The Doctor Test: Your Guide to Evaluating a True Fiduciary

When it comes to providing financial advice, we like to think our advice is not unlike the “treatment” and advice doctors provide for our physical condition.  But, instead of treating a torn achilles, a heart condition or the flu, we provide advice on “healthy” asset allocation, tax strategies and retirement projections, etc.

Recently, the Department of Labor has brought to light a concept known as “the fiduciary standard” which in the most basic terms means “always acting in the client’s best interest”.   So in the medical field, it’s the equivalent of having the assurance that your doctor’s advice and recommendations are what’s best for you and not for them.  On the surface, it makes perfect sense.  Of course, the devil is in the details as it relates to someone who calls themselves a “fiduciary” as this is not a black-and-white question.  Rather – there are shades of grey that must be defined in order for you to know exactly what kind of a fiduciary you are looking for.  And we think the best way to illustrate this is to compare it with how we work with doctors.advisor-taking-money

We call this The Doctor Test and below we detail the four types of fiduciary.  (Note: For a more detailed analysis and background on how these standards developed, feel free to read a recent and comprehensive post from Michael Kitces, a financial planning industry expert.)  In short, we would like to see the financial industry operate with the same high ethics as the medical industry.

Keep in mind, each of the following types of advisors can certainly claim to call themselves “fiduciaries” just like a medical professional earns the right to call themselves a “doctor”.  However, the TYPE of “fiduciary” or the means by which they practice is critical in evaluating whether your definition of a fiduciary aligns with your financial planner’s.

1. The “SEC” or State Registered Investment Advisor (RIA): This type of advisor complies with the Investment Advisors Act of 1940, which states they must not act in any way that is fraudulent or misleading.  Sounds great right?  BUT, this just means they must disclose their conflicts of interest, it doesn’t mean they don’t actually HAVE conflicts of interest.  So they could be paid on commissions for recommending that mutual fund, they just have to disclose it in their filings.  Did you really read the small print in the disclosure they provided?

The “Doctor” Test:  You’re having chest pains and your doctor correctly diagnoses you need to take a particular prescription that would help treat the condition.  He or she recommends an expensive drug even though there’s a generic alternative at a fraction of the cost.  In the paperwork you signed, it says he could get taken on a fishing trip or a nice seminar in Barbados for recommending this drug.  Would you be OK with that? Of course not, and that’s why doctors don’t operate in this manner.

2. The Department of Labor (DoL) Fiduciary: This advisor complies with the new DoL regulation that requires “always operating in clients’ best interest” when providing retirement advice. Again- sounds great.  However, the problem is this standard only applies to investment advice on retirement accounts.  It says nothing about broader financial planning topics and does NOT apply to non-retirement accounts.  This makes no sense.

The “Doctor” Test:  You’ve been experiencing knee pain and turn to a doctor for help.  She evaluates your knee and recommends an effective knee brace (with no financial incentive) to help you alleviate the symptoms.  But then you mention your aching back and while it could be directly related to your knee problems, she doesn’t have to provide the same heightened standard of advice and recommends an expensive, high-risk procedure to be performed by a doctor she gets a referral fee from.  Any doctor we know would never practice like this.  But just like our bodies are one system of interacting components, so are our financial accounts.  It shouldn’t matter if one is classified as a retirement account or one is not!

3. The Certified Financial Planner ® Fiduciary: The CFP certification is an outstanding program as it is comprised of a rigorous series of education requirements, comprehensive (and very long) exam and continuing education which covers almost all aspects of personal financial planning.  We are CFPs here at Magis Wealth Planning so we certainly endorse the high standards the CFP Board requires of its members.  While the certification is a great start in evaluating a planner, it’s not a legal  standard. Which means that to call oneself a CFP, you must pass their exam and agree to adhere to their Code of Ethics.  That’s fine but what if a CFP doesn’t comply?  There is no legal recourse. The CFP Board can’t fine anyone or subpoena anyone or force anyone to testify in a legal matter.  Their only recourse is to strip a violator of the certification.  While this might be detrimental, stripping one of their CFP mark does not preclude them from practicing as a financial planner.

The “Doctor” Test:  Let’s say you’ve heard there is a doctor who has some high-level certification for rotator cuff surgery.  Of course if you need that procedure, you would certainly seek them out.  But what if he hasn’t kept up on the latest & greatest techniques and technologies associated with the surgery.  What’s the risk to him?  Well, he could lose that high-level certification.  But with a solid reputation already established, maybe he might not care.  But you would certainly care.  The point is the downside risk to the doctor is not as equitable to you as it is to him.

4. The “Crystal Clear” Fiduciary: In our minds, this is the most stringent standard that we believe all people seeking financial advice should demand.  These are financial advisors who usually are members of networks of like-minded advisors such as NAPFA & Alliance of Comprehensive Planners (full disclosure:  we are member of both organizations) which actually document and sign a contract with clients which explicitly states on paper they are ONLY compensated by client fees and there are no other means of compensation like commissions, referral fees or golf-junkets to the Bahamas for selling annuities.

The “Doctor” Test:  We wish we could walk into a doctor’s office or a hospital and among all the paperwork we have to fill out (over and over again, it seems), see an explicit declaration that this doctor is only compensated by what we pay them and their medical advice is not “clouded” by potentially more lucrative recommendations from third parties.  We’re confident doctors actually do operate without the conflicts, we just wish the same were true for the financial industry.

The point is this:  The advice business, be it medical or financial, can be confusing enough with all the acronyms and esoteric terminology.  What should be completely transparent is the compensation model that may or may not be driving recommendations from our practitioners.  In short, we would like to see the financial industry held to the same high standards as the medical industry.

We think a great way to cut through the confusion on all the standards, acronyms and certifications is to simply apply the “Doctor Test” when evaluating a financial advisor.  This should go a long way toward aligning your physical health with your financial health.

Optimizing Cash Flow for Retirement – Part 1

Today, we are introducing the first of four articles detailing our unique set of tactics which we believe, when integrated as one cohesive strategy, optimize cash flow for retirees in a tax efficient and cost effective manner.  This is accomplished without conflicts of interest or the exorbitant fees and restrictions of annuities as we do not sell any financial products.

Together, we call our strategy the Cash Flow Optimization for Retirees and it is comprised of “Four Cornerstones”.

  • Bond Ladder Implementation & Management
  • Social Security Optimization
  • Systematic Roth Conversion
  • Tax Efficient Asset Distribution

This strategy is ideally suited for people who are 1 to 15 years from retirement but this can also be very effective for people already in retirement.  It combines low cost investments, tax efficiency and most importantly, peace of mind that our clients’ portfolios are “doing their job” by effectively matching future liabilities (living expenses) with assets (portfolio).cash-flow

While we cannot control the stock and bond markets, we can control our reaction (or lack of reaction) to the markets and our investment costs.  In addition, we believe legally minimizing our client’s tax liability provides extra “alpha”, which could enhance portfolio returns and extend the life of the portfolio in retirement.  While we would never guarantee returns, we believe our strategy maximizes the chance of success, which we define as funding a retiree’s lifestyle without falling victim to high fees and sales commissions paid to an annuity salesman.

Part 1 of our series starts with the Bond Ladder.  Throughout 2017, we will outline the other three strategies.  Again, we believe the combination and coordination of these strategies is unique, differentiated and ideal for individuals or couples either in retirement or anticipating retirement in 15 years or less.

The Bond Ladder

In the simplest terms, a bond ladder is nothing more than a series of individual bonds, each maturing at a specified date in the future.  We believe integrating this seemingly simple concept into a coordinated strategy is a critical component to optimizing the long term cash flow needs for retirees.

What It Is:  The bond ladder is a series of bonds (not bond funds), each with a maturity date that corresponds to a year of living expenses above and beyond pension or social security income.  To build this bond ladder, we first determine how much “income” is needed from the maturing bond each year.  We then purchase (at existing rates) US Treasury STRIPS, which do not pay annual interest but instead are purchased at a discount and then mature at the par value over time. (Income tax is still owed on the “imputed” interest each year).

How It Works: Our sample clients are 58, looking to retire in 5 years at age 63.   They are starting with a portfolio of $2,000,000 and they expect to receive $35,000 / year from Social Security at age 67. They spend $100,000 per year in today’s dollars and we would like to build a 10 year bond ladder to provide peace of mind that their living expenses are covered for 10 years, regardless of stock market fluctuations.  To ensure an inflation adjusted $100,000 “matures” each year from 2022 to 2031, we would need to take $675,928 (or about 1/3 of the portfolio) and invest it in US Treasury STRIPS that mature over that time frame.

This leaves the remaining portfolio (about 66%) eligible to invest in stocks (and even some additional bonds) for long term growth as we won’t have to rely on what will likely be a fluctuating value over the years.  So even if the remaining portfolio were 100% stocks, we wouldn’t worry too much about year-to-year volatility as we have reasonable assurance, based on long term history, that over 10 years a stock portfolio is almost always higher after 10 years!

In fact, a great article in the Wall Street Journal last year (please click HERE for a copy) noted that the average recovery period for the stock market from a bear market (down 20%) to a new high is about 3.3 years!  We all remember 2008.  The recovery period from that terrible bear market was 5.3 years.

Now what happens if it’s 2021 and the stock market were to drop 10%?  The bond matures and their living expenses are funded.  But now we’re not forced to sell any of our portfolio because we know we still have the remaining 9 years for our portfolio to recover and likely, outgrow its current level.  Now, what if (in 2021) the stock market rose only 4%, the client could still fund their living expenses with the bond that matures that year.  We could then sell about $52,000 of stock (the 4% gain of the non-bond ladder funds) and fund another year of living expenses buying a 2032 US Treasury.

Why It Matters:  First and foremost- we must emphasize the implementation of a Bond Ladder is not intended to maximize portfolio returns.  In retirement- that’s not the job of a portfolio!  Instead, we think of the portfolio in risk adjusted terms that must be custom-fit to fit retirees’ cash flow needs.  This is NOT a market-timing, stock picking or “reach for yield” strategy.  Instead, the Bond Ladder provides psychological comfort and insulation from knee-jerk reactions to stock market volatility.  Instead of fearing a bear market, we can have reasonable assurance the client’s lifestyle is protected for up to 10 years without having to liquidate the stock portfolio at fire-sale levels.

In addition, we are effectively self-funding an annuity-like stream of income, without paying egregious up-front commissions (as high as 10%) and annual fees (~3%) to the annuity company.  Using our example client, buying an income stream with an annuity could cost our retirees $67,598 up front and about $20,300 in annual fees!

Finally, the psychological impact of knowing you have 10 years of retirement income fully funded cannot be understated.  As we discussed in our prior post ROI vs. ROS, we’re much more concerned with providing retirees ROS (“Return on Sleep”) than we are taking too much risk for ROI (Return on Investment).

How to Handle the Upcoming Election Results

Since this is our last blog post prior to the national election on November 8th, we thought it would be helpful to detail what we believe to be the most important things you can do before and after the election results are posted.

This article follows last month’s post where we detailed what we are watching for in the election (you can reference that blog here).

Now it is certainly important to know how the winning candidates will attempt to implement their policies, but we think it is even more important to execute on what we can actually do to positively impact our lives and the lives of our families within the context of the election results.

In short, our recommended actions have almost nothing to do with who will sit in the Oval Office or on Capitol Hill.  No- the most important person impacting you and your family is the one staring back from the mirror each morning.worry-image

Said differently, we feel strongly that grinding our teeth about whether or not “our candidate” won is an exercise in futility.  Why?  Because unless you are directly and substantially involved in the political campaign, your impact on the result is negligible.  (Side note:  We are still strong believers in voting in every election as we think this is our fundamental duty as citizens of a republic.  A lot of people died for this right and we think everyone should take it seriously.)

So with all this in mind, we believe everyone should cast their vote then walk out of the voting booth and intently focus on the following:

  • Work hard and work smart to add value to your employer or your customers so as to maximize your earning power
  • Monitor and manage your living expenses
  • Ensure your portfolio has balanced risk vs. return profile that projects toward achieving your goals
  • Minimize your investment costs through a diversified, low-cost & tax efficient investment portfolio
  • Rebalance your portfolio at least once per year
  • Reduce your tax liability (current and future) by all means legally available
  • Ensure you are properly insured on your life, your health, your earning power and your personal property
  • Organize and optimize your estate plan

Now we know most of the aforementioned list is a bit self-serving as we are in the business of executing on these strategies with our fee-only model.  But even if you don’t use a financial advisor, the concepts still apply whether you partner with a firm like ours or not.

Bottom line:  we can lose a lot of sleep worrying about whether or not Clinton / Trump, etc. will destroy the country.  But what is directly impactful for each and every one of us is to focus on and address those factors that we can actually control!

What We’re Watching In The Upcoming Elections

election-imageThe recent cooler temperatures in Northeastern Ohio seem to have flipped the switch as the unofficial ramp-up of an already heated election season.  As we all know, this culminates on November 8th with the election a new president along with many other congressional representatives.

So as financial planners, why would we articulate our observations about this divisive election? Are we really going to get political and make an argument for either Trump or Clinton?   Of course not.  We are old enough to know it is usually pointless to argue politics with someone who already has their mind made up.  Even if you think you have an open-and-shut case for a particular position with facts and figures to back you up, we’ve learned that it just doesn’t matter.  If someone is entrenched in a particular mindset, they just can’t be convinced otherwise.

That said, we have had enough recent conversations with nervous clients (on both sides of the political spectrum) who are convinced “If Trump/Clinton get elected, we’re in big trouble!!!”  While that may be true, we can all at least agree that one of these two candidates is almost guaranteed to take the oath of office in January.  So we’re stuck with one of them.

For this reason, it’s important to be cognizant of the each candidate’s positions on taxes, trade, fiscal policy along with many other issues.   So we do need to educate ourselves on Hillary Clinton’s estate planning tax proposals and capital gains tax changes.  And we do need to know about Donald Trump’s compressed tax brackets and repatriation tax rates.

However, we think individual investors have a tendency to put too much focus on the outcome of the presidential election.


First, in our view most of these proposals serve mostly as political grandstanding.  We think most “new policy” speeches are nothing but grandiose ideas that make for nice sound-bites for the mass media, newspaper headlines, Facebook posts or Twitter hashtags.  They are almost always short on detail and there’s never really any deep discussion on how these plans would be implemented or if they are even feasible.

Which brings us to our second point- most of these proposals will never be implemented because they will never see the light of day if they aren’t passed first by Congress.  Now we don’t mean to bring back nightmares from your high school civics class but our republic has a system of checks and balances.   Laws, and more importantly, spending cannot be authorized without first passing through the House and Senate.

So what we are watching most intently is the interaction between the presidential outcome and congressional races.   As most know, currently both the House and Senate are held with slight majorities by the Republicans controlled as a result of the huge gains from the 2014 mid-term elections.

So there are four most likely outcomes:  Trump elected with a Republican congress, Trump Elected with a Democrat congress, Clinton elected with a Democrat congress and Clinton elected with a Republican congress.

In our view, any opposition of presidential party & congressional majority party (i.e. Clinton with a Republican congress or vice versa) would mean most of these presidential proposals will have little chance of full implementation.

However, if we see the same party come out victorious in both the oval office and on capitol hill, we need to watch very closely how proposed new policies would impact our investments, taxes, insurance planning and estate plans.  So what half of the country may think are crazy ideas may very well become law and could have very real impacts on economic growth, stock and bond market returns and of course, how much we pay Uncle Sam on tax day every year.   But even then, these changes won’t happen overnight, so kneejerk reactions to asset allocations or tax strategies usually does more harm than good in the long run.

Write the Check or Cash the Check?

Now that the official tax filing date has passed, most of us usually have one of two mindsets relative to this onerous process.  If we’re getting a refund, we’re happily waiting for the check or the direct deposit to hit our bank account.  We may have visions of new patio furniture or paying off that high-interest credit card balance.  But if we owe taxes, we’re not so happy to have scratched that check to Uncle Sam, our State treasurer or the local tax man.  As we dropped that check in the mailbox, we might have been thinking “What does my congressman do all day anyway?” or “Why can’t they repair that massive chuckhole at the end of my street?”Uncle Sam Shakedown

In either case, a question I often get this time of year is whether it is more advantageous to get a refund or to owe taxes when it’s time to file a return.

Like most financial planning questions- there’s a “hard numbers” answer and a subjective answer but let’s run through each scenario.


In the most basic terms, if you’re receiving a refund this year, this means you endured some combination of over withholding from your wages and/or business income this year and/or you paid estimates during the year that exceeded your liability- pretty simple.

So the government owes you your money back.  No doubt, getting a check/direct deposit for several thousand dollars always puts a spring in our step this time of year.  And I believe this “miscalculation” on the estimate stems from the fact that the tax filing process itself is such a quagmire.  The complexity around income tax returns results in a “black box” where we really don’t know with a high degree of certainty how much of a tax liability we’ll actually incur during the year unless we sit down at least once during the year for a detailed tax projection (which I walk through with almost all my clients).  This means we “overcorrect” and pay more in taxes throughout the year in anticipation of this “refund”.

But in my opinion, we’re really just fooling ourselves.

As most have probably heard it described, this refund is effectively an interest free loan to the government during the year and I don’t know about you, but lending money to the government is not high on my priority list.


Obviously, the inverse of the refund scenario means your tax liability is higher than the payments you’ve made via withholding and/or estimate payments during the year.  Again, the primary reason for this is usually related to the difficulty in navigating the tax code to properly estimate the year-end tax liability.

What some people don’t realize is the federal income tax is a “pay as you go” tax. This means that the onus is on the taxpayer to pay tax on income earned throughout the year – either through direct withholding from your paycheck or by making estimated tax payments.  The key is the timing of when you pay the required tax because you can’t just calculate the annual tax owed and write a check on Dec 31st or April 15th.

If you don’t pay enough each quarter, then you may get an unexpected tax bill after filing your tax return for penalty and interest on the underpaid amount. While the calculation (not surprisingly) is somewhat convoluted, the current interest rate on the under-payment amount is 3% and the penalty is 0.5% per month in addition to the interest.  In most cases, the penalty and interest probably doesn’t add up to an exorbitant amount, though it could be consequential if you are self-employed or if you receive a large inflow of taxable income without withholding.

In general, the underpayment penalty does not apply if:

  • You owe less than $1,000
  • You paid at least 90% of the tax owed for the year, or
  • You paid at least the same amount of total tax as you paid for the prior tax year – this requirement increases to 110% if your adjusted gross income is more than $150,000 (or $75,000 if married filing separately).

Again, this is where detailed tax planning comes into play well before filing the tax return.


In my opinion, the optimal scenario is to determine proper withholding that is likely to result in a small liability at tax time.  This can be accomplished with proper tax planning and a mid-year tax projection that factors in bonus payments, adjustments to portfolios (capital gains & losses) and a myriad of life events impacting a tax return.  Of course the primary reason is to keep our money in our own pockets and not rely on the government as a de facto bank.  Optimally, your paychecks should be coordinated with tax withholding and integrated with an automatic savings program (direct deposit to YOUR savings account, not the government’s) and a proper liquidity strategy with ample funds to handle any “surprises” when it comes to filing taxes.

As noted above, the risk to incurring tax penalties is relatively minor (especially with a little planning) so it makes much more sense to take this small “risk” of owing some tax in April.

Yes it’s nice get that check/direct deposit in April and yes, it’s easy to think of this as some sort of windfall.  But in my mind, I’d much rather look at a savings account statement from April of last year and compare it to April of this year and take heart that I had access to this money when I wanted it – not when Uncle Sam gets around to paying it back.



Wish List for Financial Santa

As those of us with young kids know, this is the time of year when they drop some not-so-subtle hints as to what they want Santa to place under the tree on Christmas Eve.  Some requests are realistic (sports gear, games, cloths, etc.) and some – not so much (Iphone 6, another dog).  The hints usually come in the form of the classic “wish list” to Santa which conspicuously left on the kitchen table, posted to the refrigerator or taped to the bedroom door.Santa Wish List image

Given the spirit of the season, I too would like to participate.  But instead of petitioning old St. Nick for a new tie or a good book, I have compiled a different kind of wish list.  My wish list is intended for a “Financial Santa Claus” and it’s not for things I’d like to receive but instead is focused on practical changes and simple reforms in the financial world that I believe would help many families working on their careers and trying to save for all their financial goals.

So here’s my Financial Wish List:

  1. Better investment options for employer 401(k) plans: In my time working with clients, I see so many companies’ 401(k) plans with expensive and limited fund options.  For some people, their 401(k)s are their largest investment accounts and with choices limited to funds with fees sometimes in excess of 1.5% (instead of index funds’ 0.20%) this leaves employees no choice but to pay unnecessarily exorbitant fees every year.  This can mean literally tens of thousands in excessive fees over the course of a career.  It can be so egregious that very often, I work with clients to re-allocate funds (across their entire portfolio of accounts) in such a manner to “limit the damage” of the high fee options in the 401(k).
  2. No matching 401(k) in company stock: Another aspect of some poorly designed 401(k) plans is a company using their “match” provision in company stock vs. cash.  In my view, the employee is already leveraged enough to the success of the company with their career & paycheck.  Why do they need to double down with additional stock exposure?  Often, the answer is an accounting game which helps the company make their balance sheet look better with additional equity outlays vs. cash.  Again, when I see this I also work with clients to limit the damage by consistently rebalancing to reduce the exposure to the company stock as part of a broader diversification plan.
  3. Simplified Income Tax Code: This is a much more significant “wish” and has about the same chance of happening as my girls getting another dog for Christmas. According to a recent report I’ve seen the 2015 IRS tax code is 74,608 pages.  Yes pages, not words! This is absolutely ridiculous and in my opinion, speaks to the notion that the tax code is nothing more than Uncle Sam’s means to pick winners and pass out favors via tax incentives.  Even though part of what I help families with is navigating the quagmire of tax regulations, I would happily trade this value-add for the additional time to address other pressing financial needs.
  4. Eliminate “automatic” withholding from paychecks: Speaking of taxes, I believe people would be much more aware, more sensitive and hold our governments more accountable if employees did NOT have taxes automatically withheld from our paychecks.  Of course, the government employs this practice to improve collections but paying the government “automatically” masks the actual costs of the services provided.  How can anyone make a value judgement if they don’t see how much they are actually paying?  If everyone had to write a check every quarter (much like business owners like myself do), they might think twice about some of the programs and policies their favorite politicians or party support.
  5. Mandatory Financial Class for middle school and high school kids: Again, helping people with their financial lives is my business but occasionally I get requests from clients to sit down with their younger relatives just to chat about finances in general terms.  This speaks to the complete dearth of any financial education for school aged kids today.  I would like to see a one-semester class in middle school and another in high school to teach concepts like compound interest, how a mortgage works and the basics of saving and investing. With the basics, I believe a greater percentage of our children would enter the work force more aware and equipped to handle their personal finances.
  6. Everyone who has a financial advisor ask one question: “how much in dollars (not percentage) am I paying you every year?”  It’s a simple question really and I’ve written about this in another blog (which you can read here).  But I can’t overstate the importance of this:  everyone who has a financial advisor has the right to know exactly how much they are paying for their advice & service.  Advisors need to be paid for valuable service- no doubt about it.  However, people should ask themselves: why would an advisory firm NOT want their clients to know how much they are paying?  I think we all know the answer to this question.

This list could be certainly be much longer but I don’t want to overstep my bounds with Financial Santa.  After all, I haven’t been that good this year!

Merry Christmas, Happy Holidays and Happy New Year to all!


As computing power and connectivity increase at a dizzying pace every day, it seems we are now deluged with statistics and metrics. Perfect examples include the “Fit Bit” (measures our steps and calories throughout the day), chip timing in long distance races and up-to-the-minute text delivery alerts from Amazon!

The number-centric nature of our investments and finances plays right into the hand of this phenomena as we now have access to instantaneous market trends, daily emails (or texts, tweets, etc.) on our portfolio performance and high-level statistical analysis all with the intention of optimizing financial returns or return on investment (ROI).

In light of this, I believe we should also consider an under-appreciated concept that seemingly contradicts ROI.  However, I believe this concept should be considered alongside the black and white world mathematical returns.  I call it Return on Sleep (ROS).  In short Return on Sleep (ROS) is that subjective “gut feeling” or sense of serenity that comes along with knowing we made the right decision for you and not necessarily the decision that mathematically optimizes the potential for returns or savings.

Now the difficulty with this concept lies in the fact this can’t be measured with spreadsheets or high-level analytics and data-minReturn on Sleeping.  No, this must be discussed in depth and thoughtfully weighed over time in order to conclude what’s best for a particular scenario.  As we know, patience, in-depth discussion and subjective consideration are things number-crunching computers and fast networks don’t do well.

Let’s look at some examples:

Should we pay off the mortgage? This is the most common ROI vs. ROS scenario I encounter.  And I must say with today’s mortgage rates (historically low) and tax policy (deductions for mortgage interest) the ROI usually spits out a calculated conclusion that most people should NOT pay off their mortgage, assuming ample available funds.  However, this must be incorporated with some peoples’ strong urge to not have a mortgage payment, whether it makes optimal financial sense or not.  So in our analysis and discussion, I simply present the current facts and projections. Usually the calculated conclusion is the ROI trumps the ROS.  In fact, I even explain that sometimes you can have a higher ROS by NOT paying off the mortgage (better liquidity, etc.).  However, some folks just won’t sleep well with a mortgage and for them, we strike a balance and devise a strategy that optimizes their financial ROI in the context of their need for ROS.

How aggressive should our investments be?  This one is a little tougher, especially since we haven’t really felt the angst associated with a significant market downturn since 2008 (even with the recent pullback).  Generally speaking, most people know stocks have higher returns on bonds over the very long term.  However those higher historical returns come with a price- higher short term volatility and therefore lower ROS.  Much like the mortgage payoff, my role is to present the facts and coach clients NOT to react impulsively to market downturns, etc.  For some, the course of our discussions and analysis leads us to the conclusion that higher ROS at the expense of not maximizing ROI (i.e. more conservative portfolios), may make sense for them. If that’s the case, we then integrate those assumptions into the broader financial plan.

How much life insurance do we need?  As most know, I don’t sell life insurance and when I discuss this topic with clients, we always bring in a licensed (and low cost) provider to consult and fulfill if necessary.  However, our discussions sometimes conclude that some folks are actually OK with paying additional premiums for over-the-top death benefit coverage that may not be technically necessary.  In fact, the insurance agent and I sometimes conclude we could save the client money by not renewing what we believe could be an unnecessary policy.  However, if the client’s ROS trumps the ROI of the lower premiums, then it could be worth paying those premiums when taking a much higher level view of a family’s financial lives.

Bottom Line:  As I work with individuals and families, I integrate both sets “metrics” in order to balance both ROI and ROS.  Sometimes the ROI is so compelling that it outweighs the ROS and sometimes it’s the inverse.  If ROS is higher than ROI, we then work together to account for financial inefficiencies (statistically speaking) and plan accordingly.

Cold hard numbers don’t always capture the reality of our real-world financial lives.  If our financial lives are technically optimized but we lay awake all night staring at the ceiling fan, worried about so many “what ifs” then our ROS is close to zero.  For most people, a good balance is what works well for them and that can’t be captured in a spreadsheet or fancy graph.     Sleep tight…..