want to trust a human to be able to make these decisions because it…
BRIAN: Expand on that. Why?
BEN: Well, because there’s two great factors that are involved with an individual if they’re the ones that are doing these decisions and the first one is greed and the second one is fear. Now if you are investing based on greed and fear, you are going to make mistakes. And so what we use are computer driven, trend following algorithms. They see market insights and they make their decision based on computer algorithms.
BEN: It’s much easier to predict, it’s much easier to really quantify how they perform, especially in down markets, if these computer models do the same things in the same situations.
BRIAN: Okay. So fear keeps you from getting into a market when you should at the bottom and greed keeps you in the market too long at the top, right?
BEN: Absolutely.
BRIAN: Okay. This is the most important question on the radio show that I’ve asked so far. How do these models protect principle when the markets roll over and go down like in 2008?
BEN: Well, there’s three ways that these models protect capital. Now the first way is that they buy simply what’s trending higher. So you remember in 2000, ’01 and ’02, in the middle of the tech wreck, a lot of the technology stocks were crashing. They were doing horrible. But truthfully, there were a lot of stocks doing great. I mean in that section you had real estate was strong, material companies were strong, biotech, there were hundreds of stocks that were continuing to climb up. These trend following models keep the stocks that trend higher.
BEN: So that’s number one. Number two is the stocks that don’t do well, that cross their moving averages, their 200 day moving average, they will automatically sell and go cash. Which a good point here is that here at Decker Retirement Planning, again, we are on a distribution mindset, not an accumulation. So we can go 100 percent to cash. If there is nothing good to buy we go cash.
BRIAN: On the risk models, yeah?
BEN: Yes, on the risk models. And so a lot of these mutual fund managers have a cap of five or seven percent because they have an accumulation mindset. Now the third way that these models protect capital, and this is very important, is if the market is in a defined down trend that these models will hold a portion of the portfolio short to preserve capital.
BRIAN: Eww, that’s risky.
BEN: And I always hear that. I always hear that it’s risky. And truthfully, if you look at it, let’s define risk. Risk is defined as volatility. Now volatility can be good or bad. Upside volatility you want all that you can get on that, downside volatility you want to limit that as much as possible. And so we go back to how…
BRIAN: Downside volatility is losing money.
BEN: Yeah, you lose money. It’s bad.
BRIAN: Yeah.
BEN: That’s the biggest overstatement I think we’ve said on the show. Losing money is bad. It’s detrimental to your retirement. Yeah. And so that goes back to what we were mentioning earlier in the show is that 90 percent of Americans manage their money in a two sided market with a one sided strategy.
BRIAN: Two-sided market, meaning markets go up and down.
BEN: Uh-huh.
BRIAN: And one-sided strategy, meaning banks and brokers tell you to buy, hold and hang on.
BEN: Yeah. Which that works great if the market’s going up. Everyone’s happy. If the market’s going down and you are on a one sided strategy, look what happened in 2000, ’01 and ’02. What happened?
BRIAN: Fifty percent.
BEN: Fifty percent drop on a one sided strategy. That is very risky. We at Decker Retirement use a two sided strategy and a two sided market. And going short is what helps us on the downside protection. And so if you look at our trend following computer driven algorithms, in 2000, ’01 and ’02 our models did not lose money.
BRIAN: Okay.
BEN: The banker and broker models lost money.
MIKE: So I’m going to send another offer here because our lines, I mean typically when we talk about the two sided model they fill up. And so actually we had a wonderful lady that called us after we had the ten calls and really said, “I need to come in and see this.” So we’re going to extend a second time here for another ten callers to call in and visit with us. And we’re doing this because we are very passionate, not only about what we do, but about educating people and showing the books so the people know that there is a solution to what most people think may be a broken model, this buy and hold strategy, because it is broken.
MIKE: And these two sided models are crucial to a proper retirement plan, in our opinion. And so for the next ten callers that are 55 years or older and have at least 300,000 of investable assets, the next ten callers again, 1-800-261-9446, we will let you come in at no cost to you because quite frankly chances are you’re taking too much risk. That number one more time is 1-800-261-9446. All right, let’s keep going. This is great material. Keep it coming.
BRIAN: Okay, so Ben, you’re hitting it out of the park here. Why, when we talk about short and you explained volatility, can you prove mathematically that our clients are taking less risk with a two sided model?
BEN: No, absolutely. And it makes it a lot easier with the fact that we are using these trend following algorithms because like we were mentioning before, is it gives a great back data showing what happens in these market crashes. And so I can show you mathematically how we are much less risky doing our sided risk model than you would be in a one sided buy and hold strategy.
BRIAN: Okay. So it so blatantly obvious, if you buy the S&P you lost money, you lost 50 percent twice, 2000, ’01 and ’02, you lost 50 percent, and then from October of ’07 to March of ’09 you lost 50 percent. Two times you took a 50 percent hit. Did our models, you already said this, I just wanted to repeat this, did the models that we’re using lose money in 2000, ’01 and ’02?
BEN: No, they made money.
BRIAN: Okay. Did they double when the markets doubled from ’03 to ’07?
BEN: They did.
BRIAN: Okay. Then when the markets went down in ’08, collectively did they make or lose money?
BEN: They made money collectively.
BRIAN: Okay. Has there been a year collectively that the models we’re using now has ever lost money?
BEN: And this is very important, no.
BRIAN: Okay. So by definition, mathematical definition of risk, which is we defined as downside volatility, which is, duh, losing money, these models mathematically, factually, objectively carry far less risk, far less risk than the banker broker model that is buy and hold.
BRIAN: Let’s talk about the banker broker model. By the way, we’re fiduciaries so you’ve seen in the meetings, Ben, where we tell our clients if they want to manage their own money, is that okay?
BEN: Absolutely.
BRIAN: Okay. And if they manage their own money and they’re with a banker or broker, they’re with a banker or broker that is charging them one or two percent management fee for a buy and hold strategy, we point out that there’s something called robo investing with Schwab, Fidelity and Vanguard, where you automatically, for no management fee, have the ETF’s, the index ETF’s, that are rebalanced on a daily basis.
BRIAN: Warren Buffett talked about this last weekend. Warren Buffett easily the most brilliant investor on the planet excoriated fund managers by saying that they don’t, he’s on the verge of winning his bet that over a ten year period the indexes will beat a managed account. So we’re looking out and seeing a bald eagle just make a hard right bank turn.
BEN: Next to our office.
BRIAN: Oh my gosh, this is so beautiful.
BEN: With the Space Needle in the background.
BRIAN: Yeah. That is a big eagle. But anyhow, we, if people want to manage their own money we not only say that that’s fine, but we help them save fees. We point out the robo investing strategy at Schwab, Fidelity and Vanguard is a way that they can significantly reduce their fees on a buy and hold basis.
BRIAN: Let me say this differently. If someone’s going to manage their own money with a buy and hold strategy why do you need to pay a management fee for that?
BEN: You don’t. Could I put something out here, too? If a client, and some have done this, I mean robo investing, and that’s fine, we don’t make any money off of that. I know we poked earlier about the, poked fun at the broker who won’t ever bring up mutual funds they wouldn’t get paid on, but we’re a planning firm. This is retirement planning and if robo investing needs to be a retirement plan we’re gonna let you know about it and let you make the decision because that’s what a fiduciary does.
BRIAN: And we’re respectful that this is the client’s money.
BEN: Yeah.
BRIAN: Our job is to put ideas on the table. So now let’s talk about management fees. We talked about fees. If we let the fee tail wag the dog, do you know where I’m going with this?
BEN: Mm-hmm.
BRIAN: It’s not a good thing. How can we be fiduciary’s, Ben, and tell clients that if we help bring their fees down to zero that that might not be the best thing for them? Can you talk about that?
BEN: Well, sure, the fee, what you need to be looking at isn’t the fee itself, you need to be looking at the net of fee performance. So if I could tell you I’m going to give you something that has no fees, but I’m also gonna give you very little return, that’s not as great as me saying, “Okay, there’s a fee for this investment; however, I’m going to give you 20 times the return.” Well, that’s going to be better.
BRIAN: Right. And so let’s talk about an example. So let’s say, Ben, that you gave Mike a dollar and he gave you a dollar ten back and you gave me three dollars and I gave you six dollars back. Who are you happiest with?
BEN: I’m happiest with you.
BRIAN: Okay. And but Mike would jump up and down and say he’s three times more expensive than me and you would say?
BEN: I’m still getting more money from you.
BRIAN: Net of fees.
BEN: Net of fees.
BRIAN: Okay. So as fiduciaries, it is a seeming contradiction for us to not bring fees down to zero. Let me say this another way. If we were to bring fees down as much as possible we would have our clients on the S&P index, which is diversified over 500 different companies, we would own the ETF, which is four point zero four, four basis points in fees, bringing fees down to zero, and yet in the last 16 years our clients, if we did that, would have taken two 50 percent hits on their portfolio and retirement.
BRIAN: I think we would have gotten sued. Just sayin’.
BEN: Well, it also wouldn’t have been great for our clients. I mean we’re looking as fiduciaries at their best interest, at your best interest. And, you know, the fees are one part of it, but you can’t have the fee be the only thing you look at. We’re looking at net of fee performance, what’s best interest for the clients.
BRIAN: Right. So we, that’s why we say we don’t let the fee tail wag the dog. We look, like Ben said, we look at net of fee performance, where are we consistently getting net of fee performance.
BRIAN: So a hundred thousand, Ben, grows in 16 years in the S&P to a little over 200,000, average annual return is four and a half percent. The net of fee performance for the models that we’re using grows to over 900,000 at Decker Retirement Planning in Kirkland and Seattle, average annual return is 16 and a half percent. Do you plan with 16 and a half percent estimated?
BEN: Oh no, absolutely not. I want to be very conservative when I’m talking to people about their retirement. I want these numbers to be something that they can absolutely rely on and they feel comfortable with. So when I’m planning I typically use six percent return in the risk bucket.
BRIAN: Okay. So I’m going to jump into something that’s happening March 15th, Mike. I’m going to bring this up. And then I want to talk about taxes with Ben again.
BEN: Sounds good.
BRIAN: March 15th, that’s the date that the debt ceiling is set to expire in our country. If congress does nothing, and it probably won’t, Treasury Secretary Mnuchin, and I don’t know how to pronounce that name, will be forced to get creative in the nation’s accounting procedure to avoid a fiscal crisis. As it looks now, sometimes in July time will run out and the piper will have to be paid.
BRIAN: March 15th is the latest suspension expires and the debt limit will likely be reset into little north of 20 trillion dollars. If law makers don’t do something before March 15th the United States will default on some of its debt, which would probably push the world markets and the, and I don’t even want to say a tailspin or anything scary, interest rates go up, dogs and cats living together, it could ruin the sterling credit of the United States credit and cause a lot of economic tumult.
BRIAN: Not exactly what Treasury Secretary wants to happen on his watch. So Treasury Secretary Mnuchin said during his confirmation he’d prefer to skip any drama quote, ”Honoring the US debt limit is the most important thing. I would like us to raise the debt ceiling sooner rather than later.” Former OMB Director under President Reagan, David Stockman, he’s really bearish. I’m just saying he’s really, really bearish. He points out some harsh realities, he says quote, “I think what people are missing on this date, March 15th, 2017, that’s the day that the debt ceiling holiday that Obama and Boehner put together right before the last election in October of 2015, that’s when the debt holiday expires.”
BRIAN: “The debt ceiling will freeze in at 20 trillion. It will become law. It will be a hard stop. The Treasury will have roughly 200 billion in cash and they’re burning 75 billion a month, by summer they’ll be out of cash. Then we’ll be, that will be the mother of all debt ceiling crises, everything will grind to a halt.” So it’s just an interesting date that we want Decker Talk Radio listeners to be aware of.
BRIAN: Okay. We have ten minutes?
BEN: About ten minutes left.
BRIAN: Okay. I want to talk about the four horsemen of retirement. These are major problems that people in retirement face. No, I want to talk about taxes.
MIKE: Save that for the next week.
BRIAN: Yeah. So I’ll push that aside. So Ben, we do comprehensive tax planning here, tax minimization, right.
BEN: Right.
BRIAN: We don’t do 1040 returns though, right?
BEN: No.
BRIAN: Okay. So talk about some of the tax, tax minimization strategies you do for your clients in Seattle.
BEN: Well, some of the most common ones that I see is if you look at your 1040 on lines eight and nine you typically see reinvested interest and dividends that you’re getting taxed on, but you’re not collecting as income. And so on average…
BRIAN: Wait, you’re paying tax on something you never even see?
BEN: Yeah. And most people don’t even know this. And so we take a look at that and it’s an inefficiency. And so that’s one where we either want to move those funds into a retirement account and defer those taxes or just take the income now. If you’re paying taxes on it might as well take it.
BRIAN: That makes sense.
BEN: So one or the other.
BRIAN: So that’s number one.
BEN: Yeah. The second one is actually the biggest tax savings that an individual can go through in their entire life.
BRIAN: Typically, right?
BEN: Typically, yeah. And that’s converting from an IRA to a Roth.
BRIAN: Why is that such a big deal?
BEN: Well, a Roth is a golden account. And so what I mean golden account is that it grows tax free, it pays to you tax free and it transfers to your beneficiaries’ tax free.
BRIAN: That’s awesome.
BEN: It is awesome. So, you know, if we have somebody come into our office that has 300,000 dollars we’re putting at risk and we grow it to 1.2 million dollars will they be happy with us?
BRIAN: No, because they owe tax on that huge amount now.
BEN: Because now they’re going to owe tax on 1.2 million dollars.
BRIAN: Or R&D’s, right?
MIKE: Most people would get that wrong.
BRIAN: Yeah, most people would say they’d be really happy with us.
BEN: Yeah, they’ll be happy with the return, sure, but what we do at Decker Retirement is that we’ll take that 300,000 dollars and we will convert that to Roth, pay taxes on 300,000 dollars, as opposed to paying taxes on 1.2 million dollars.
BEN: And so later on in your life then it distributes to you tax free and then you can pass it to your children tax free.
BRIAN: That is great. What about your buckets one, two and three? Do you do IRA to Roth conversions there?
BEN: No, the gains are too small and you’re taking the money out too soon. It only makes sense in the risk bucket.
BRIAN: So you’re planning, that’s impressive, you’re planning, you know to the dollar how much you should convert from IRA to Roth and you’re saying that’s a six figure tax saving strategy?
BEN: Yeah. Well into the six figures.
BRIAN: Okay. So at Decker [top grade you?] if you don’t have an IRA to Roth conversion in retirement, and most bankers and brokers don’t, they don’t have that strategy and plan, you should come in and see it. We have a mathematical approach in our offices that talk about how much specifically you should have in converted IRA money to Roth.
BRIAN: Okay. I think we still have about ten minutes, don’t we?
MIKE: Yeah, we’ve got about ten minutes. Nine minutes now.
BRIAN: Okay. So you talked about two parts of your tax saving strategy, one you talked about the lines eight and nine on your 1040, number two, you talked about the IRA to Roth conversion.
BEN: Mm-hmm.
BRIAN: So what else?
BEN: Well, and the next one we do, so we’re not lawyers and so we don’t give any legal advice, but will look at your estate documents, your will, living will, power of attorney, and the goal here is that we can zero out your estate tax. And so we’ll help to, uh, to facilitate that. And if your estate’s over three million dollars, we’ll look at various other structures to help, you know, family limited partnerships, Nevada Corps, foundations, that type of thing.
BRIAN: Okay, so that would be number five. So number five, the Nevada Corps, the foundations, family limited partnerships, they help bring the tax down on our client’s income for higher, for the larger estates. But let’s go back to what you said about estate tax planning. There seems to be a philosophy, don’t you think, Ben, that our clients are really, really smart because they chose us, so they’re very, very smart.
BRIAN: Our clients, half of our clients, when we talk about estate taxes. And by the way, to worry about federal estate tax you have an exemption that covers a little over five million per person. So you have to have an estate, a taxable estate of over ten million dollars to deal with federal estate tax. We’re talking most of the time about maneuvering around or zeroing out the state estate tax, which is you have an exemption of two point two million per person so your estate, if it’s over four point four million will deal with estate, with state estate taxes.
BRIAN: When it comes to state estate taxes, half of our clients, would you say, Ben, say, “Gosh, I’m not gonna worry about paying or not paying estate taxes. Whatever our kids get is gonna be more than I ever got. So whatever they get net of the estate tax, I’m not worried about.” So half of our clients do nothing and are fine with it and we’re fine with it because they’ve made a decision eyes wide open of what the tax is, what the estimated tax is, and they’re fine just having the state, having the estate tax taken out of the estate and the net estate distributed to their children.
BRIAN: The other half, Ben, they say something like, “Geez, it’s not about getting our kids more money at all, it’s about after a lifetime of paying taxes I am not gonna give another hunk of flesh to the government.” So they want to zero that out. So when we talk about estate taxes, one of the easiest ways is to move to a state that has no state estate taxes. Five minutes?
MIKE: Mm-hmm.
BRIAN: So we’ve had a client we were visiting with, this is really funny, where the attorney was putting on the whiteboard the intricate plan of zeroing out the estate tax and I raised my hand and I was in there with them and I said, “Um, I should point out that these clients might move to Texas.” The attorney stood there and said, “Well, then you’ve just saved yourself 4,500 dollars and all of this plan goes away because the state of Texas doesn’t have a state estate tax.”
BRIAN: We’ve had clients move to Idaho, which has no state estate tax. So one of the easiest ways to zero out your estate tax, sate estate tax, is to move to a state that has zero estate taxes in the state. But let’s say, Ben, that you’ve got your grandkids here. You don’t have any grandkids. But if you did and they’re here and your roots are here and you’re not moving. Now you have to deal with the state estate taxes. What are some of the options that you could do? Gifting, right?
BEN: Yeah, there’s a handful of options, gifting, we look at different trust options, there’s a handful of different solutions that we can look at and it’s all tailored based on your specific situation and what we really need to be looking at.
BRIAN: And we work closely with the attorney because they’re the expert on this anyhow, but rather than brainstorming at 400 dollars an hour, we try to help prep the client with a plan to go in to talk to the attorney about and get the attorney’s guidance.
BRIAN: So when it comes to any taxes of any kind, we are all about minimizing taxes across the board for the clients’ accounts except for one. Oh we only have three minutes left for this. This is a teaser. There’s one tax that we want clients to maximize in their life and that is when they’ve owned a stock and they need to sell it some people won’t sell it. If it’s a lost cost basis stock they won’t sell it. They’re frozen. Deer in the headlights. They’re frozen.
BRIAN: And so we’d say to those people, “Hey, let’s wait until the stock market goes way down and we’ll sell it at the very bottom to minimize taxes.” That’s silly. And when we say to the same people, “Hey, if you had 20/20.” Dang, we’re not going to get through this. So in the next…
MIKE: Finish your thought. Yeah.
BRIAN: Okay. We say to these same people that say they’re not selling a low cost basis stock, “If you could with 20/20 hindsight go back and sell Microsoft, which hasn’t done much in 16 years, and sell it at the top, November of 1999, would you do it?” Every person, Ben, says what?
BEN: Yes.
BRIAN: Yeah. And we point out, “You mean you would maximize your taxes.”
BEN: The capital gains, yes.
BRIAN: Because?
BEN: Because you’re selling at the top.
BRIAN: Right. And because they’re maximizing their after tax gain.
BEN: Mm-hmm.
BRIAN: That’s what we’re all about. All right, Mike.
MIKE: Yeah, so we’re going to wrap up our show here real quick and we’ve covered a lot of information, but for more information, go to www.deckerretirementplanning.com for a number of articles that we’ve written and continue to write as we continue to post on there.
MIKE: Also, just a heads up, we’ve had a lot of listeners that missed the show. You can listen to the show via iTunes or Podcast. If you’re not tech savvy, grab a friend, a child, grandkid, I’m sure you can get help there. But then you can listen to it at your own ease. So the show is Protect Your Retirement on iTunes or Google Play. Or you can just go to our website and listen to it. We post the shows every Tuesday on our website.
BRIAN: And we’ve written a lot of articles about how bankers and brokers can hurt you.
MIKE: Absolutely.
BRIAN: In retirement.
