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.

2 Minutes With Magis Wealth Planning

2 Minutes With Magis Wealth Planning” is published on the second Friday of every month and includes brief summaries of articles and data points that we’ve come across during the course of our daily reading and research. The focus is on content that we find both relevant and interesting on various topics including investments, retirement, taxes, industry news, etc.  

  • Last week Charles Schwab lowered its standard commission price to $6.95 per trade, which is now the lowest in the industry. Expense ratios are also being reduced on several Schwab mutual funds including the Schwab S&P 500 Index fund (0.03%). This is good news for our clients.  While investors cannot control market fluctuations, they can (and should) control investment expenses – a foundational element of our business model.
  • In January, the U.S. Securities and Exchange Commission fined both Citigroup and Morgan Stanley Smith Barney for overbilling clients. Billing errors aside, a lot of people are paying more for financial advice than they realize. We employ a flat fee retainer model that is easy to understand and we do not sell products or accept commissions, kickbacks or any other sources of income.  Our clients always know exactly what they are paying – because we have nothing to hide!!
  • Bloomberg Businessweek magazine published an interesting profile of the founder of “My Pillow” which shows the power of the entrepreneurial spirit…. and a good infomercial. To summarize, Mike Lindell has built a wildly successful business from an idea that came to him in a dream and along the way lost his house, battled drug and alcohol addictions, almost died in skydiving and motorcycle accidents, and was banned from multiple casinos for counting cards at the blackjack table to pay suppliers.
  • Chart of the Month: The Price of Poor Timing. Returns for average investors are lower than market returns (i.e. stock/bond indices) over the past 10 years. Key take away: Don’t try to be a market timer. You have to make two decisions correctly, when to sell and when to buy back in, and that’s a losing proposition.


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).

2017 Market Outlook

© Copyright 2010 CorbisCorporation

Yes, it’s that time of year again.  It’s that nostalgic week with Christmas / Hanukkah behind us and the New Year’s Celebration front and center. There is something about flipping the calendar that seems to spark a thoughtful review of the year gone by and to wonder what’s in store for us in the next twelve months.

For some reason, Wall Street prognosticators (who like to refer to themselves as “strategists”) seem inclined to provide readers & clients with their official predictions for the upcoming year as a means to provide the incremental perspective they so often claim to have (and sell).

In that light, we’re happy to jump into the fray and provide our own “official bold prediction” on where stock and bond markets are going in 2017:

“We don’t know.”

Sorry to disappoint you all but if you read our blog posts enough, you should have seen that coming.  We readily acknowledge to NOT being able to accurately predict what’s going to happen in the next twelve months.  But we are happy to admit what many other advisors have so much difficulty admitting:  we don’t know because NO ONE knows.  And anyone that claims to provide you with assurance as to what’s going to happen in calendar year 2017 should be classified in the same category with tarot card readers and astronomers.

Now this doesn’t mean we don’t have an opinion.  But having an opinion on near-term market moves and a long term investment strategy are not the same thing.  In fact, these two mindsets often conflict as knee-jerk reactions to market moves often works to the detriment of building wealth over the long term.

So why don’t we provide predictions?  Two main reasons:

  1. Predictions are almost always wrong: Since 2000, people with important-sounding titles like “Chief Market Strategist” predicted the stock market to go UP every single year by an average of 9.5%. In reality, it was up about 3.9% and actually declined in 5 of the 16 years.  That includes the massive decline in 2008, when the average prediction was for an 11% rise and the S&P 500 declined 38%!  So why are the predictions so biased to be bullish?  That’s because…..
  2. Predictions drive commissions & fees:  In the short term (less than a few years), selling predictions as “market strategy” provides some insight on the mindset of the source. Predictions are usually issued by entities who benefit from trading and gathering assets. Keep in mind who is issuing these forecasts: banks and brokerage houses who make their livelihood on some mix of trading commissions, selling high-fee mutual funds or gathering assets.  A business model with these compensation structures might have their crystal ball clouded up by the potential for a large bonus.  Said differently, these folks are speculators and/or salespeople, not investors. In fact, the louder and more outrageous these predictions are, the more they remind us of the weekly NFL “Vegas Insiders” who claim to have some unique insight as to why the Browns might cover the point spread against the Steelers this week, a dubious bet indeed.

The point is this:  we have no control over the stock and bond markets and while we might sound like a broken record, we have to emphasize again: we all need to focus on the aspects of our financial lives that we can control.  Again, these factors include our risk-adjusted asset allocation, investment fees, savings/spending rate, tax liability, value to employers/clients and most importantly, our emotions.

Over the last century or so, patient investors in the U.S. have been rewarded with owning a piece of the miracle that is capitalism.  This assumes of course, they can keep their heads despite the occasional roller coaster ride of gut-wrenching declines and euphoric increases.

Sure those predictions are fun and you might even find it slightly amusing to hear a market “expert” opine on exactly where the S&P 500 may close 2017.  But we’re in the business of helping our clients maintain and grow wealth.  We are not in the entertainment business.  Ask yourself this:  If someone really knew exactly where things are going, why would they be so generous to let us in on such valuable information?

Best wishes to all for a happy and healthy 2017!

Trump, Taxes and You

By now we should all have digested the surprising results from the most recent election on November 8th.

Some of us may be rejoicing and some of us may be despondent but whatever side of the political spectrum you’re on, it’s now time to deal with the reality of the situation:  Donald Trump will be inaugurated as the 45th President on January 20th, 2017 and the Republican Party will hold majorities in both the House and the Senate for at least two years.

As we wrote in our most recent blog, the best way to deal with the results is to “control what we can control” as it relates to our financial lives.  This means adding value in our careers, optimizing investment strategies & tax strategies, etc.

But now that we know the results of the election- what can we actually do in more tactical terms?  How should we be thinking about 2017 and importantly- should we be doing anything before the close of 2016?Trump & Taxes

We believe the most immediately applicable policies to consider center on taxes. While there are many moving parts and multiple proposals from Trump and the Republican congress, at least we do have some hard numbers that could (we emphasize could) be implemented in 2017.

These are:

  1. Income Tax Rates: Rates on “ordinary income” could be flattened from seven brackets to three (12%, 25% and 33%). The 33% top rate would be lower than the current 39.6%.
  2. Deductions: Both Trump and Paul Ryan (Speaker of the House) have announced plans to limit deductions in size (i.e. put a cap on the total dollar amount that can be deducted) and type (i.e. eliminate what is considered deductible). This could partially offset the impact of lower rates.
  3. Capital Gains: Trump’s plan is to keep the current rates in place (0%, 15% and 20%) while Ryan’s plan raises them slightly.
  4. Alternative Minimum Tax: Both Trump and Ryan propose eliminating the dreaded AMT.

If these tax policies were to become reality, it has a few implications for near term tax planning.

First, for high earners (Married Filing Jointly, above $231,450 in taxable income) this means the value of any deductions could be higher in 2016 than it might be in 2017, all else being equal.  So as you look at your tax projection before year-end, you should seriously consider “pulling forward” any itemized deductions such as charitable donations and real estate taxes as you could have lower rates in 2017.

Second self-employed individuals may want to consider deferring some income (in a legal manner) to 2017 and pulling forward (and deducting) some business expenses so as to reduce 2016 taxable income.

Aside from taxes- what else should we consider?

Trump and the Republicans firmly believe that lower tax rates do not necessarily mean lower tax revenue for the U.S. Treasury, as the lower rates applied to a faster growing economy have historically resulted in higher income for the federal government.    This worked for Kennedy (a Democrat), Reagan and George W. Bush in recent decades.

A faster growing economy could also ignite inflation, which could also mean higher interest rates. In fact, the bond market seems to already be anticipating this scenario as yields on US Treasuries have ascended rapidly since the election.  Unfortunately, the puts-and-takes around interest rates and investments is a whole other topic for another time.

Overall, we view the Trump/Republican agenda as generally pro-growth.  But this could always be countered by some growth constraining policies from a President Trump like a potential trade war (with Trump’s much discussed tariffs) which could dampen growth.  In addition, we are dealing with a truly unique President-elect (never been elected to any office) with a track record of unpredictable and sometimes outrageous behavior.  So there is always the possibility of some out-of-left field action that can’t be blocked by Congress (like crazy treaty negotiations or cancellations) that could have a deleterious market reaction.

Bottom line:  We view the near term political landscape with a positive bias given the pro-growth agenda, underscored by the aggressive tax reform.  In this context, we should all be vigilant in our tax planning for 2016 and into 2017.  Aside from this, we should maintain our focus on what we can control (factoring in the new information) while the politicians slug it out in D.C.


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.