Be Responsible for Your Advisor Relationship

Becoming a responsible Client is partly about your financial advisor, who must (but may not) be honest, but the onus is on you, the Client, who must remain alert. Looking out for Number One (that’s you, the Client) requires attention. While realizing an appropriate return on your investments over time is the important objective, not getting ripped off is critical. And avoidable. Learning how not to be ripped off is mostly up to you; how you handle your relationship with your advisor will determine your eventual outcome.

Your first responsibility is in selecting an appropriate advisor for your needs. If you are deeply involved in trading individual stocks, a stockbroker with a reputable Brokerage Firm may be right for you. However, if you are interested in comprehensively planning your entire financial life, you should seek an advisor with a broad knowledge of topics. Insurance Planning, Tax Planning, Investing, Estate Planning, Cash Flow Planning, College Funding, and Retirement Income Planning are important components of a lifetime financial plan. Advisors capable of participating in and coordinating all of these must-have special skills and credentials. To assure that you are dealing with highly a trained and knowledgeable advisor, look for the Certified Financial Planner®, or CFP®, credential.

Advisors are compensated through commissions and/or fees, and a good Client needs to understand the compensation formula for any advisor being considered. Fee-only advisors are fiduciaries, meaning that they must place Clients’ interests ahead of their own. Accepting the serious responsibility of becoming a fiduciary eliminates commissions from consideration. True fiduciaries are fee-only (not to be confused with “fee-based”). Potential Clients should be aware of the difference, and only interview advisors who actually operate within your desired business model.

Regardless of the type and style of a potential advisor, the second criteria for a good Client is to understand that they should never write a check to the individual advisor. The advisor’s Custodian (any of a number of large, well-known companies that are in business to hold assets and perform transactions) should be the recipient of all funds and will retain all accounts and assets. Accounts opened must be shown under your name on the custodian’s webpage, which must remain accessible by the Client from any web browser at all times. Monthly statements, confirmations, etc. should only come from the custodian and must be timely.

Not getting scammed is vital to success. Most scammers are not as sophisticated as Bernie Madoff, but some are pretty darn smooth. Don’t fall for obvious “sounds too good to be true” promises, which are all-too-often camouflaging fraudulent schemes. Stick with investments you understand and can monitor, watch for unusual transactions, and avoid getting stung by the handful of criminal so-called financial advisors. Remember, it’s your money. Treat it appropriately, and it will pay you back for a lifetime.

Van Wie Financial is fee-only. For a reason.

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Average American workers miss out on $1,336 annually of “free” money. According to Fidelity Investments, that is the amount that workers fail to receive in 401(k) employer matching funds every year. This is due to insufficient salary deferrals by working people, who are not contributing enough to reach the employer’s contribution matching limits. Failure to collect available free funds into your account means that your money is being underworked.

Leaving money on the table should be a last resort, financially speaking.

Many reasons, and several excuses, address this ongoing financial tragedy. Some people simply cannot make ends meet after increasing monthly deferrals, despite receiving current tax breaks. Others (we suspect an even larger group) are unaware that their retirement money is not working up to its potential.

Encouraging 401(k) participants to increase their contributions is largely a matter of education. Financial advisors illustrate that increased contributions result in much higher account balances at retirement. For example, increasing personal contributions, and receiving the extra $1,336 in matching funds per year, raises the expected retirement account value by at least $300,000 over 30 years.

Underworking your 401(k) through ultra-conservative investing is also common, and especially among young people. When getting started, young savers should try to be very aggressive, owning a high percentage of quality equities. A very low-cost S&P500 tracking fund is a good choice for younger investors. Diversification into other asset classes can be implemented with age and increasing account balances.

IRA investors don’t receive matching funds, but similar strategy applies. As recently as 2015, only 8% of eligible Americans contributed to an IRA. Of those, only about a third contribute the maximum every year. This is yet another example of underworking retirement funds. Just as with young 401(k) participants, young IRA owners should invest aggressively, adjusting the asset allocation over time to reflect age and account balance.

In economics, lost performance from underworking your retirement funds is called “opportunity cost.” Also in economics, we use the term “sunk cost,” which simply means that what’s in the past cannot be changed. Fully employing your 401(k) and IRA funds should begin immediately. Your future comfort depends on your actions today.

Van Wie Financial is fee-only. For a reason.

August’s release of the July Producer Price index (PPI) showed an increase of 1.0% for July, following an increase of 0.8% in June. The earlier Consumer Price Index (CPI) showed annualized gains of over 6% and accelerating. Gasoline at the pump is up about $1.01 per gallon since this time last year. Inflation is here, everyone is feeling it, and it is a shame.

That is the current economic picture, and it did not have to happen. Last week we wrote about poor energy policy in the U.S., which is at the core of the national inflation problem.

Energy is not the only component of rampant inflation. Economics 101 teaches us that there are four Factors of Production: Land, Labor, Capital, and Entrepreneurship. Each can contribute to inflation or deflation, depending on the overall economy, national policy, Americans’ expectations, and a host of other contributors. Unfortunately, politics is at the heart of many factors.

Land is plentiful and affordable, but our energy policy is taking millions of acres off-limits for energy exploration and drilling. This adds to the inflationary cycle by driving oil purchases offshore to competitors, many of which are not friendly to the USA.

Labor is in short supply, due to poor economic policy. Available jobs are now over 10 million, and people are reluctant to fill them until excessive Unemployment Compensation (U/C) benefits dry up (currently slated for September 6, 2021).

Capital is cheap, brought to us by poor FED policy. “Easy Money” is supposed to be a tool used by the FED when the economy is in bad shape and needing a jump start. While that was the case about a year and a half ago, today’s strong recovery requires raising interest rates to dampen inflation.

Entrepreneurship is a hallmark of the American experience, fueled by opportunity, education, and availability of the other three Factors. Today, Land is plentiful, Capital is cheap, but Labor shortages and expenses are problems for existing employers. Potential new entrepreneurs are aware of labor market conditions and are holding back new products and companies.

Economic policy is a large component of inflation. Yet another problem is active in the political class as we speak. Regulatory costs and threatened increased taxation are passed along to customers, fueling inflation.

Pay increases at the national level are running about 4% annually. Inflation at the current level exceeds labor increases, creating a lower standard of living. Thomas Jefferson famously said, “You get the government you elect.”

Is it 2022 yet?

Van Wie Financial is fee-only. For a reason.

Americans everywhere are talking about the elephant in the room, but Congress and the Biden Administration remain in denial. Ditto the Federal Reserve (FED). That beast is inflation, and only Americans of a certain age can remember the last time consumer prices escalated with the ferocity we are experiencing today. Our current situation was not inevitable; it is the direct result of bad economic policies.

Extreme spending by the Administration and Congress is creating demand for goods and services that are not yet in sufficient supply. “Emergency” Unemployment Compensation Benefits being paid to potential workers are keeping capable people on the sidelines of the job market while lining their pockets with spendable cash. Economics 101 teaches us that when Demand exceeds Supply, the variable is Prices, which rise.

Before the pandemic of 2020, inflation was nominal, although even then it was understated by these same deniers. Our impulsive “shut it down” response to COVID-19 caused millions of job losses, and resulted in shrinking demand for goods and services. Individuals and families lost purchasing power, and for a short time, deflation was the result. But that was over a year ago, and the situation has now reversed.

When the current economic recovery began in April of 2020, deflation was halted. Demand for most everything soared, and shortages of available consumer products caused panic-like buying. To this day, some store shelves remain vacant of necessities such as toilet paper and household cleaners. Many car lots are sparsely populated with vehicles, new or used, awaiting semiconductors produced primarily overseas by companies affected by COVID-19 production limitations. Rental cars are unavailable in many locations.

Resulting from this “perfect storm” of economic disruption is rampant inflation. We are being assured by Administration “experts” that the current inflationary cycle is transitory. This, too, will pass, according to them. When is anyone’s guess, and my estimation is later. Much later. Inflation is being fueled by policies that will not be improved for years.

At the core of the problem is energy policy. Having voluntarily relinquished our nascent 2020 energy independence, oil prices have skyrocketed. Virtually everything we do, and everything we use, is impacted by the rising price of petroleum. Transportation and manufacturing are greatly impacted by oil price increases. Electricity, currently undergoing spiraling demand, is largely derived from coal and natural gas. Yet every day, domestic oil and gas production are being curtailed by nonsensical energy policy, in a fanciful flight to “renewables.” As prices rise, workers demand higher wages, which are granted of necessity, though mostly at a pace slower than inflation. In turn, rising labor compensation pushes up prices of labor’s output, and the cycle feeds on itself. Prior to the next Presidential election, there is little chance of the inflationary cycle being interrupted by Don Quixote officials, forever tilting at windmills.

Van Wie Financial is fee-only. For a reason.

Social Security is going broke. It needs to be fixed, and quickly, or future benefits will be sharply reduced. That would be extremely unpopular among the high-voting population we affectionately call “Seasoned Citizens.” Currently, that population is about 61 million strong.

Congress created the Social Security System, and, unfortunately, only Congress can fix it. For decades, the easiest way to get a politician “unelected” is for him or her to even mention cutting Social Security.

How, then, can Social Security be reformed and sustained for future generations? Theoretically, it could be done, but getting a majority of Congressmen and Senators to agree on a solution is like herding cats. Only harder.

Many interested parties have proposed solutions to Social Security’s funding problem. In my opinion, any acceptable solution begins with raising the qualifying age for collecting benefits. Simply increasing the future benefits eligibility age to reflect rising life expectancies renders Social Security actuarily sound for some time. It works despite requiring no new taxes or benefits reductions, and it provides an important, though incomplete, “fix” to the System.

One of the more interesting suggestions is from the Association of Mature American Citizens (AMAC), a conservative group supporting Seasoned Citizens. AMAC would impose a benefits COLA (Cost of Living Increase) that varies with income levels. For beneficiaries with smaller monthly benefits, the annual increase would be a minimum of 3%, with a cap of 4%. The highest benefit recipients would have a COLA ranging between 0.5% and 1.5%. Full Retirement Age (FRA) would slowly increase from 67 to 70. Additionally, AMAC would create a voluntary add-on account called “Social Security Plus” that would be invested mostly in stocks.

It is significant that AMAC has not yet “priced out” their proposal. Somehow, Social Security must find a new source of revenue, at least until the large younger generation reaches working age. President Biden campaigned on raising taxes on high-earning Americans, but “the rich” can handle only so much, and they are already strained.

Remember that Federal General Revenues can only be enhanced through raising taxes, borrowing money, and/or printing fiat currency. (Fiat currency is money created with no residual store of value to back its worth.) We already see the inflationary effects of flooding the economy with fiat currency. Cooler heads must eventually prevail. It is time to step up. Congress, do your job.

Van Wie Financial is fee-only. For a reason.

Bank accounts of millions of Americans received a boost in July, as IRS issued the first round of payments under a new Child Tax Credit program. Roughly 60 million parents received Child Tax Credit payments in July, and others may be eligible. The new payments range up to $300 per child for eligible families.

Similar payments received prior to July, whether for Stimulus or Child Tax Credits, were essentially gifts to taxpayers. They had no effect on tax returns. Earlier or later, it was new money to the recipient, and had no effect on the regular tax refund (or tax due).

Parents everywhere have become accustomed to receiving IRS payments under various stimulus programs from the COVID-19 economic meltdown. But, if you received a check or a direct deposit starting in July, 2021, you need to see if you are truly qualified. There are definitive income restrictions. Further, you need to decide if you want payments in 2021, or if you’d rather wait until April 15, 2022, when tax returns are due. Before you make any decisions, here is what you need to know and understand.

The new round of “Tax Credits” is very inappropriately named. They are “prebates.” In other words, IRS is sending your own money back to you before you even pay it in. Every dollar you receive in 2021 will either lower your refund or raise your amount due. Wait, it gets worse.

Income used for determining eligibility for payments is from tax filings 2 or 3 years ago, and may not be relevant today. If you are earning substantially more this year, you may find that you are ineligible, yet receiving payments. IRS will “clawback” these payments, even if you already spent the money. You need to stop the payments now.

Opting out of future monthly Child Tax Credit payments is straight-forward. Go to the IRS website (www.irs.gov), and they will provide a calculator to test your eligibility, based on your 2021 income. If you are not eligible, opt out of further payments while on the website.

Avoid receiving a shock from your tax preparer in April, 2022. Know where you stand on the 2021 payments. While I believe that the government is not fulfilling its obligation to keep us adequately informed, stay safe by knowing where you stand.

Van Wie Financial is fee-only. For a reason.

On July 9, 2021, President Biden added to his impressively high stack of Executive Orders (EOs), signing a three-part plan purporting to improve opportunities for workers. The stated goals are: (1) limit or ban Non-Compete Agreements (NCAs), (2) eliminate unnecessary occupational licenses, and (3) allow HR professionals to share more information.

Before the ink dried on this epistle, I questioned the probable outcome of these mandates. Do the underlying assumptions make economic sense? Do these proposals pass the Constitutional smell test? Finally, will they help or hurt workers?

Non-Compete Agreements are generally used to prohibit (for a period of time) terminated key employees and sellers of businesses from creating or entering into competition with the employer who has paid them handsomely, or the business buyer who helped enrich the seller. Biden seems to believe that eliminating NCAs would somehow enhance workers’ job possibilities.

Personally, in the absence of an NCA, I would expect a business seller to receive substantially less from the sale, knowing that competition from him or her could be immediate. Many business sellers offer the buyer an NCA in order to receive a higher sale price. For key employees, the argument is similar. A key-person would be unlikely to receive the same compensation if not for the NCA. Again, why pay someone handsomely when that person could leave and compete immediately? This one seems to me to be a loser.

Elimination of Unnecessary Occupation Licenses is long overdue. Biden’s own party has relentlessly expanded occupation licensing requirements for jobs that certainly do not require a certificate on the wall. Flower arrangers, hair cutters, interior designers, shampooers, upholsterers, and many more must today be licensed. The public is more than capable of deciding who does a good job, and who does not. Customers will vote with their feet. Besides, prices will come down, making life better for everyone.

HR professionals today are unable to share much information beyond, “Did so-and-so work there from this date to that date?” Workers’ privacy is well protected, and job seekers perceive more flexibility to request higher salary ranges under today’s “don’t ask, don’t tell” rules. Allowing HR people to share more data will likely reduce some applicants’ ability to demand a better deal, fearing his or her previous earnings may be publicized. At the very least, workers will have less privacy under the new EO.

I am baffled how the Administration is expecting improved opportunities.

Van Wie Financial is fee-only. For a reason.

Today we look back at our blog posting from February 26, 2020, at the beginning of the Coronavirus pandemic. At the time, we issued a mass email to clients and friends, and also discussed these points on the Van Wie Financial Hour. How did we do in the face of that uncertainty? We’ll dissect the discussion, using actual quotes from the 2020 blog (italicized), with current comments following.

“When market conditions become unusually disrupted, it warrants communication with our clients and friends.” Looking back, the markets were actually roiling, trading halts were being imposed, sometimes even before the market opened. It was a scary time for investors, and there was much to discuss.

“We won’t try to sugar coat this morning’s market futures – they are ugly.” Time has told the tale, and this was accurate. The market dropped more than 27% over the next month. Responding responsibly to those uncertain conditions would prove critical to our long-term investment outcome.

“Our concentration is always on the outlook for the business environment and corporate profits, which have been doing very well. How much impact will ultimately be felt on Q1, 2020 profits are unknown”. We foresaw the disruption, including interruption of worldwide supply chains. Under no scenario would our short-term economy be a pretty sight. But over-reacting is not really an option.

“With a product-oriented company, the result will mostly be felt in delayed sales, rather than lost sales. Some service businesses, particularly restaurants and bars, will incur actual lost sales. Bottom line – there will be some impact on profits.” These cautions have been spot-on, as many service businesses faltered, and far too many failed. Fortunately, demand for products is still playing catch-up, and the appetite for restaurants, etc. is now voracious and growing.

“Looking at the positive side, Americans have been finding out (the hard way) that diversification in supply chains is as important as diversification in portfolios.” Supply chain diversification was moving forward nicely, and America was winning the onshoring battle for critical supplies. Under the current Administration, progress has been halted and is actually starting to reverse, as companies are once again offshoring, apparently caring more about saving money than protecting production.

“We are finally energy independent, something I remember being promised back in the 1970s.” Our energy independence dream was fulfilled in 2020, but now, in 2021, gasoline prices are much higher, and much domestic production has been severely curtailed. We are again becoming dependent on countries that do not like us.

“How long it takes for the market to attain another new high is unknown. In the interim, we look at the fundamentals, and we see strength.” We know how far the market dropped, and we have witnessed unusual speed and magnitude in the recovery. Several new market records have been set, and on Friday, July 9, 2021, all three major indices (DJIA, S&P500, and NASDAQ) closed at all-time highs.

“Our suggestion is to ride this out, even if a market correction occurs. After all, a correction is about a 10% drop in equities, and we have gains over the past 14 months far above that number. Also, our portfolios have components of bonds, cash, and alternatives, which will not fall like the equities.” While we actually experienced a Bear Market (20% or greater decline), the recovery has been stellar, and our clients’ portfolios are reflecting the strength and speed of the recovery.

“Should anyone feel that they will lose too much sleep, please call us. Otherwise, enjoy a good book and avoid the fearmongers.” Results have proven this to be good advice, even in the face of adversity. It was a difficult time for investors and advisors, and our approach was a solid call. Rushing to “do something” is a general formula for inferior investment performance. We invest for the long term.

Van Wie Financial is fee-only. For a reason.

 

Not everyone starts a tech company and becomes a billionaire. But Peter Thiel did, after his 1998 startup Confinity became successful and valuable. Within 3 years of startup, the company was handling over $3 Billion in annual online payments from over 10 million commercial customers. His success was rewarded and in a novel and unusual manner. Because of his Roth IRA, it is forever tax-free.

In 2000, Confinity merged with X.com, Elon Musk’s online banking site. It was used primarily by eBay. In June of 2001, Confinity became PayPal, which went public in 2002. On day 1 it gained 50%. When eBay bought PayPal in October of 2002, the company was valued at about $1.5 Billion.

Now, about Thiel’s Roth IRA. In 1999, he made a $2,000 contribution to his Roth IRA. Roth IRA assets are never taxed because contributions to the Roth IRA were made using already-taxed funds. In Thiel’s Roth IRA, he purchased 1.76 million shares of his startup company Confinity for $.001/each ($1,760.00). As success was achieved, his Roth IRA stock value rose, and because of Roth Account rules, will never be taxed.

While the average Roth IRA balance today is about $39,100, Thiel’s Roth is currently valued at about $5 Billion (9 zeros). Thiel’s account is exactly the same size as anyone else’s would have been, had they made the same investment when he did, and then let it grow tax-free. He has received no preferential treatment under the law. I should also note that he was audited by the IRS, and passed. Remember that, in an audit, the taxpayer (rather than the accusor) has the burden of proof. Thiel met the burden, and his Roth IRA was declared lawful.

What he has received is criticism from the likes of investigative website ProPublica. In a recent report created by them, they illustrate that a lot of rich people pay little or no taxes. The ProPublica report was based on illegally leaked tax returns for Jeff Bezos, Elon Musk, Warren Buffett, and the like. IRS claims to be looking for the leaker, who has committed several felonies. (As an aside, many of us believe that no one will ever be punished for the leaks.)

What’s the bottom line on those rich people’s returns? They didn’t pay taxes because they didn’t owe any. What a concept! Thiel’s tax-free wealth was due to the Roth IRA’s tax-free environment. Other wealthy people pay little tax due to untaxed capital gains on appreciated stock. Appreciated assets are only taxed upon being sold (so far, anyway).

Taxation rules are defined and codified in the U.S. Tax Code, written by some of the very people who complain about Thiel and other wealthy people. American class envy is at work once again, and some influential people want to change the rules because of Thiel. They want a piece of his enormous pie. Many apparently feel that they deserve it, for reasons I cannot comprehend.

Responses to the ProPublica report ranged from Thiel’s no response to Musk’s single question mark, to Bezos’ explanation that, while he believes the Tax Code needs changing, at his death 99.5% of his fortune will go to a combination of taxes and charities.

Here’s my take on all of this. Get over class envy, America. It doesn’t look good on you. If you care to speculate in your Roth, and if you hit a home run, good for you. A word to the wise in Congress; don’t make any Tax Code changes based on an individual, or even on a small group of people. It never works out well over time.

Van Wie Financial is fee-only. For a reason.