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Flight #19: Investment Newsletters – Investment Advice or Entertainment?

Pilot Money Guys:

What's Up With Investment Newsletters?

Flight #19: Investment Newsletters – Investment Advice or Entertainment?

“There’s a lot of money to be made from financial newsletters that give investment advice. But the money comes from selling the newsletters, not from taking the advice.” ~Paul Merriman 

Investment newsletters are getting more popular every year and the returns they promote are extremely tempting. So, should you ditch your financial plan and subscribe?  

We’re diving into newsletters to give you our honest opinion and concerns.  

Unfortunately, anyone can create an investing newsletter, and because they are not actually managing your investment accounts, they have no regulatory agency monitoring their recommendations or investment performance accuracy.   

Investment newsletters only fall under the 1st amendment right of free speech, so they can claim any returns over any time period regardless of actual performance.  

From the article “The Truth About Financial Newletters” by Paul Merriman.   

https://paulmerriman.com/the-truth-about-financial-newsletters/ 

“In a 35th anniversary edition of The Hulbert Financial Digest, publisher Mark Hulbert noted that when he began tracking newsletters in 1980, there were 28 of them. Of those 28, only nine have survived. The rest are gone. 

Of the nine newsletters for which he has continuous data back to mid-1980, only two have beaten the market (measured by the Wilshire 5000 Index) on a risk-adjusted basis. One newsletter has matched the market for 30 years, and the other six have lagged behind.” 

Podcast Transcription:
 

voice actorr: ladies and gentlemen, welcome aboard the pilot money guys podcast, where our mission is to help clients build and protect wealth to achieve their dreams and goals. This podcast is brought to you by leading edge financial. Without further ado here is your host. Robert Eklund.

rob: Here we go. Investment newsletters, flight 19 folks, a tip of the cap to you.

Thank you for joining us here at flight 19, the pilot money guys podcast, where we cover some airline news and of course, a financial topic we aim to educate and bring some light hearted, financial fun to your day. I'm your host wealth manager, Rob Eckland, AK rubber mallet, the flight crew today. Is the godfather certified financial planner and former F 16 fighter pilot, Charlie Mattingly godfather.

charlie: Thank you, Mellon. Great introduction.

rob: You're welcome. Flying in the number three tail and Charlie position is Mr. Kyle Bell, the Ben Dickinson. Welcome Cabo. Oh, I can barely hear it.

Ben: Clear that up

rob: in editing

Ben: post production.

rob: I didn't bring that biz as an a biz in the best. That's super dope. This is a good one. Guys. We got investment newsletters. This is going to be fun. A lot of fun. That's

charlie: right. Robin, you sound like you're feeling better, which I'm really excited

rob: about. I'm not a hundred percent, but I'm getting a 99.9.

In fact,

charlie: you just need to calm down just a little bit. You're getting way too excited.

rob: You shut your mouth when you're talking to me, Cal belt. Kalba all right. Still nothing been. Aviation news. We're going to do a little obstacles the way on this one as I messed up and I'm going to apologize.

I can't believe it happened, but I know first time ever don't tell my wife quick correction. On the previous podcast, I called the T 38 and F four. I don't know what I was thinking. It was a slip of the tongue. Forgive me the F five. Of course, which was the Russian MIG and top gun. Yeah. Yeah, many apologies.

So we're going to use as our aviation news because we're going to tie it into what's replacing the . Which show a picture. Ben, can you

charlie: me pull that up? I got it pulled up. Oh, there it is.

Ben: There you go. Wow. That

charlie: was your music.

rob: All of you listeners out there. We've got the bowing SOP slash sob. It's an American Swedish speeding.

Eklund is Swedish T seven red Hawk. That's going to be set to be delivered or it's set to be delivered in 2023 to replace the teeth RDA. That's a good looking trainer and

charlie: is nice. Look at this one right here. Why do you need, oh yeah, that's nice. Wow.

rob: Yeah, that's beautiful. I want to go back. Northrup.

Talon was a two seater. It was the world's first supersonic. And is also the most produced it's pretty cool, but it's going to be retired in 2023 or there abouts it began production, or at least it started the development. The development started in 1952. So it's about time to be replaced. I think Charlie, when he got through that, I

charlie: did, I flew that airplane.

It was a fun. Pretty cool airplane. First airplane to go supersonic. And you went on a designated ride for your supersonic rod. That was so cool. Boom. Yeah, it was pretty cool. I'll never forget. One of my best memories was your first formation night flights as a student. You're on the wing. It's at night, you're sitting on the runway, they push the power up and all of a sudden you see a big.

To your left or right. Whatever now. And you're just, I was so stunned. Like I got left behind on the takeoff.

rob: I forgot.

charlie: I forgot to pull them and push my throttles forward. I was like, this is so awesome. What are you doing?

I was singing and I would like, look at, look in the mirror and do this little look here, like in the.

rob: What was your call sign? I should have asked you that. What was your calls? I,

charlie: it was Woody,

rob: Woody. Oh from the animated. Yeah. Probably

charlie: something like that. Something, yeah. Toy story.

rob: Yeah.

charlie: Nice. I think that was what I got when I was in the F 16, before that it was like, we have a couple different ones as you go through training. One of them was a. Which I think means dumb cow in Spanish. If I'm not, if I'm not mistaken, dumb cat,

I don't know. My Spanish is not very good, but that's what they said. It's not my dumb cow. That was me. And then

rob: smart cow would have been way better.

charlie: I don't think I fit that role. Ever though that was appropriate. Where'd

Ben: you fly or did you fly over. So you get on that flight. Where were you flying over on that flight?

Which one?

charlie: The supersonic training, the training somewhere over Mississippi, those lakes to the north of Mississippi. What do they call the point set? I can't remember. Welcome up.

rob: Hey, Ben used flashed right before you put the up there. You flash something about the. It was hell yeah.

Ben: Oh yeah. So this is the new doge coin. It's the, basically this is also a joke crypto coin that was making fun of doge coin, which those coin is a joke coin made up of making fun of Bitcoin. But Sheba, let me tell you. Just pass doge coin and it's doing great. I think it's because Elon Musk got a Shiba Inu, I guess it's a breed of dog.

And let me tell you this thing is doing great. It's got a market cap of 40.7 billion value, which is with a B, which is just wild. I don't even know this is a little scary. I don't even know if I should share the year to date returns, but I'll put it on here on YouTube. Check that one out.

rob: It's a little scary.

I dare say, Dr. Evil's the person who came up with Sheba. I

charlie: think he

Ben: might be right. It's doing great. I bought some today just so I can talk about it on this podcast. And let me tell you, let me see, let's see how we're doing here. Got about a hundred dollars worth I'm down.

charlie: Dang here's the kicker, Ben like you and I talked and I said, okay, I'm in, I'm going in 96000000% return.

Yeah, I'm in and I'll put a dollar or two and become a gazillionaire, but how do I get my money back? That's what I want to know. Yeah. Yeah. I don't think there's a trick. That's the trickery, huh? Yeah.

Ben: Yeah. Just selling $96 million worth of your Sheba. I don't think it's, first of all, it can crash the market, I would imagine.

And then, so this

charlie: is real, it's not real yet. To me, in other words, I can't get my money back. Like you said somebody, and this is I'm being a little bit serious right now because everybody's Hey, I'm going to put 10 bucks a piece in all these. And I read, I think I read today, there's 10,000 different cryptocurrencies now is that we'll look at that in a minute.

I've gotten to see the seam Taylor the mask pronouncing that, it seemed to leave tele whatever. We'll re reference him in a minute, but really smart dude. That's the point? And so if I want to put my money in these things, I want to put 10 bucks a piece in each one and it goes up 96000000% in a year.

I can't really get that back. I got to go to some kind of, nah, that's the catch?

Ben: Here, I'll share this. This is this is. Some people are saying here, there was this NFT that was sold for $532 million. I think they realized it was actually dished up. They says it's a flash loan. I'm not exactly sure how that works, but, or people I was reading about this and what people were saying was the guy couldn't get his money out of.

He put money into cryptocurrency is obviously a very rich person. They, he wasn't able to get it out. So he's converting it to all these different crypto based assets to just try and get his money out. And I don't know. We'll see. I don't think you can get your money out if you put it in.

charlie: Oh yeah.

So that's the catch right there. So this is a fake world of something weird going on that I can't explain yet. And not many people can either, but back to the article NASEM to leap tailoring. I keep, no, that's not him. That's the writer of this article.

Ben: Okay. Okay. Got

charlie: you. Got you. So this guy has written books And Ben, would you Google which books he's written?

I cannot escape my mind right now. He's a prolific writer. In fact, reading his books is a challenge because it is dense Swan, black Swan, all the ones he's

talking

rob: about

the same, not very

charlie: different. So here you go. You got to pull it up on, on the article that we read today. And it's pretty interesting. And Bitcoin, I'll just read a couple of the highlights here. Bitcoin has failed to become a currency because Bitcoin transactions are too expensive and too slow. I didn't know that this article says that if you go to buy a cup of coffee with Bitcoin, it can take 10 minutes.

If it were a currency, it's not a currency now. But I didn't know. I didn't know. It was like that. I thought the whole point was that it was a fast or instantaneous or whatever, is it inflation, hedge? What happened in 2020? Did it protect anybody during the market downturn of 2020?

This article says no. Yeah. And here's the interesting thing. And it's towards the number seven, eight or nine, one of the goals with these cryptocurrencies is to get rid of the intermediary and that's number nine. Bitcoin does not solve the agency problem of reliance on intermittent inter intermediaries.

Sorry. So that's one of the solutions that people say, Hey, we need this decentralized. Money. Yeah. The problem is he says is every time you have in history or whatever, when you have an effort to get rid of intermediaries, the disruptors become the new intermediaries. In this case, it would be the people mining the coin.

So the miners themselves, if they knew that all of a sudden this became the one, the thing now they're the new intermediate. So I'm going to get it from the miners. Yeah. So that was an interesting thing that I didn't think about. And I'm not sure either, and this is me, not in the same, not sure either that the decentralization is really what we want in our money, even though we, a lot of times we don't one entity, either government in our case doing things it's one of the more trusted.

I know that's I know that's laughable. Sometimes I expected you all to laugh when I said trusted, but thank you. All the PR is the fed or the government, whoever we do need some entity that somewhat trustworthy besides. Bitcoin miners in their basement,

rob: Yeah.

Some sketchy folks

charlie: at the top. I call the top a couple of weeks ago. I don't know if I'm still right or not, but yeah.

Ben: Oh no. I think you're doing great. I think you're doing great. And just a, something on Coinbase and all of these different marketplaces where you can go and buy the Bitcoin. We were mean the professor, we're just talking to somebody who was involved in the Mt.

Gox got money, all his money stolen back in the Mount gospel gosh, crisis that we've talked about in the last podcast. We think Coinbase is going to survive. We think that they're doing the right things, but we don't know. We don't know what, like Jim and I that's another big one.

We don't know if they're going to actually end up being able to allow. Not to mention the problems with going on with the stable coins that are, it's just awful. I think tether is big issue right now, but

rob: anyway, I'd like the scroll up just a tad bit there where it says he aims a mini gun, where's it say?

Oh, scatter

Ben: gun that Bitcoin

rob: has underlying database technology, blockchain. Yeah, he's a smart guy, again, not the guy picture, but

Ben: again, and black SWAT is a great movie to

rob: check it out. Let us know what you think. All right. Charlie, what do you got on any other aviation? I know that wasn't aviation, but

charlie: we couldn't resist that one.

The other aviation stuff we talked about was just the interest in, the new pilot hiring. It's just been insane to see. Get rid of, airlines get rid of pilots. I E me and then, and and lots of others. And now they're just desperate for POTUS again which is totally crazy, but it's, that's the reality that we live in.

So what are these programs? A lot of our clients, kids, a lot of people are saying, my kid wants to fly. What, how do we do this? What's the best way to do it. And almost every airline. I know I looked into United. I looked into Southwest, maybe a no, I think Delta has one too. Southwest is called destination 2 25 pathways.

So what what are these things? Basically, you go to some training out in Arizona for Southwest, and it's part of a, they have a partnership with CAE and you do a flights and simulators. Then you go work for four years somewhere. But if you do all that, go through the programs, then you have a chance to become a Southwest pilot or United or a Delta pilot, depending on which program you go through.

So there's some that are like college, where you go to school, you get a degree, you then become a pilot or you skip the college stuff all together and then just go straight into the flying program. If you get accepted, there's no flying experience required, but I think the program for a year or so, it could be, I'm not mistaken, 80 to a hundred thousand.

So the other thing that we looked up for one of our clients was can I use my five to nine, we checked into that, tried to dig a little bit. I don't have a definitive answer. My guests at this point would be know that you cannot use five to nines for some of these destination 2 25 programs.

And it basically has to be an eligible education institution in the eyes of the IRS. And and in fact, on the website there, especially for Southwest or specifically for Southwest, I should say it says you must demonstrate the ability to pay out of pocket. Or secure financing for the total amount of the program.

So in fact, then they start to advertise Southwest federal credit union, blah, blah, blah. So let's say IRS website, here's the IRS website language, an eligible educational institution is a school offering higher education beyond high school. It is any college university trade school or other post-secondary education institution eligible to participate in a student aid program.

Run by the U S department of education. So according to this irs.gov program can w can, you can use your five to nines for that program, if it's an eligible educational institution, which means they accept students. So that's from the irs.gov website there. So check the interesting.

rob: Wow, very interesting.

So I just

charlie: want to share that real quick, because we have a lot of people thinking and talking about, Hey, my kid's interested in flying. They're hiring again. There's a pilot shortage. So hopefully

rob: that's. Yeah, it is. I think that's a useful to a lot of listeners out there. There's a lot of good stuff we're covering on this podcast has that moved newsletters, but let's get into it before that though.

Why is money important to you? Do you need help with retirement planning, college savings, tax loss, harvesting state planning. Let us know as fiduciaries we stand ready to help. We can manage your investments and provide comprehensive planning continuously or on an hourly basis. Give us a jingle at 8 6 5 2 4 0 2 2 9 2.

Or check us out@leadingedgeplanning.com.

charlie: All right. Nice work. Hey, you know what, Rob, the best part of that, you got the voice, you got the phone number, right? This time.

rob: Nailed it. I've

charlie: had to edit out the phone number, every other timing now.

rob: So if you ever called us,

charlie: if you notice a previous podcast where Rob says and give us a call. Thank you very much. And I don't know how to insert the right number into our oh,

rob: nice job. My bad somebody to your actions. Two times I've been wrong.

Hopefully that

charlie: does not listen to know

Ben: your rights.

rob: Okay. Investment newsletters. We're going to cover newsletters, intent, the legal standard they owe to you and their performance. First things first newsletter the intent. Are they for entertainment purposes? Are they fiduciaries? Charlie? What do you got on the man's letters?

charlie: I'm going to start talking now and I'll be done in about 25 minutes.

So just want to clarify newsletters. We're talking specifically about investing newsletters. There's a lot out there. In fact, we say we have a newsletter, our newsletter, not our newsletter. Our newsletter is truly the best. Yeah, but the newsletters we're talking about today are the ones that say, buy this, sell that, buy this, sell that you're going to do.

Awesome. And there's a bunch of them out there. So

rob: Like stock picking or mutual fund.

charlie: Exactly. Yeah. There's tons of them out there and I've used some paid for some before and some of them are very interesting, but that's what we're talking about today. The intent is to help you to invest your money.

Is that a good answer? Everything.

rob: Well, is it their intent? Sometimes? I think you're right. I think other times they're, they're not a financial, they're not associated with any kind of the, of controlling entities, such as the sec or a state or anything like that. They're only governing. And we'll get, I guess we'll get into this into the legal standard, but I might as well cover it.

Now. They're only governed by the first amendment. They don't have to report that what they actually did to anyone. And matter of fact, if it weren't for some, just a nice folks out there tracking them, no one would know what they actually do. So I think their intent is mainly for entertainment purposes.

A lot of times. And you have to be really careful what you're getting into. There's a lot of money they're making off of you. So you say, oh, they're just a hundred bucks a year. No big deal. Multiply that by a thousand, 10,000 people, obviously that's the money. So I think it's mainly entertainment for frugal people thinking, and this is going to be harsh, but I'm going there anyways, entertainment for frugal people.

They think they can beat the system by paying a hundred or even a thousand bucks. To a newsletter that they think is out there trying to do the best they can. And so they intent is there really a publishing company for entertainment purposes, and I'll even read one of their disclosure. I'm not going to say the name of it, but Blanc is a publishing company.

Period. Blank is not a financial advisor, nor is it a financial. So that's kinda my 2 cents on the intent, the they've done studies. We're going to get into mark Holbert. Who's the godfather not to steal your name, but the godfather, the king of a newsletter analysis. Who started it, he's been examined him since 1980.

And they've from his research. They've distilled that even though the newsletters are written and produced by really smart folks that went to Harvard or whatever, and have all these different degrees behind their name or letters behind their name. They actually didn't do any better than newsletters produced by Joe Schmoe down the street.

So anyways, that's what I got. Ben, what do you got?

Ben: Yeah.

 There are many different types out there I've even seen some for the crypto have been out there now they'll even give you the what to buy, what when to sell. There's some, I know there's a really popular one about options trading.

There's some about that. And it's just kind of these groups of people that think they know when to time, how to time the market. And as we all know, there's you gotta be right when you're trying to time the market on two things. The buy and sell. So you may be right on the first side, but when are you going to sell when am I going to sell my Sheba?

I don't know. I'm waiting for a newsletter to come out to tell me, but but yeah, the intent behind it is I guess it's just a, it's just to make themselves seem really smart and get some clicks

rob: and pulled us. We have a conflict of interest, obviously, because if you're about a newsletter, you probably not.

Part of a leading edge financial planning. So that we're going to say that up front, we have a conflict of interest. Doesn't mean we're wrong

charlie: right, I'm gonna, I'm gonna disagree and I'm gonna get angry. And the reason is because yesterday I was in Nashville taking my daughter to we just went to the concert.

We visited Vanderbilt and in the hotel, I met this guy and this girl, and they were there to be on the Maury Povich. What? And so they were Maury Povich stars. And he was offering to buy my daughter some snacks, and he's Hey, we're here on NBC's card. So his job was to be on Maury Povich and and be the drama guy.

And he was a coach. He said he wanted to be a coach to teach people how to be more dramatic and angry on their show. So I'm trying to take the tips that he taught me.

All of that's a hundred percent true, except I'm not very good at being emotional and getting angry. But let me just, I'll just tell you this. Did you have a question about the more he puppet show

Ben: Ben? Yeah, I was just going to say, was it about like you are not the father is that

charlie: He said we do a really good job of showing our emotions.

So we come back on the show multiple times. Oh,

Ben: wow. Wow. What a career? I

charlie: love that. He said he makes 50. If he was to be a coach, to coach other people to be on the show. 1500 a week. So that's not bad, not a bad coaching gig. Just tell somebody to get angry and start shouting about that. Baby's not my daddy, the baby daddy.

Anyway, sorry. We really got an off track, but the point of all that is I will tell you this, there are some newsletters that have done really well over a long period of time. Okay. However, so have some mutual friends. So have stocks, so have some bonds, no, not bonds disregard that part mutual fund, any other holdings.

So here's the challenge. And this is what mark Holbert does. Like you mentioned, Rob, he, he ranks all these newsletters over time one year, three year, five years, 15 years. So you can go look at some of these newsletter. And go, how well have they done over 15 years time period. W what time period is appropriate?

I don't know. What's a good sampling size point is there's some pretty good performers out there, but how do we pick the ones? And if I did pick the right one, would it be a good performer in three years and five years in 10 years? Would it be the same one? It's the same process with investing there's mutual funds out there. You can go Google the top 15, 20 mutual funds of all time. And they do just as well, if not better than the best mutual, excuse me, newsletters of all time. So it's interesting that they can produce documentation. Some of them that say we've done this performance for 15 years, but Rob, back to what you alluded to, they are absolutely not advisors.

They're not regulated. Like we are a registered investment advisor. Regular regulated by the securities and exchange commission. So when we tell our client, this is your performance, that number has gone through some rigor, Moreau. That's a scientific word for there's a lot to that. You can't just tell somebody, here's your performance, which is what the newsletters do.

And they compare it. For example, there's one newsletter that caters to our pilots they'll compare their performance to the S and P without. Dividends make up 20, 30, sometimes 40% of the actual return, depending on the dividends that year. So I could tell you, in essence, that I'm beating the S and P 500 without dividends and not tell you I'm comparing to something that's.

And that's not something you can actually invest in. Does that make sense? Yeah, absolutely. That's where newsletters get tricky is because sometimes they're good, but how do you pick the ones that are going to be good in the future? Just like picking an investment. That's going to be good in the future.

You don't, you can't.

Ben: Yep at Charlie Holbert. He was doing, we were in this article where he's got since 1980, he's been tracking these newsletters and 28 of them, I think, is in the article. He's been able to attract since 1980 of those only nine are still around today and out of all of 28, just in general, only two have actually beaten them.

Only two. So just like you said, yeah. W what are the, are you going to be able to pick those two newsletters out of the 28 that were then, and then stick with the program, then not missing email. What if you missed a newsletter? Oh, There it goes, you're tracking. Yeah, you're right.

You're not gonna be sticking to it. That's

rob: exactly what happens. This kind of, this is a great segue into the legal standard owed. When we talk about anything, when it comes to money, I think it's important to peel back the layers and peel back the onion a little bit here. The layers of the onion. Is that a proper term?

The onions of the layer? Yeah, the London. I'm eating an onion anyways. There's a lot of layers in an onion. Okay.

When we peel it back and we start looking at who can start a newsletter, like who can be in a financial advisor, you have to pass a test in a series 65. And not that makes you the end all be all by any means. But I think it's important to look at some of those basics and some of the background there.

So who can start a newsletter and investment newsletter. Anyone?

charlie: Anyone? Yes. So I'm going to start a new, oh, sorry. Ben.

Ben: No, I was just gonna say it reminds me of this gambling show that I watched a few times about sports gambling and they have their track, their picks. Who's doing the best, who's doing the worst.

They also have a goldfish that whichever side it swims to that picks the winner. And it almost, it's just as good as anybody else. It's just like that in the, in these newsletters, just get a goldfish or

charlie: pick it for. Yeah, no that's been done in the world of investing to where there's a, I can't remember.

I wish I could remember the story, but same thing. So I'm going to start a newsletter, you all, and here's how I'm going to do it. You ready? I'm going to design a strategy that has beaten everything in the last year. I'm going to, I'm going to do something. I'm going to do it right now and go, Hey, what would have beaten that in the last.

I'm going to put that out on my newsletter and then I'm going to put four or five other newsletters out that are maybe a little different just in case things are different, going forward. And then one of those five is going to do really well. And that's the one that's going to survive for the next five years.

And then I'll design. So go on mark. Holbert I think I'm pronouncing his name correctly. Yeah, you are. Look at the newsletters for each newsletter. He pulls up there's about five or six of them that are very similar in name and come from the same company. So it's not difficult to design a newsletter that is going to be successful.

And then you can tout those returns going forward. The other thing I'm going to do is I'm going to design something that did great in one year and that year of 2000. So that actually happened. In fact, this is a mark Halbert's article in the Barron's newsletter, September 9th, 2009. He says, how should you pick a newsletter?

And remember, this is September 9th, 2009. I went through a pretty helacious one of the worst besides the great depression recessions we've ever had. So you look back, he said, what if I look back at the last 12 months and I get the best performing newsletter of the last 12 months and pick that one, that's a pretty good, right?

That'll build you some credibility. If you can kick butt during the worst recession we've ever had. But the catch is those newsletters, underperform. Every other time in the. So they were only successful during one year.

rob: And I think that's so important. And the point you made there, Charlie, we hammer this a lot, but it's worth it.

A foot stomping again, past performance does not guarantee future results. When we talk about money managers, there's been tons of studies out there. Here's one that comes to that we've got in the show notes. We'll put it in the show notes. The study that was done on this one shows the top money managers in the top core tile, the top 25%, the NICU of the last three years, they fell out.

70% of that top. Cortel fell out of the top core tile at the top 25 over the next three years. So if you're picking somebody because they did well the last three years, there's a 70% chance they're going to fall out of that top 25%. So even if you found. There you're going to, the chances of picking someone like that's going to continue to be a top performer is very slim.

So I think when you're talking money managers, newsletters, it's all in the same vein there, right? Yeah.

charlie: So people say, Hey, you're bagging on these newsletters. They're terrible. You guys are awesome. Of course, so what is the answer? The answer is. Is that no one, no investor should only focus on investing.

Now that sounds weird. Investing is very important, but there are many other things that, that I think an investor needs to focus on that I believe the newsletter distracts you from. In other words, if I sign up for a newsletter. Then I get some sense of control, some sense of I'm doing the right things.

When in reality, you're really not doing anything differently than owning, maybe aggressive mutual funds. For example, these airline newsletters, they give you a recommendation and they require you to say or pick, are you aggressive? Are you conservative? Are you monitor? So pick one of those. Okay. You pick aggressive and then boom.

And I used to I used to, I signed up for this newsletter. I evaluated it, looked at it or whatever, because I wanted to know what people were doing and how they did it. So you just pick the mutual funds that are equity, the stock mutual funds. If you're aggressive, that's what you get. If you're conservative, guess what?

You don't pick the equity mutual funds. You pick the, you pick like maybe 30% equity mutual funds and the rest bond. So you're conservative. So what if I just picked the aggressive mutual funds. You just did just as well as any newsletter.

Does that make sense? In other words, I'm having to choose, am I aggressive? Am I conservative? Am I moderate? That's the most important thing to try to understand and know, and the newsletter can not do that for you. You have to make that selection. If you're all following there, I'm probably not explaining that wherever

rob: I'm going to use a, their own verbiage again here, while we're talking about this and it's the publisher does not analyze the suitability of any particular fund or investment approach for individual investors nor makes specific recommendations tailored for individual investors.

There you go. Yeah. These portfolios have significant risk and are for sophisticated investors willing and able to assume a high degree of. And then the next part's nice to any and all communications from blank incorporated. The employees should not be construed as personal advice on investment. So any communication from employees should not be construed as personal advice on investments.

Although our employees may answer your general customer service questions, they are not licensed under security laws to address your particular investment situation. So I think that's very important that they are not governed by. The sec and they do not have a fiduciary standard or best interest standard.

They don't even have a suitable standard. They are just protected by the first minutes, meaning they can claim almost anything. So some of the best pitches are fantastic. I like this lock in 400% returns. Lock-in 400% returns or this one's actually my favorite to turn $10,000 into more than 40.

Nice.

charlie: Wow. She's

rob: 847% annualized returns over the past three years. And then wow. Blank newsletter delivers information. You can't get anywhere else. Nowhere, that almost sounds like insider trading, which is. But I like how they

charlie: say, I like how they say this is for sophisticated investors. It's what's sophisticated about that.

You know what I mean? That's

rob: That's not do exactly what you tell

charlie: me. Yeah. So the, I'm trying to, you did a great job, Rob, of trying to articulate or help me articulate what I'm trying to say, but I'm trying to say that what. What if I say, I want to be conservative in a time, and then I miss out on the next 10 years worth of returns because I decided I should be conservative.

That's just, that's my point is what does that mean? And how do I pick that? And that's the most important thing. Here's another disclosure from one of the newsletters that, that caters to the airline pilots. He says, we're not gurus. There's no crystal ball. We don't know where the market is going, but we can tell you what are the best performing funds,

 a money magazine article done in 2014 about. About these newsletters, because the newsletters were directing people to sell mutual funds. Our airline people to sell mutual funds in their 401k is in Vanguard T Rowe price.

There may have been another one. They put restrictions on it because they said, we, we do not want this mass Exodus of funds of money from our mutual funds because we. Execute our mutual fund strategy within that mutual fund. There's two, you gotta have too much liquidity for a mutual fund to execute.

So they said no more of that. They cut them off. And it was, they were basically doing these massive trades because of the newsletter. So the newsletter, why is the newsletter so appealing? And it was this article did a really good job of interviewing some people. I was one of them. They didn't quote me in it, but anyway,

so one of the persons they interviewed, I thought nailed it. She said all I had before this newsletter was a single index fund, but I always felt like I could do better. I was missing out. I feel like I have more control. And after the say the same is talking about American airlines bankruptcy the 25 year vet said she needed that sense of stability more than ever. So it's fascinating how, again, we've, and I can understand that you feel like you want to have some sense of control. And, that's a behavioral finance thing and here's the, here is the man, the legend William Bernstein.

He's awesome. He's a doctor and he's a private pilot, by the way. He says investing as with flying, our instincts can be wrong. Warren's William Bernstein, the neurologist turned investment guru, who also has a. When a pilot comes in for a landing while flying slowly and descending rapidly, the instinct is to pull the nose up, but you actually need to point it to the ground to get enough airspeed to fly.

Again, investing is the same way. We instinctively react to danger with fight or flight, which is useful, which is a useful instinct in nature, but all the wrong and finance, you should not sell. When the fund goes down, you should hold on. And I'll add, buy more of that. I want to buy more when it's down but nonetheless.

It's really a fascinating how it becomes a behavioral issue. You want to get some kind of control and I can do that for 90, 95, 99 a year in the newsletter when there really is. It's just a facade. Sorry to interrupt. I'm

rob: done. It ties right in to mark Colbert's analysis. And one of the most distinct patterns, I guess they notice.

From his analysis and the newsletter monitoring was the inverse correlation between markets and the consensus and the opinions of the newsletters. They were monitored. So they tended to be bullish at, or near the top of the market and bearish at, or near the bottom of the market, which is just super fun, like opposite of what you want.

And these guys that said, I don't think we. Say this enough or we can't do it justice, but these guys are so good. These newsletters, and a lot of them are so good at a copyright and convincing you, they know what they're talking about. And some of them are great, absolutely phenomenal speakers. And they go, they're asked to speak at all these financial conferences and at the end of the conference, everyone's going up and asking them, oh, how do you do this?

And I'm going to get in and meaning. I won't name names, but I guess when he's been down here, he does an option newsletter and he's been down 20% a year for the last 15 years, at least when that study was done. And I don't think it's up to date 20, 21, but down 20% a year, you start off with a million dollars.

You're not going to have very much after a 20% loss every year. And when you talk about, I think it's important to talk about option newsletters, which I guess there's quite a few out there. They have a terrible track record and they sell you on the this notion of, Hey, we're going to we're you're not going to participate in the downside of the market.

And unfortunately, that's exactly what you end up doing is losing a lot of money. A lot of downside.

Ben: And maybe we talk just really quick about some of the alternatives to this newsletter, a tactic of investing, because we're really comparing this to the markets and what you could get in the market.

And, not only is there the stress involved in the likelihood that you're going to probably lose money by following these newsletter based on a lot of the studies you could just get a very healthy return if you're just invested diversely across different asset classes in the markets and you get what you get the returns of the market you invest through time and and it's much, much less stressful than trying to keep up with the next the next big hit investment and, hoping you buy and sell it at the right time.

rob: Yeah, I think that's important to BIM because a lot of these newsletters, you have to do it when they're saying, if you're to capture the gains they're talking about, and if you miss that, say you're flying that day and you don't get to it, you can miss out on whatever theory they're trying to implement.

charlie: Perfect. Rather you nailed out what I was getting ready to add on to Ben's comment is, those things are really, you got to make this trade now because it's based off of this moment. Momentum in there, these moving averages and whatever, of course it's proprietary the technique that they use very proprietary that they can tell you, but it is momentum. Based on the prices, most recent prices, that's what that person was alluding to. And we know the prices today and that there's some information in that. However,, here's a couple alternatives bend to the question that you raised, which is excellent.

What else should I do? , I would rather personally do a target date fund if I was going to do, if I was looking for something, , I think planning is the way to go.

I think there's ton of value in planning and knowing should I be risky? Should I. Aggressive, should I be conservative? You know that, that's the key question. That's the most important question like we've talked about before, even with the target dates, maybe I've got a military pension maybe maybe I can handle more, be more aggressive, maybe.

But the point is there are other alternatives been that in, that's a great

rob: question. And I just, I have to throw in because there's a lot of scholarly debate on you made it sound. Charlie will throw you under the bus. The momentum is something you can count. And there's a lot of scholarly debate that you can not do that efficiently.

But I just wanted to foot stomp that there's a lot of people say you can't do that in momentum. And also that's if your newsletter is actually, prescribing to that theory and trying to do that some newsletters, or I guess there was one back in the day that literally said they were.

Their investment advice from God and that's who they were getting thing. Yeah. I know. Turned out not to be true, but yeah, I'll say they can claim anything. Yeah,

charlie: just you're right though, just to be more specific about the momentum factor sometimes that's what it's called is dimensional fund advisors will say that we cannot capture.

That re that that factor, we can't get that premium because it costs too much to just wrap up in a mutual fund. In other words, dedicated an entire fund to that because of the expenses, it negates the benefit of the momentum factor BlackRock, or I shares does have an ETF. They tend to put stuff out there where if somebody wants it, they put it out there.

That's just, how they're different than dimensional. So you're right. It is definitely very debatable on how to capture that, that

Ben: And it just, and the other thing about these new letter, I know we've said it, but these people are not registered in any way, shape or form. They don't actually manage people's money.

They're not allowed to, or I'll say they wouldn't be able to do these newsletters and say these Garren teas, when you could invest in an active ETF, actively traded mutual fund, that's held, that's run by manager, a fund manager that has all the certifications that is regularly. And, they probably have a lot more knowledge than the the newsletter people, but just

rob: another alternative.

That's a good point. But, and I think we've thrown a lot of numbers out, but one that I think is easy for people to, to realize is you have a one in seven chance of picking the newsletter that will outperform the. So you do the math on that one, you got a one in seven chance of outperforming the market, or there's the opinion.

You just try to be the market as best you can or factor investing or whatever. But yeah. Mr. Jaffe from the Wharton school of business and James Mahoney from the federal reserve bank of New York, they came out with a study a while back that concluded, taken as a whole, the securities that newsletters recommend do not outperform.

Appropriate benchmarks, period. That's and that was the quote directly from it.

charlie: I

Ben: know. Might drop right there. Yeah.

rob: I love it. I know we got more on this, Charlie, what else you got?

charlie: I think it's a behavioral thing.

I really do. I think it's like that quote earlier, we feel a little bit out of control. We want to have some control. We want to do something. We want to feel like we've earned that passive income. There's some science behind that. In fact, Dan O'Reilly one of our favorite behavioral finance economic professor out of duke says sometimes when feeling out of control, we reach for a narrative that will help us we don't like randomness. He adds, we try to force order on life around us. So we tell ourselves a story. And that story is that I subscribed to this newsletter. I'm going to do better when in fact, you can do okay.

It's just that like you can do okay. With a lot of other things too, such as a target date fund or buying the most aggressive funds in your 401k. But anyway,

rob: I'm done. You can't. Yeah, you can do. Okay. But I think it's so interesting that those, the publishers of these newsletters, they only, again, you only hear about their wins and they are geniuses at hiding their losses and only, research like Holbert is able to point out their losses.

Yeah. All right. I think that's it. You guys got any fun, man that went

charlie: by fast. I think our training from the Maury Povich show paid off,

rob: can we get an emotional adviser?

charlie: That was intense drama.

rob: I was hoping we were going to come up with our own news. During that whole thing, actually

charlie: talk about it.

That's a good point. Ours is boring.

rob: Yeah, but we can name it something good. One of the kind first in class retire next year.

charlie: Best ever guaranteed.

Ben: Lots of guarantees in our newsletters.

rob: Lots just done. All right. That's it a couple of quotes to leave you with from Charlie. Here you go. You don't make money when you buy and you don't make money. When you sell you make money. When you wait.

charlie: Boom, Charlotte.

Ben: He always knows what to

rob: say. Second one, those who keep learning will keep rising in life.

All right. That's it. We've arrived at our final destination. Let us be the first to welcome you to the end of flight 19. Thank you for joining us here at the PA money guys podcast. If you have any questions or would like us to answer any, anything you have about the show, shoot me an email.

robert@leadingedgeplanning.com. Sign up for our newsletter. You go to leading edge planning.com. We're going to have a link on there. And let me know if we don't think we did good. If you liked what you heard, you hit that subscribe button so we can reach more people. And remember, as Emerson said, the world makes way for those who know where they're going.

So plan according. From all of us to here at leading edge, this is October 29th. So we're going to say happy Halloween. You're not going to hear this until afterwards, but happy Halloween

charlie: at the hut

for

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Categories
Pilot Money Guys

Flight #15: Changing Your Domicile to Avoid State Taxes

Pilot Money Guys:

Changing Your Domicile to Avoid State Taxes!

Your domicile is defined as your permanent home where you pay your state income taxes.
 
For most people, your domicile is straightforward, however, for those with multiple residences domicile can be hard to establish. And maybe even a little tempting to lean toward the lower tax state. Our goal in this podcast is to help you understand how to have multiple homes and stay out of trouble with Uncle Sam!
 
Furthermore, the IRS says your domicile is based on your intent, which can be tricky to prove. A famous example is from a New York corporate executive moving to Texas. Even after getting a Texas driver's license and registering to vote there, the New York Division of Tax Appeals performed an audit and found the man to be liable for thousands of dollars in New York state income taxes. The man had to use the veterinary records of his dog in Texas to prove that he was intending to stay in Texas for the long haul!
 

Thank you for listening! If you’d like to have a conversation with us about tax domicile questions you may have, please email info@leadingedgeplanning.com or call 865-240-2292.

www.LeadingEdgePlanning.com

 

CHANGING DOMICILE CHECKLIST:
 

 

 

 

Podcast Transcription:

Rob: tip of the cap to you.

Welcome to the pilot money guys, podcast flight 15 already today. We're going to be talking about changing domiciles, changing where you live, and I'm your host. Rob Eklund, a wealth manager, financial planner, whatever you want to call. And with me, we kicked off Charlie. He's not, the godfather is not with us today.

Instead we have the professor CPA and certified financial planner. Kevin Gormley. Welcome Kevin. Yes. Thank

Kevin: you so much. It's great to be back. Oh, great. To be back. It's good

Rob: to have you here. The fans wanted more Kevin. They did. And of course we have the wonder boy, Ben Dickinson. Wonder man. You're a man cow bell.

What? I'm the cowbell? You're a man of many faces. That's for sure. That's true. Welcome. We're going to kick it off here with the little aviation news. Kevin, you were just talking about some movies. What do you got on the movie front for AVS?

Kevin: Yeah. So I'm a big movie fan and I was one of the people that did like top gun, so please don't judge me.

But so I was excited that the new movie was coming out. It's been delayed again until may of 2022. So say it. You can watch those trailers over and over again, but it's just not the same, but also two other things I learned is that jackass forever has also been delayed until the February of 22 and a mission impossible seven has been moved to September of next year.

Now the only other fun fact I'll tell you about jackass is I actually came across an article and those guys have spent like $38 million in medical costs. Oh,

Rob: are you serious? Yeah.

Kevin: Those people abused themselves, get paid for it. But they also have to pay all those medical bills. So anyway, wow.

That was just something that was Johnny Knox is from Knoxville

Rob: that's a Tennessee thing. Ben, were you ever thinking about. Oh, yeah.

Ben: W there's some videos out there of me and my friends doing some of our own our own stunts but I think one broken arm, then it really made a stop stop worrying about it.

And that's actually true. That's true, but that that's the other day, but but yeah I, my guess is why this is delayed is probably goes back to the Suez canal being blocked. That's my theories on supply

Rob: chain, hurricane Ida. Ranch and everything. Yeah. Excellent. Aviation wise, we got a pilot shortage that has been around and we knew it.

We'd known it's been coming for quite a while. And now they're just talking about, Hey, we just have 5,000 pilots taking early out from the airlines because of COVID. They, the companies were in dire straits. They offered pilots to get out a little early and 5,000 of us took it to include the gods.

Charlie and now, with air travel ramping back up and getting back to 2000, 19 levels or close to, we'll see what happens with the Delta Varian obviously. But, we have a bigger shortage now because 5,000 of us are gone. So it's interesting. No new shortage, new, old shortage here.

Ben: Yeah.

Yeah. That'd be interesting. A lot of they'll have to be bringing us some young folks in there,

Rob: training them up.

Kevin: Doing so Rob, let me ask you what, how much does it cost to become a pilot today and what are the different ways to become a pilot? That's because sometimes people will ask me.

Yeah, that sounds like a good good life, which it's not always, but it is hard to get into.

Rob: Yeah, no, that's a great question, Kevin. And it's a moving target back when I, way back when and the 2000 timeframe, when I got in, obviously I went to the military, so they paid. But then that's a significant cost buried by the by the taxpayers there.

As far as the commercial side of things, you bear a lot of the costs. You have to really, you're betting on yourself for a lot of years there and, you pay for all the training teacher ratings, your instrument ratings and whatnot. And then you have to accrue time and hopefully get hired by somebody to do that.

So they're paying for the gas and the plane. As you're accruing time once you've got the ratings, but the ratings are substantial now, though you've got a situation where airlines are seeing the shortage so that they've gone out and done different programs. So they're starting to take guys off the street and gals off the street and teach them right from the get go and start with some of the costs there.

They're providing the cost upfront for those pilots. So they're covering some of that. There's still a heavy burden, I think, on the individual. And you've got to bet on yourself for a long time before it pays off before you get to a major. For sure. So does that answer your question, Kevin?

Kevin: Yes, it does. And I think that's the interesting part to me is are there programs that are out there that if somebody wants to do it, that a company could take an equity position in that individual and say, we're gonna, we're gonna help pay for it.

Training and then you have to, give us three or four years or whatever the case may be.

Rob: Yeah. And it used to be that the military, I think, was producing more pots than in a, maybe the military has to ramp up their pilot production if you will. But I think right now with a lot of UAVs and unmanned aircraft out there, it's not going to be as organic as it used to be as not as seamless as hail was finding the KC 10 and.

Just move right over the airlines. So it'll be interesting how this all shakes out, but there'll definitely be different programs coming out. United has got one. I know Southwest has some things in the works and I'm sure Delta and American do as well. So we'll have to cover that on a different episode.

Maybe like what exactly are the avenues that the majors are looking at to bring guys on.

Ben: Yeah. And if you're a new pilot check out our last series, because we got some good info on some benefits stuff especially for some younger folks or people getting into it, because there's a a lot of nuances I've learned from

Rob: you all.

Absolutely. And then once you get to the majors you're gonna probably have enough money. You might have to give us a call. So that's true. That leads right perfectly into our next set. Which is exciting stuff. We're going to be talking about changing domiciles, which military folks, airline pilots, everyone deals with at some point in their lives, usually.

And but before that, this podcast is brought to you by leading edge financial planning, we're fiduciary fee, only advisors who strive to do what's right for you. What keeps you up at night? What questions do you have about retirement savings? Life insurance policies. Long-term care options. State planning or why we call Ben Kalba give us a jingle

it's up to you to get these facets of your life in order or not. If you decide to get a handle on these issues, we can help. Okay. Now for that, let's kick it off with domiciled change, Kevin, over to you.

Kevin: Yeah. First of all, as the Eagles wrote in the song hotel, California, you can check out any time, but you can never leave.

And that's a good quote to discuss the fact that when you move from one state to another or even when you're working in multiple states states love to get tax money from. And even though you've checked out of a state and you think you're gone, they may not think you're gone and they will track you and and they have the power to tax you.

That's really what this is all about. And this has come about for me, Rob, because a number of clients have said, Hey, I'm moving out of one of the high tax states, California. Illinois New Jersey, New York, and one of the things I need to be cognizant of as I moved to the promised land, which there are nine states out there that are a part of what I would call the tax promised land, the sunshine states, including Florida Texas, Tennessee.

And then there's a Alaska Rob, which you grew up in Nevada, South Dakota. Washington, Wyoming, and then New Hampshire up there on the east coast. So these are all no tax states. And so people can get really excited even to retire to one of these states and what we're finding, what we see online all the time is that even though you've checked out of a state and you've left the state continues to tax you and then you have to fight it.

And so that's really what this is all about.

Rob: That's tough too, Kevin. Cause if you get in a situation, as we're doing some of the readings here for the show prep, some of the states, can, you move from one state, they taxed you and you moved to the new state and they can tax you.

And it's not exactly clear. Who's going to win that battle. And I guess the federal government, in some cases, won't even step in and say, okay, you're going to, or the court system will step in and say, okay, California, you got the tax. Whoever Colorado, you got the taxes. Which was very interesting to me.

I thought that at some point, they'd say, okay, you're not going to be double taxed, but it's it's a tough situation. So what do you want to do in that case, Kevin, to make sure you're not getting double taxed. I might be getting ahead of myself.

Kevin: No, I think that's a good place to start. And there was a Supreme court case a few years ago where taxpayer said, Hey, this is not fair.

And the Supreme court voted, I think it was. I think it was five to four. I don't know how many circles Supreme court justices there are, but anyway, it was a okay good. There was a very narrow victory in favor of the taxpayer that you can not be taxed by more than one state. And so I've heard people say to me before, Hey, I can't be taxed by two states.

That's true, but you still have to file two tax returns and take a credit. And it costs money to file tax returns. That's not fun. And also if you brush up against one of the high tax states, Rob, let's say that you end up paying tax in California and you get a credit for Tennessee.

Guess what, there is no income tax in Tennessee. So that's really where the devil's in the details with this. And it's just something you want to be cognizant of. Now, I will say as well, that we've, since we live in Tennessee Ben and I we've had people that have been Tennessee clients who have moved to other states.

Such as Colorado. And that tax is not the only reason to leave a state obviously. But when people leave Tennessee, they say, what do I need to do? And I said not really much because the new state is going to be happy to have you and Tennessee doesn't get any income tax anyway.

So they're not going to be fighting over you. So that's one of the dynamics that, that happens.

Rob: Yeah. And like you mentioned, Hotel California lyrics, California is one of those states that has obviously high tax, New York, probably New Jersey, those types of states. They're going to want to hold on to you as much as they can.

Kevin: That's a, that's one of the most fascinating things in my reading is that, in California, you could have a domicile. And the word that we're going to get into in a second is domiciled versus. But if you're a domicile in California, that is, you have a place there, you return there and you don't live in the state of California even one day of the year and you work in another state and you live in another state.

You, you're actually physically out of the state, California will still tax you and they have a right to tax. And you will pay California tax or you can, fight them for years. So these rules are very complicated and convoluted but it can be a very painful experience in California and New York.

Ben and I were talking about this earlier when there's a lot of money on the line, they're obviously going to hire a lot of people to come out.

Ben: Yeah. Yeah, there's a bigger reward on the end of that that battle and Kevin, you were telling me it's the burden of proof is on the taxpayer.

These states will come after you, like you're guilty and you have to prove otherwise. And we'll get into later, maybe more details on some of the things to avoid doing that. But I just thought that was really crazy that they actually basically can say, you're, we're taking this money and good luck telling us otherwise,

Rob: pretty much I've heard, I heard one.

One Pandit was talking about states being like pit bull. He compared to the states to pit bulls and they just don't want to let go. And you gotta practice.

Kevin: I think that's, I think that's great, Rob, and yeah innocent until proven guilty does not apply. And, like one person recently said that's not fair.

And I said, no, it's not fair, but fairness. Doesn't have anything to do with it because taxing authorities have the ability to garnish wages and, if they rule in favor of their state and you lose the case, guess what. You're either going to have to pay or maybe flee the country and, fleeing the country.

I don't think there's a good financial strategy although some do.

Ben: Yeah, that's true. But I think they still, Hey California in New York, they may still come after you never.

Rob: Yeah,

Kevin: Ben, that's a, that's an excellent point. And so I got into the idea of, ex-pat and I followed some people on podcasts and YouTube.

And so one of the things I learned as an ex-pat, if you want to be an ex-pat and you live in California, is that you absolutely need to not just move to the foreign country. You need to move somewhere else. First, you actually need to change your domicile because there's people that are over in Costa Rica.

Europe and other places that California is still taxing them because the person moved directly from California to these other states and California argues that when you come back to the country, you're coming back to us. And so a lot of ex-pats I've said you actually have to move to a state like Texas establish established domicile, which I think we're ready to get into what domicile is, but established domiciles and then move overseas or California will continue to reach out to you across the world.

Rob: I love it. Love it. Let's get into it. What's what is the domiciles?

Kevin: I'm gonna, I'm going to try to explain this and then help me. You've done a lot of research on this as well, but domiciles, you really only have one domicile. So domiciles is the state, which you live and expect to return to, and that expect to return to that's intent, right?

And intent. Is very hard to know like what's your intention, Rob? I don't know your intention, . But I can, if I'm a taxing authority, I can tell you what I think your intention is. And that's where we come back to. You need to prove your intention. So at domiciles, you really only have one domicile.

That's the place that you. That you are, and you expect to return to, whereas you may have multiple residents what do we call someone with multiple residents, Rob,

Rob: a rich person. Snowbird

Kevin: or a snowbird? Yeah. Yeah. Snowbird is good. So yeah, if you have multiple residences there's let me find the verbiage here.

There's something that states will do, and they will try to say that you are a statutory, and they in any state in which an individual has a residence has a right to tax individuals, worldwide income. I always love that worldwide income. That sounds like you're making money all over the world.

But if you are in a state for a certain period of time and every state has their own rules, They can try to say that you are a statutory resident and they can say that your domicile is in their state. So although there's only one Dom domiciles more than one state can say you have a dominant style in their state and start tackling.

Domiciles is one thing. Residents, you may have multiple residents, but again, the issue is that multiple states will say that your domicile is in their state, then help me.

Ben: One, one thing that I was reading is that it basically, it does change to the definition of what domiciles is from different states.

And so maybe that's why California has maybe more strict rules, but I've got here two concepts that these states generally agree on. And the first one is that a domicile is a person's fixed permanent and principle home that they reside in. And then there's number two that they intend to return to or remain.

 I guess if you intend to be there for long term, and you also have a home there that you live in, even if you have multiple residences they can still say you intend to return back to this. So this is your home.

Rob: I think it's important for folks that are thinking about changing their domicile or moving that they think, there's some things that they can do.

To help make sure that their domiciles established in that new state, right? Yep. Yep. Absolutely. If you sell a house, if you move from, for our airline pilots who move from Oakland to Denver or Oakland to Dallas or wherever, if you're moving from California or wherever you sell the house that you have there, and you buy a new one, that's obviously going to go a long way towards establishing your domicile.

It gets a little trickier. If you keep that. And you have a house in Colorado and in, in California, then that's where it gets a little tougher, but they get, I even heard one example where a guy moving from New Jersey to Texas, he was a big hedge fund guy. And he, I think he had $400 million of income that year in a huge tax bill.

And New Jersey obviously didn't want that. And the judge. I think if if I heard this correctly, the judge actually used where his pet was, where his dog was to establish what was his domicile. It went that far as the, his intent was established because his pet was intact.

Ben: Yep. Yeah. Moving is not just enough.

We've we've seen and learned that you've got to, you've got to basically prove that you're in it for the long haul, many different ways. And we have a pretty robust checklist that we we got that it goes through kind of some of those things that you should go into.

And it's pretty funny how many different things they, they talk about in here? Are we ready to maybe jump in. I think so, guys. Perfect. All right. Let me let me pull this up because I think it's worth showing if you're on the, if you're on the YouTube check this out, but if not, you can check out our website.

We'll post this on here, but first of all, it talks about taking residents. Obviously owning a place in a different state and having your physical presence. So this is a, having six. At least six months in a day or the majority of your time in that new state. So if you do keep

Kevin: 183 days spend

Rob: 183

Ben: days, magic number was 365 divided by two plus one.

Perfect. Yeah, file for tax benefits. There's a, I guess you can declare that this is my domicile. I didn't know about that one. Do you any idea what that is? Is that some type of fancy form.

Kevin: No I don't have any idea. The big D I'm trying to figure out ways to remember that domicile is really the key.

It's not just residents. Declaration of domicile, that really sounds that your intent is to be in a new place. So I would definitely do that.

Ben: Yep. Yep. And like you said, it is the intent, that seems to be what really matters, but maybe it's like in the office where you just say, I declare domicidal Michael Scott, but yeah, I think maybe that's what that is.

I don't know.

Kevin: Michael Scott. Yeah.

Ben: Yeah, but this goes into things, things that you may not think about, your voter's registration, if you have a, if you're trying to establish residency in Texas, but, and you also have a home in California and you're registered to vote in California, it's not, that's not gonna fly just because you have that home.

Even if you, even, if you lived in Texas for the majority of the time, , you gotta have all of these little things in place. Your estate planning documents is a big one. Make sure that those are changed with the new addresses. Insurance a big, that's another big one that, that this goes into detail on your banking accounts your checks, making sure the checks, there's little things like that.

And this is all just building that evidence to prove that your intent is to not only just be there, but be there for the longterm and stay there and be able to prove that,

Rob: That, that estate planning one is huge too, because different, obviously the death taxes that we talked about in a previous episode, Go back and look at that.

And our I'm dead now. What series? That's great. Great series, I think. Yes. And

Kevin: No. Ben, let me make a comment here with all of this. Because people will say it's very obvious. I. Okay. It's very obvious. And I've heard that quite a bit. The problem is not that some of the people we're working with are not actually leaving a state.

The problem is there, there are some people, just a few, maybe in New York that will buy second homes elsewhere. And of course, where do you want to be domiciled? You want to be domiciled in the low tax state. And these auditors, again, we always think of these auditors as either. Devious not good people, but they are dealing with some people that actually are skirting tax loss.

So I think that's always something to remember. So they are going to look for ways to, to nail you. And this is the good get caught up in the bad sometimes. And the thing that I really like is that pilot pilots, like checking. And here's the cool thing where you can actually use your check, not a checklist knowledge to to just make sure you do all of these checklists

Rob: discipline.

Kevin: Yes. That's it?

Ben: Yeah. We'll give some access to this. . This goes as far as saying, even your memberships, join a club, just join a club in your new state charitable giving the chair give to charities in your state.

So this really goes into to a lot of detail. I won't go through all of it here, but it really goes through all the different details and it shows just to the extent of how you have to prove that you intend to not only live there but stay there and be there for the long haul.

And, yeah, it's not just about being there.

Kevin: Yeah. So what you just said is not just about 183 days. New York, actually, I saw some statistics online. They when greater than 50% of the cases against people, so greater than 50% of the time they win, they also have five years on average that these audits last, or I shouldn't say on average up to five years, these audits will.

So this is not just about money. It's also about annoyance and frustration and all these other issues. So one of the things that I think is extremely important is for you to is for you to have a a divorce date or a date that you are gonna be actually have left the state and come to a new state.

So picking a date of divorce and that's actually what they say in a number of the articles is that you need to treat the state like. Where you severed everything. So I even think, like people will say I'm going to buy another house in Tennessee. I've heard this recently and I'm going to move to Tennessee, but I'm going to keep my old place in my other state.

Again, it's very easy for that state to argue that's a second home in Tennessee or Florida or wherever. So I actually think selling your old home, although you don't have to do that, selling your old home might actually be a good one. Selling all real estate and then some of the other gotchas, you mentioned the dog, Rob social media is a very powerful tool when you're standing next to a New York building with your dog.

 And all your friends and you just got out of the cigar bar or whatever. And the auditor shows you a picture of yourself from your Facebook page. They are going to use cell phone records. They're going to use social media. So again just be careful with that. And if you really have left the area, you, and I would say that she shouldn't have problems, but multiple states right now,

Rob: Yeah.

And that's a a key point too. When you talk about, if you're there in the social media aspect, a state, I believe most states treat you as being there. If you're there for one second of the day. So for the pilots that bounce around, have their own airplanes and bounce around. If you're there for one second, you could be considered.

That could be one. 183 days as far as they're concerned. And so if you have credit card receipts and that kind of thing from that state, that's gonna be used against you for that. Potentially if you are an airline pilot, maybe using cash again, not trying to skirt the rules, but just making sure you've established that domiciled correctly.

Ben: Yeah, I wish it was as easy as, you could live in California and buy just like a apartment Tennessee and say that's where you live, but it's just. Yeah, they've got to figure it out and they know that people do that. And so they're looking out for people doing that and that's why it's, they've made it very difficult for you to do stuff like that.

So definitely something to be aware of when you're trying to trick them tricked system,

Rob: And I've heard there's now, with the social media and all the apps that are out there, that there are apps out there that you can actually buy to help you establish that you were in a state. For a certain amount of time.

So some, sometimes the states will be like you said you were there 185 days. We don't believe you, but there are apps, one it's called tax bird. It tracks your GPS location. And you can use that as, Hey, I was in this state for 190 days or whatever you were. Very interesting. Kind of mind blowing to me.

Yeah. That is

Kevin: As long as your app says that you've moved around a little bit and you didn't stay in one location for 183 days straight, Rob that is something that I read is that people have lost, caught court cases because they left their app and their phone. At one location and we're traveling all over the place.

Rob: So

Ben: God, it's amazing what these people people are doing. They're trying everything, but making it more difficult for those that are maybe if you're trying to do it the right way too. So

Kevin: for sure final thing I have Rob concerning. This whole issue is. I will tell you there's a, and you might not know this Rob there's 50 states in the U S and there's 50 different and there's 50 different taxing authorities and there's 50 different set of rules.

And even as a tax person when we have to look at different states it's even challenging for us. So you have to know the rules of an individual state and never asked soon. That, what the rules are going to be because they do change.

And sometimes like the 183 days, that's not the rule. So maybe seeking some, somebody that, that knows interstate tax and all the rules around tax in this case, I really think it's money well spent because if you wait until tax time and you've already been hit on the radar it might be too late.

Rob: Yeah. That's a good point. And if you're married, And you leave your, you may be moving to a new state and you leave your wife behind to fix things up or whatever. But of course the state's going to try the higher tax state is going to try to use that is, Hey, you're not really leaving you after wife here for crying out loud.

You didn't move. So just something to think about

Kevin: everybody laughs at that. Sorry.

Rob: Awesome. Awesome guys. We've got anything else?

Ben: I th I think this is this is good. We don't want to bore anybody too much about this stuff,

Rob: but yeah. Yeah. Something to think about for sure. Check out the checklist.

That'll be in the show notes, the link for sure. Leading edge planning.com. You can find it there as well. And that's it. We have reached our final destination on this special domiciles changing episode with the professor and Mr. Kelly. Thanks for joining us. I'll leave you with a couple of quotes by Robert Scheller famous.

Robert Schiller, the ability to focus attention on important things is a defining characteristic of intelligence. Think about that for a second. It amazes me. And the second one, it amazes me how people are often more willing to act based on little or no data than to use data. That is a challenge to assemble Robert Shiller brainiac.

That's it. That's all I've got. If you like what you heard, hit the subscribe button and let us know what you think by emailing me, robert@leadingedgeplanning.com or info@leadingedgeplanning.com. Give us good compliments bad suggestions, whatever you want to say to us, we're willing to hear you and make the show better.

So that's what we're here for. Remember, as Emerson said, the world makes way for those who know where they're going. So make so plan accordingly. We're out of here. Thanks Kevin. Thanks Ben.

 

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this Podcast will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 09/07/2021 and are subject to change at any time due to the changes in market or economic conditions.

Categories
Pilot Money Guys

2021 Child Tax Credit Payment: How Much Is Your Kid Worth?

Stitcher Button
We apologize for interrupting your regularly scheduled podcast program. We have BREAKING NEWS! What is up with the new American Rescue Plan (ARP) CHILD TAX CREDIT payment?

There is a new increased Child Tax Credit Payment via the American Rescue Plan (ARP) that's paying out right now. Like many of us, you may have received a payment that you weren't expecting.

  • Will you have to pay it back?

  • Will it cause your tax bill to be higher in April?

  • Should you spend it now?

  • What's the difference between the new increased ARP Child Tax Credit and the previous version of the Child Tax Credit?
Typically, taxpayers with income under $400,000 MAGI, married filing jointly, received a $2,000 tax credit per child under the age of 17 to offset your tax bill. This year, instead of getting the credit on your taxes, a portion of the credit will be paid out in advance over the next 6 months. If you count on the tax credit to offset your tax bill, you could be in for a big surprise!

In this podcast, Leading Edge's Co-Founder and CFO, Kevin Gormley CFP®,CPA aka "The Professor" covers all the details of the new increased Child Tax Credit as well as the existing credit. Plus, everything you need know to NOT be surprised at tax time!

Check out this Wall Street Journal article on the Child Tax Credit!

Check out our recent post on Tax Deductions

Podcast Transcription:

Voice: ladies and gentlemen, welcome aboard the pilot money guys podcast, where our mission is to help clients build and protect wealth to achieve their dreams. And. This podcast is brought to you by leading edge financial planning without further ado, here is your host Robert equity

Rob Eklund: tip of the cap, Tia and welcome to the pilot money guys. Ad hoc special edition podcast regarding child tax credits. I'm your host, Rob Macklin. Joining me today. We are lucky enough to have certified financial planner and CPA. Kevin Gormley, nicknamed the professor. Which isn't too original as he used to be a professor, but still he's known to pontificate around the leading edge campus.

And he looks like a young Jim Gaffigan lives in Tennessee, loves long walks on the beach and usually has a good bourbon with it. Welcome Kevin.

Kevin Gormley: Hey Robin. Yeah. It's, it's great to be here with you guys. A big, big fan boy of the pilot money guys. First time, long time and all that other crap.

Rob Eklund: Perfect. Perfect.

We got a, of course we've got anchoring. The podcast is our financial wonder. Boy, Ben Dickinson. Welcome Ben. Good to be

Ben: here. Anchoring it down. Like keeping it anchored. I like it. Charlie is out. Charlie's out. Charlie's out. Kevin's in. And this is a good time.

Rob Eklund: Good crew the crew. Yeah. Yeah. Uh, let's jump into it.

We've got a little airline news. This is an ad hoc, uh, podcast. We just brought it out because the child tax credits, if you're getting payments from the IRS, or if you make less than $400,000, you might want to tune in. But first we're going to jump into airline news. Ben, what do you got?

Ben: Airline news. So I, this, this one might not, might be debatable whether this is airline news, but this is, this is sort of aviation news.

Uh, maybe more rocket. Our man rocket, the myth, the legend, Jeff Bezos, rocketed into space, debatable. Whether he actually made it to space. I think there's been some debate on that. I know he went fat farther than Branson. Well, what are you guys saying, Nick? Did he make a space?

Rob Eklund: I don't know. Did he? Well, I can tell you it's not an astronaut.

At least the FAA says he can't wear the wings. No, can't

Ben: agree.

Kevin Gormley: He's like, why not? Why not Rob? Why can't he wear the wings? He

Rob Eklund: says, uh, passengers can't can't wear the wings. And unless you've demonstrate activities during the flight that were essential to public safety or contributing, attributed to human space, flight safety, he wasn't a pilot.

He wasn't commanding it. He wasn't working on it. Really. He was just passenger. So no wings for him,

Ben: man. No rings for you also just couldn't. It had one button that they had to press just to get the wings. I mean, they could have, he really should've thought of that. If he's this genius, billionaire, come on, just add one button in there,

Rob Eklund: cowboy hat for crying out loud, you should get the wings.

Kevin Gormley: You should get the wings at the blue, the cowboy.

, Rob, I do have a question for you. Um, has he, has he been up higher?

Oh, yeah, it's a little it's a little bit. Yeah.

Rob Eklund: Yeah. Tap out about 41,000 for myself.

Ben: He, how high did he go? I mean,

Rob Eklund: I was able to make it Branson. That's always a good thing,

Ben: right? Yes. Yes. Um, the billionaires like to get after each other, which I appreciate as a, as a simpleton, uh, here, I, I, I don't mind, I don't mind doing this, this.

I dunno exactly.

Rob Eklund: Did he really get the space Branson that is? Did he really make it? I don't know.

Ben: W we, we were debating before this, about the Karman line, uh, that Kevin was talking about to us. Uh, the Karman line apparently is a unofficially official line of S of, uh, where space begins. Yeah. I'm not sure.

Kevin Gormley: Yeah. Ben, it's a, it's a little known fact. That Theodore Von Karman actually established the Karman line. And it's, it's somewhat, yes, it's somewhat of a nebulous, uh, amount, but it's 50 miles up or roughly 80 kilometers. I don't know, 80 kilometers. That doesn't sound like very much, but, uh, that's, that's where the space line allegedly begins.

And I know, uh, Bezos was making fun of Brandon. And, uh, you know, look, I'm afraid to go, uh, even 30,000 feet. So I'm not making fun of any of these guys. The interesting part for me though, is a lot of people are like, well, how does this space flight solve world hunger? Like, you know, how does this solve world hunger?

How does this solve other problems? And I'm like, I don't really care. It was pretty cool to watch.

Ben: Yeah. Yeah. I go hungry and watch the show.

Kevin Gormley: I mean, what are the aviators think? Rob? What's been the, what's been the scuttlebutt around, uh, aviators, as far as all this. Do you even care?

Rob Eklund: I don't think we care too much, but maybe I'm wrong. I have, I've only flown a few, a few, uh, flights, uh, since it's happened, but I don't think we care too much other than we like to make fun of.

Maybe the shape of the rocket and whatnot, but

Kevin Gormley: yeah,

Ben: it was a little Dr. Evil, Alaska, no one, but

Rob Eklund: he's got some big windows like it. Excellent. Anything else? Any other aviation S news. I know United bots and planes, or is it planning to buy a lot of planes? Like 200 Max's

Ben: yeah. So that's exciting. I mean, hopefully it happens.

There's always, always some risks around. I'm not even gonna say the name of the plane. I don't want to jinx anything, but don't say, but yeah. Yeah, besides that, I mean, we, we, uh, luckily we, we recorded, uh, our, our last podcast here. What last was it? Last week? I think it was last what? Yeah. And so, yeah. Yeah. I mean, uh, not too much going on since then, maybe some, some different, uh, different fuel shortage, potential issues I saw on the west coast, but, uh, for the most part, it looks like things are going pretty smooth.

Um, how are the flights in Southwest? So you're,

Rob Eklund: they're, they're busy. Things are crazy right now. Uh, you know, I think the airlines are hopping, so hopefully that continues, uh, through the, through the Delta variant and all that good stuff, but we'll see. Absolutely. We'll see. Absolutely awesome. Sounds good.

Let's move it along. Uh, before we get to the exciting stuff, let us remind you. This podcast is brought to you by leading edge financial planning. We are fiduciary fee only advisors, and we want to know what keeps you up. When you were thinking about your finances, what questions do you have about your retirement savings?

Life insurance policies long-term care options, or estate planning, or why we call it? Ben Caldwell, give us a jingle 8 6 5 2 4 0 2 2 2 9 2 2 8 6 5 2 4 0 2 9 2 2. It's up to you to get these facets of your life in order or not. You decide to get a handle on these issues. We can help that's enough of that.

Mr. Professor. Kevin Gormley let's get into the child tax credits.

Kevin Gormley: Yes, sir. Um, so I think I'll just start out by saying I had more conversations during this tax season about people's kids and basically what their kids were worth to them. Um, because we talked a little bit about if a kid's a, you know, when I say kids 17, 18, 19 years old should be claimed as dependence and or should file themselves.

All the kids want. That money that was out there. So when we talk about taxes, we talk about tax credits and everybody goes to sleep. Uh, if somebody mentions that you might get some of that free money, all of a sudden everyone wakes up and that's really what this is about. This is about, uh, either that free money or maybe having to pay back money if you are a high income person.

So, so that's really how I would frame this discussion. If you're high income, you may not be getting some of these, uh, these friends.

Rob Eklund: Yeah. I feel like Ben should insert the little clip from Jerry Maguire. Show me the money right there

Ben: to meet the money. I just cause we met just because you make a lot of money.

It doesn't mean you shouldn't get any free money. I mean, come on. Right? Right. Well basis to get some free money to

Rob Eklund: you probably don't well, I don't mean to sidetrack you here, but for our listeners, um, who don't know that much about taxes, can you just explain real quick, the difference between a tax credit and a tax deduction kind of different.

Kevin Gormley: Well, uh, I'll give it a shot. I hope I can explain it. Uh, but a tax deduction lowers your taxable income. So if you have a hundred thousand dollars of tax in taxable income, you have a $2,000 deduction, a hundred minus two is 98,000. And so you still have to pay taxes on that income, but a tax credit. Wow. A tax credit is if you have a hundred thousand dollars of income and you're going to pay $20,000 of tax.

The credit actually will reduce your tax dollar for dollar. So the credits is really where we come in and we say, uh, you owe a $20,000, no check that you owe $16,000. And so it can be like a four, $5,000 difference when you have credits.

Rob Eklund: Very nice. Excellent. Awesome.

Ben: So the tax credit, I've got a letter here that was sent by none other than the president directly.

Not me. That's a Charlie handwritten from what I can tell. Very good to handwriting, very clear, almost looks at times new Roman. Um, it kind of goes over some of these details, estimate some stuff. What's going on with this child. I don't have a kid, so this doesn't, this doesn't help me at all. But unfortunately, yet I'm thinking now though, I should start having a bunch of kids just so I can get these, these credits.

Rob Eklund: Well, I'm absolutely be

Kevin Gormley: a bad idea. I'm absolutely not going to touch that one. Cause that sounds like a political hot potato. But, um, but yeah, the thing is, is, uh, you know, I don't know how much children crock cost to raise. Uh, Costa rays, but, um, you know, I've heard, I've heard a million dollars over your lifetime.

I've heard other numbers as well. And so at tax time, we actually might get something for having children and that's really what these tax credits are about. So, so Ben, when, uh, the tax law changed, I think it was in 2017 or 18. Uh, they changed things where people even making up to $400,000, married, filing jointly could now get child tax credits.

Now other things were lost, but I'm not going to go into that. But, uh, so it's $2,000 per child that are under the age of 17 or 16 or less at the end of the year. So, uh, when the kids are over, then set older than 17. Uh, you only get $500. So what ends up happening with a lot of our clients who are high income is one year, uh, they don't know much tax the next year they owe a lot of tax and then they say, I think our CPA did something wrong here, Kevin.

Yeah. And they call me and they say, uh, are you sure this is right? And I say, let's take a look at it. And then we find, well, uh, you have two children that are now over the age, so you're no longer getting all these calls. So, uh, so anyway, that's really, there is a great benefit to having the child tax credits you, you saved money.

Rob Eklund: And I think that was a, the tax cuts and jobs act of 2017. They raised it from a thousand to 2000. So we're already moving the right direction,

Kevin Gormley: right? I am. Yeah, that's good, man. I love when people pull out that, uh, uh, legislative language there. Thank you, Rob.

Rob Eklund: My brother's

Kevin Gormley: a lawyer. Yeah. Yeah. So, so really what's happened in, in 2021.

Um, and this, this sounds like I'm an infomercial here, but for one year only for just one year only, uh, you get, yeah, you get extra, you get extra money. So, um, but, but there's lots of caveats as always. So if you, if you are a single and you make $75,000 or less adjusted, gross income, Uh, head of household 112,500 or less, uh, again, just a gross income.

We won't go into what that is or married, filing jointly 150,000 or less. Uh, you will get per child. Now you'll get $3,000 if they are 17 and below in 2021. So for one year only, it's not 16. It's now 17. And then if the kids are five or younger, You would get $3,600 in a child tax credit. So, um, now that caveat of $150,000 married, filing jointly and single 75 or less, um, I don't know what you guys think about how many clients we have that actually, uh, make less than that.

But it ain't many.

Rob Eklund: No, not, not a lot for us. Uh, but you know, those younger pilots out there, they're hitting that. They're below that 150 in, in, during COVID times, you know, some of our other clients, I think might've been a hundred below, 150. And depending on what the IRS is looking at there, they might've thought, oh, well, they make less than 150 based on their 20, 20, uh, income and or their two.

Yeah. Or 2020, income. So we're gonna give them this, tax credit, something

Kevin Gormley: like that. Right. Yeah, Rob. So, uh, what was really interesting last year? Interesting to a tax geek that is so take that with a grain of salt, is that sometimes like 2000, right now it's 2020 tax return. If he didn't file a 2020 tax return, it's the 2019 tax.

Yeah. So for people that actually made more in 20, sometimes it's better to not file your tax return. And we did a lot of that. Um, I don't really want to call it gaming the system. I like to call it a tax smart planning, but, uh, some could perceive it to be gaming the system, but it's based on 2020 tax return.

If you did not file one, which I did not file my own tax return yet it then is based on 2009.

Rob Eklund: Gotcha. So just kind of to summarize a little bit the American recovery act, which is in 2021, raised it from that 2000 to 3000. If we're just talking, uh, 17 and under now.

So you can, uh, you got the tax credit of $3,000. If you're 1700, unless you're under six and it's 3,600. Is that per child? Is that.

Kevin Gormley: Yeah, exactly. So let me, let me take it a different way here. Uh, frame it a different way. You still get your $2,000 per child. If they're 17 or younger, you then get that super bonus 2021, a APA, extra thousand dollars.

So, and the reason why I say this and it's called an enhanced credit, Rob is because if you make over $150,000, that enhanced part starts to go away. If you're married, filing joint, But you need to make over $400,000 before that $2,000 starts to phase out. Gotcha.

Rob Eklund: Okay. Fantastic. Now for those people that did make under 150 or maybe didn't file in 2020, and they saw, uh, an IRS, payment in July, how in the heck did they calculate it?

Kevin Gormley: Yeah, I'm going to, I'm going to make fun of myself as I always do. And mentioned that on July 16th, I looked at my own bank account and said, what's this $167. And so, um, I, I didn't, I didn't expect it, but what the IRS ended up doing is they said, all right, you're going to get this amount of tax credit.

We're going to divide that amount by, of tax credit by 12. And then we're going to pay it over six weeks. So Ben, I don't know if there's an easier way to say it than that, but boy, that sure is confusing. How would you, how would you say that? Only the IRS.

Rob Eklund: Yeah.

Ben: Maybe I'm just trying to ask a question with this, but so you're you get, you get half of essentially what you should be getting as the credit, if you, if over the next six months and then at tax time, is that going to come in the form of a refund or, or potentially reduce the amount you owe?

Is that right? Based on half of what you should be

Kevin Gormley: getting well, that that's, that's sorta correct, but I'm not really sure what you said. Uh, Rob, where you, where are you tracking that? Um, yeah,

Rob Eklund: , I think I tracked it. You get 50% of the credit that you would've got when you filed your taxes the next year during April, or whenever you file, but you're going to get that over the last thing.

You're going to get a prepaid over the next six months from July to December, you're getting that 50% broken up. Six payments is that Kevin,

Kevin Gormley: is that what you're tracking? That, that that's perfect. So let's, let's give an example. Examples are always easy. So let's say that you're going to get $2,000. You're you're over the $150,000 in whatever tax return.

So you're going to get $2,000. They will pay you a thousand dollars from July till December, and then next year, when you file your tax return, you get the other thing.

Ben: But what is the cause I was hearing that there is the major confusion point with these are the big challenge for some people is you may be getting these payments and then not expect that you're going to owe more in taxes or, or get more money back. Can you explain that part of the confusion there?

Yeah.

Kevin Gormley: Yeah. So the, uh, the most evil words in taxes is claw-back claw-back is always things that, uh, make, uh, everybody upset. And it, it particularly makes people that prepare taxes upset because we always get blamed. So if you were to get that thousand dollars extra, or let's say it's 1500, let's say, let's say you made a hundred thousand dollars in 2020.

And now you joined Southwest airlines and you're flying a lot of premium trips. And so now all of a sudden your income is I'm just going to make this up 450,000. So, so you went from making a hundred thousand to 450,000. So that, that thousand $500 that you got an advance.

You got to pay all that back when you do your 2021 tax return. So not only do you not get that 3000, you have to pay back 1500 when you arrive at your final destination of filing your tax return.

Ben: Yeah. What about you think there would be any penalties or anything on that if, if you have to pay it back.

Kevin Gormley: So I told you the most evil words and tax, I'll tell you the most friendly words in tax and that's safe. And so there is actually a safe Harbor where you'll not have any penalties on that you're doing, unless, unless you're, uh, unless you're cheating the IRS and you lie about something. But no, there's, there's no, there's no issues with that.

It's again, it's going to be when you file your taxes, uh, the, if you're married, the spouses are going to look at each other and say, uh, oh man, we all, all this money.

Rob Eklund: If I'm, if I'm, uh, thinking of this correctly, Kevin and Ben, uh, if I'm gonna make, if the last year I made less than 150,000, and this year I'm going to make over 150,000 and I'm getting those IRS payments, then I better be real careful what I do with that money.

I might want to, you can go, there's a couple things you can do, right, Kevin, and you could go on and go onto the IRS website and register and do all that, uh, get through that process. And then. Or you can probably put that money aside and make sure you don't touch it. Maybe make a little interest on it and then get ready to pay that come tax time next year.

Kevin Gormley: Yeah. So my, my advice to everybody is not to do anything, not to go cancel it, especially now that it's after July 15th, because you know, people will say, well, I got to check in the mail. I'm going to send it back. Please. Don't do any of that. Just to just accept the money as an interest free loan. If you get them.

And then at tax time, you, you basically end up settling up at tax time. So, uh, but, but yes, to answer your question, if you're, if you're getting, uh, you know, too much money, quote unquote, you could save that money and be prepared to pay some taxes next year. But of course, Rob, no one does that. Everybody gets the money and spends it.

And that's the whole reason why we, uh, we are getting this free money, which is not at all free because it's going to be on our taxes next year. Yeah.

Rob Eklund: Well little savings account, then what would you do with

Ben: it? What would I do with it? You know what I would do, I would throw it all into

Rob Eklund: not dose

Ben: on the rise, but,, I wouldn't do that.

I don't know. I think maybe a person that would, that likes you to refund back and this is just behavioral, but, and this is another thing just to think about, some people just. Hate owing on th on their taxes. And I agree the interest free loan , is exactly what you probably should do.

Um, you know, really take it, take advantage of it. But, um, if you're a person that hates to have to owe money, I would definitely consider turning that off. Or, I mean, is it worth it maybe up in any sort of withholding at all, just in case, uh, if you are getting that, would that be smart at all?

Rob Eklund: That could be a tactic.

Kevin Gormley: Yeah. So the more money you withhold, the less money you pay a tax time. Uh, so, um, that is absolutely a tactic and for certain people, uh, if they, if they get, if they don't get a refund, they're very upset. So, uh, But, you know, like you said, Ben, you should never overpay your taxes. You know, you can never be too thin.

You can never be too rich and, uh, you should never overpay your taxes. I think I just made up a third one. Yeah.

Rob Eklund: Nice. So, uh, again, not too many people listening probably are in this category, but if you do fall into that category where you're making really close to that 150,000, you should probably think to get to take advantage of these child tax credits.

So you want to get your ink. Lower than that 150,000. If you're close, if you're within, you know, maybe 10,000, maybe you've got a better number there, Kevin. Right.

Kevin Gormley: So Rob, the phase out starts, uh, at 150,000 and I think, I think that's just a great point for tax planning. Is, uh, you know, you don't always need to know their tax rules, but find yourself a tax geek that knows the tax rules.

And there are times that by, you know, and maybe you put a little bit more, more money in your 401k, or maybe you do something, maybe you give away a little bit more money in that year to lower your adjusted gross income. So you can be eligible for certain things. I think that's always a good thing.

Strategy.

Rob Eklund: Yeah. Things like IRA contributions, health savings accounts, those kinds of things. Yeah. Key. And that's where professor Gormley can really help all your tax for bedroom. Like it. Awesome. You haven't what else you got on this topic? Yeah, I know. It's really dense and there's a ton we could talk about, but uh, what

Kevin Gormley: else you have?

Yeah. So just a few things, maybe the top five things to know about this is, uh, if you're, if your kids are older than 18, Uh, you're out of luck. They're only worth $500 to you. Uh, maybe, maybe they're worth a little bit more, but if they're 18 or over in 2021, it goes back to 17 and 22, they're only worth $500.

, if, if children are claimed by another person, Sometimes we have mixed families. Well, obviously you're not going to be getting the tax credit in advance, but you would still get it. If you're going to claim that child, if you yourself are dependent on someone else, I would love to be a dependent on Jeff Bezos if he's listening.

But if you're a dependent on someone else, Yeah. Uh, if you have a brand new baby, uh, you're not going to get the advanced tax credit because the IRS is not aware. Congratulations on your brand new baby. Uh, you do, as they say in the tax business, you have a new deduction and in this case, a new child tax credit.

Um, and then the other thing is if your children are five or younger in 2021, you could get this, uh, you know, $3,600. You know, some of the websites where I've read, they talk about winning the lottery. If you have a really young child and you could get that 3,600, but for the most part, and here's the final takeaway point is most of our clients that we work with, Rob, this will not affect, right?

Because they make too much money and I'd love to discuss in another podcast, what making too much money means, because I sure say it a lot and nobody ever knows what the heck I'm saying. When I say it, you make too much money. They're like, Yeah, put it on the

Rob Eklund: books. Gavin, I like it. Ben, any, any final thoughts?

Ben: Just, just rethinking, uh, the new kids situation now. Um, I'm really seeing the dollar value in them. Um, you know, feed them cheap. That's what I'm going to say. And that way you can really, really make some money off of this tax credit. Um, but, uh, but no, no. It's good, great information.

It's that? And the fact that it's automated is definitely something to be aware of. You're getting it whether you want to or not, you have to pay it back.

Rob Eklund: So, yeah. Kevin, did you finish your, finish your thoughts there? You got some more,

Kevin Gormley: well, I have 16 more cards to go through, but I think, um, I think I'm good, Rob.

Rob Eklund: Perfect. All right. That's it. We're going to leave you with an anti quote today because we've been doing a lot of, uh, regular quotes, financial. This, one's not so much of a financial quilt, but it could be. And it's this from Mario Andretti. If everything seems under control, you're just not going fast enough.

Anyways, anything, any thoughts on that? Ben,

Ben: you know, just, I guess I, maybe I just don't get it. Maybe I'm not smart enough, but I'd rather be in control than going too fast where I'm out of

Rob Eklund: control. Definitely not a way to fly a plane.

Kevin Gormley: I don't think. Yeah. For, for our younger viewers, um, Mario Andretti was a race card. Yeah.

Ben: Yeah,

Kevin Gormley: I've used, I've used quotes from Mario Andretti and people have said, ah, what the hell is he talking about?

Ben: . That's it? We've reached our final destination on this ad hoc special edition of the pilot money guys podcast.

Rob Eklund: If you like, what you do. Hit the subscribe button. If you have any topics you want us to cover, you can contact me@robertleadingedgeplanning.com or info@leadingedgeplanning.com. Remember, as Emerson said, the world makes way for those to know where they're going. So you may want to plan accordingly. Thank you for listening.


Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this Podcast will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 08/02/2021 and are subject to change at any time due to the changes in market or economic conditions.
Categories
Education Rob

The Fiduciary.

The Fiduciary.

The first time I heard the term “fiduciary,” I said to myself, “fidu…what? Sounds fancy.” Then I fell asleep. Admittedly, this topic appears boring and could put my 16-year-old boy all hopped up on Mountain Dew to sleep. But, here is a wake-up call – knowing who is and who is not a fiduciary is the first step in finding someone actually to help you with your money.
So, what is a fiduciary?
A fiduciary is someone who acts on behalf of another person and has a fundamental obligation to put their clients’ interests ahead of their own, with a duty of undivided loyalty and utmost good faith. Fiduciaries are bound both legally and ethically to act in the client’s best interests.
SEC Chairman Jay Clayton defined the fiduciary responsibility this way, “This duty – comprised of both a duty of care and a duty of loyalty – is principles based and applies to the entire relationship between the investment adviser and the client.”
When someone is a fiduciary, it applies to the “entire relationship,” not parts of it. It is the highest standard in the financial world. You may be saying, “Okay. Great! Aren’t all financial advisors fiduciaries?”
I would say, “NO!”
Unfortunately, the term financial advisor is very nebulous and can apply to brokers (registered representatives), IARs (Investment Advisor Representatives), or hybrid advisors who are dual-registered and can act as both a broker and IAR. The bottom line is only IARs who are only IARs (not dual-registered) are fiduciaries always. They must do what is in your best interest, even if it hurts them. They are like financial knights, putting your kingdom before their own monetary gain.
You, “Great Rob, what about Bernie Madoff? Wasn’t he a fiduciary?”

You are absolutely correct!

Yes, Madoff was a fiduciary advisor  (before that, he was a highly successful broker). I am definitely not saying that just because someone is a fiduciary, they will do what is best for you and your money. However, I am saying, by law, they are supposed to do precisely that (Madoff was sentenced to 150 years in federal prison). There are criminals in the world, and you need to take steps to make sure they are not defrauding you. Fortunately, many changes have taken place since Madoff and, perhaps one of the most important was the shift to a custodian system. A custodian system is where your advisor does not hold your money. Instead, a custodian like Charles Schwab retains it, and you can independently check your accounts to make sure it is where you think it is…not off in a Ponzi scheme. So, make sure your fiduciary IAR has a third-party custodian, and they don’t hold your money themselves.
You, “How did you gather this knowledge?”
I have been interested in investing ever since I was knee-high to a grasshopper. However, I acquired this fiduciary knowledge several years ago when I was a newly minted first officer before becoming an IAR and before Reg BI (discussed below). At that time, I began a journey to find a trustworthy financial advisor for myself. As a military officer, money had not been a primary concern, and, to be honest, I didn’t have enough of it to matter. But as I began my major airline career (2013), I realized I would soon have enough money that I had better start thinking about how to manage it.         I knew I needed help. My focus was on learning how to be a First Officer while still juggling my Air Force Reserve career.
Many questions ran through my head. The biggest and most important was, “How can I protect my money?” The money I had worked so hard to accumulate. What I found surprised me.
Many investment advisors wanting my business were brokers. Some of these brokers were very intelligent and could sell with the best. One problem, they only had a “suitable” duty of care to me and my money.
What does “suitable” mean? It means they only had to put my money into investments they deemed…wait for it…adequate. They did not need to give me advice that was best for me. To be clear, I am sure there are many respectable, ethical brokers out there; I am not saying there aren’t. But, with a suitable standard, they had no legal obligation to do right by me and my money.
For example, say I had two financial advisors: an IAR (fiduciary) and a broker
(suitable in 2013). Let us say they both had the option to put me in one of two identical funds, except one fund has higher fees. The IAR, legally, could not put me in the higher fee fund. The broker could legally put my money into the higher fee fund and likely would if they were getting paid to do so, as long as they deemed it adequate. You, “Okay, but that was then, right? What about now and Reg                 BI?”Regulation Best Interest (Reg BI – effective January 1st, 2020), has attempted to change the relationship and move the ethical bar higher for brokers. Instead of only having a suitable duty, they are now supposed to have a “best interest” duty. The regulation takes several steps to raise the bar (like having to disclose conflicts of interest); however, it does not change the dynamics of how a broker operates. A broker is still paid by a 3rd party to put their client’s money in certain funds. This relationship has not changed. Now, however, the SEC expects them to use the client’s best interest.
You, “How can they do what’s in my best interest if they are getting paid by someone other than me to put my money into particular funds?”
Great question; you are not alone asking this. Some say Reg BI hardly moves the bar; some say it moves it a lot. Here is my take…
The regulation does not and cannot change the dynamics of how a broker operates via a 3-party exchange. The broker will still have the broker, the client, and the entity paying the broker to put the client into their particular funds (3 parties). This higher standard is potentially good, but brokers still get paid by people other than the client. IARs, on the other hand, are fee-only, meaning the client is the only one who pays them (i.e., IARs are not paid by mutual funds or companies to get you to invest with them).
Per the Investment Advisors Act of 1940, IARs have always had a higher fiduciary standard and deal with this 2-party exchange. There is the client and the IAR, that’s it (2 parties). There is no incentive for an IAR to put your money into funds that may not be in your greatest interest.
You, “So how are IARs paid?”
Typically, IARs are paid by you quarterly. They get paid a percentage of how much money they manage for you. In the business, this is called AUM (Assets Under Management). It means, if you do well, they do well (Leading Edge charges pilots 0.85 % up to the first $1 million). So out of every $1,000 you have invested, you will pay us $8.50 per year (paid quarterly – $2.13) or less than 2 cups of Captain lattes per year (This is different from a broker who is paid to sell you a product and gets paid regardless if your money does well or not).
You, “Why would I pay someone a percentage of AUM?”
Well, think about having a wingman, co-pilot, or workout buddy. You are more likely
to get where you want to go if you have someone helping you and encouraging you to get there. IARs help you stay the course when times get tough (Extremely wealthy people pay hedge funds similarly, but a much higher percentage of AUM). You do it because of the value you get from it.
Vanguard has studied certain financial advisors’ value and determined that advisors can add 3% to the client’s portfolios. This sounds like a pretty good investment to me!
You, “Okay, so I pay you $8.50 per $1,000, but you can add value of $30 per $1,000?” Although this is not guaranteed, this is precisely the idea. Generally speaking, if an advisor starts guaranteeing returns, tell them you’ll call them back, but our job is to add value.
You, “How or why is this?”
Morgan Housel (the author of The Psychology of Money) has a great point – Napoleon once said, “a genius is the man who can do the average thing when everyone else around him is losing his mind.” A good advisor is someone who can help you be average when everyone else is losing their mind. If you can do this, you can make a lot of money. Good advisors help you do just that.
Think of being an airline pilot; much of our training deals with emergency training. What is the goal? To get us to do the average thing when most people are losing their minds. IARs can help instruct you through these market emergencies.
Furthermore, IARs give you comprehensive financial planning. Comprehensive financial planning may include Estate Planning, Tax Planning Strategies, Risk Management, College Savings, Employee Benefits Optimization, Insurance Planning, Career Planning, and Financial Independence Planning. These services can help you sleep better at night knowing you have taken care of your future self and loved ones, which in my book is priceless.
You, “So I get access to all of these types of planning with my 0.85% payments?”
Yes, most IARs offer many of these services, included with your quarterly fee. If you are familiar with a retainer, this is similar. You pay quarterly fees and have access to all kinds of advice/planning all year long. At Leading Edge, all of these services, and more, are offered and are included with your quarterly 0.85% payment.
In airline terms, when passengers pay for a ticket, that ticket includes deviations around thunderstorms, ATC delays, de-icing costs, etc. When you pay an advisor, you get almost all of the fixings with investment advice.
You, “Sounds great, but what does fee-only mean?”
Fee-only means you are paying both commission (and other custodial fees) and advisor fees. Simply put, when any trade is made establishing an investment position, there are commissions paid to brokers. Brokers make the trades but are simply the mechanism for buying and selling. In this capacity, they do not act as advisors and are not part of the decision making process. They do not get paid by the IAR and do not pay the IAR. These trades are separate from a broker selling you a product for a fee.

Now brokers giving advice, not acting as fiduciaries, may come up with all kinds of reasons why they are better for you than an IAR. It should only remind you of a quote by Upton Sinclair, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”
I believe this is what Reg BI attempts to do. It tries to get brokers to act in the client’s best interest, but their salary often depends on him not doing so. I fear that many brokers will continue finding ways to put clients in funds that pay the brokers. Even in the regulation itself, the term “best interest” is ill-defined and very open to interpretation. Time will tell how the SEC enforces Reg BI, but it will not change the dynamics of a 3-party (broker) relationship vs. a 2-party (IAR) relationship.
A fiduciary IAR is the highest standard and likely will be for the foreseeable future.
Reg BI does take steps to ensure brokers disclose conflicting relationships, which is a good thing. However, the fact they have to admit the relationship is irrelevant, in my opinion.
It makes me think of getting hit with a rock by a bully. His parents have come along and told him he has to tell me he is hitting me with a rock before he does it…but he can still hit me with the rock.
Understand, the bully can be quite crafty when explaining why hitting me with the rock is best for me, but I still get hit with a stone at the end of the day. Why would I sign up for that? I wouldn’t, and I didn’t.
Now, if you have fallen prey to some of these brokers, take comfort in knowing you aren’t alone. Many hardworking people have trusted these people to do what was in their greatest interest, not knowing these brokers had no such obligation. Several studies have shown that most investors don’t understand their financial advisor’s duty (or lack thereof). Many people believed their brokers were always legally bound to do what was best for them. Unfortunately, this was and is not the case. Again, only IARs (Investment Adviser Representatives), who do not wear broker hats ever, have a fiduciary duty to you at all times.

Back to my hunt for an advisor (pre-Reg BI)… Armed with this newfound fiduciary/suitable knowledge, I arranged a meeting with an advisor through my airline company’s 401k plan.
During the conversation, I asked, “Do you have a fiduciary duty to me?”
What should have been a simple yes or no, was instead a bunch of hemming and hawing, but no real answer. Not to be deterred, I asked again. This time I received another vague response, so I asked again. Finally, this advisor told me he only had a suitable responsibility (today, he would have told me he had a best interest responsibility).
Case closed. He may have been a great advisor, but he had no legal obligation to do what was right for me. If he put me in a poor investment and lost all of my money, I had very little to no recourse.         Today, instead of deeming that same investment “suitable,” there will likely be brokers who find ways to make those same investments “best interest.”
What I wanted was someone who had a legal obligation to me and my money. I wanted my financial advisor to do what was in my highest interest. Furthermore, I wanted someone who had no incentive to put me in a particular fund. For me, the fiduciary is the answer.
You may be saying, “Great Rob, but how do I find out if someone has a fiduciary responsibility to me?”
This one is easy, ask.
Ask the following question, “If I hire you as my advisor, do you always have a fiduciary duty to me?”If the answer isn’t a fairly quick, “Yes.” I advise looking elsewhere.
If it is, follow it up with, “To be clear, you never put on a broker hat and always have a fiduciary responsibility to me?”
The answer should again be, “Yes.”
Beyond asking, you should also be able to find out by looking at the disclosures on their website or looking at their Form ADV Part 2A/Firm Brochure or the new Client Relationship Statement (CRS) mandated by Reg BI.
When I became an advisor, I knew I wanted to do it the right way and only become an IAR (fiduciary). Thankfully, Leading Edge Financial Planning (LEFP) shares this belief. Our Form ADV Part 2A says this:

Item 10: Other Financial Industry Activities and Affiliations
No LEFP employee is registered, or has an application pending to register as a broker-dealer or a registered representative of a broker-dealer.
LEFP only receives compensation directly from our clients. We do not receive compensation from any outside source nor do we pay referral fees to outside sources for client referrals.

If you have gotten this far and not fallen asleep, I thank you. As you now know, I am a fiduciary and vow to protect my clients’ hard-earned money with the highest devotion to their goals. If you want to chat further about this or any other subject, please give me a buzz at (707) 712-9387 or shoot me an email at robert@leadgingedgeplanning.com. Until next time, I hope you have only tailwinds and blue skies!

Robert Eklund
Leading Edge Financial Planner

Robert Eklund

Financial Planner

Rob is a Southwest Pilot and soon to be retired Air Force Lieutenant Colonel. He grew up working on his family’s ranch in Colorado and went to high school in Alaska.  In 2000, he graduated from the United States Air Force Academy, earning a Bachelor of Science degree in Legal Studies.  Rob has served over twenty years in the Air Force, ten years on active duty, and over ten in the Reserves. During his military career he flew the C-130 while stationed in Germany and the KC-10 in California. Rob has accumulated over 700 hours of combat flying hours and participated in multiple Operations.  He was hired by Southwest Airlines in 2013 and became a staff officer at USNORTHCOM’s Domestic Operations Division in 2016. While holding this position as an Air Planner, Rob helped areas recover from Hurricane disasters; specifically, he was called to active duty to aid in recovery efforts following Hurricane Maria.

While studying at the Academy, Rob discovered his enthusiasm for the study of personal finance and investing.  As his military service comes to a close, he is excited to combine his passion for helping and protecting others with his enthusiasm for personal finance.  This culminated in 2020 with Rob passing the Series 65 Uniform Investment Advisor Law Exam and joining the Leading Edge team as a fiduciary advisor.  A fiduciary’s role comes naturally to him as he enjoys helping people whether that benefits him or not.  Rob knows the tremendous trust clients place in their financial advisors, and it is his goal to grow that trust through the highest level of transparency and integrity.  In his personal life, Rob married up to the love of his life and has been married for 18 years. He is overwhelmingly proud of his son, whom he recently donated a kidney.
]Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 03/18/2021 and are subject to change at any time due to the changes in market or economic conditions.

Categories
Retirement Rob

What Does Fiduciary Mean and Why is it Important?

Leading Edge Financial Planning is growing!  Thanks to you for spreading the word about Leading Edge, we’re adding new advisors to increase our capacity and continue to improve the quality of our service for current and future clients.   

We’ve been tremendously fortunate to have added three new advisors over the last few months.  Many of you already know Ben Dickinson as he’s been with us for almost two years now.  However, he’s moving into more of an advisory role as he’s increased his knowledge base, experience and met the SEC’s requirements to become an Investment Advisor Representative (IAR).   

We’ve also added Mark Covell as an IAR.  Mark is a soon-to-be-retired Marine fighter pilot as well aan American Airlines pilot And yeshe’s brilliant and talented in addition to being a Marine warrior for our country!   

For many of you, this article may be your first introduction to Rob Eklund.  He’s one of our latest additions to the team.  We’re very excited to add Rob to our team of advisors because of his passion and excitement for helping people with their personal finances.  Mguess is his enthusiasm will come through in this article. He tells his story of searching for a trusted, fiduciary financial advisor to help him and his family with their personal financebefore becoming an IAR himself.  Click here tlearn more about Rob’s background and experience, and please check out his article below... 

 

What Does Fiduciary Mean and Why is it Important

The first time I heard the term fiduciary, I said to myself, fidu…what? Sounds fancy. Then I fell asleep. Admittedly, this topic appears boring and could put my 16-year-old boy all hopped up on Mountain Dew to sleep! But here is a wake-up callknowing who is and who is not a fiduciary is the first step in finding someone to help you with your retirement and investment planning.   

I have been interested in investing ever since I was knee-high to a grasshopper. However, I acquired this fiduciary knowledge several years ago when I was a newly minted first officer for a major airline, before becoming an investment advisor myself.  At that time, I began a journey to find a trustworthy financial advisor for myself and my family. As a military officer, money had not been a primary concern, and to be honest, I didn’t have enough of it to matter. But as I began my major airline career in 2013, I realized I would soon have enough money that I had better start thinking about how to manage it. I knew I needed help. Furthermore, my focus was on learning how to be a first officer while still juggling my Air Force Reserve career.  

Many questions ran through my head. The biggest and most important was, How can I protect my money? The money I had worked so hard to accumulate. What I found surprised me.  Many financial advisors wanting my business were not fiduciaries. Some of these advisors were very intelligent and could sell with the best. One problem, they only had a suitable duty of care to me versus a fiduciary standard.   

The Suitability Standard 

The suitability standard means an advisor or broker only had to put my money into investments they deemed adequate. They did not need to give me advice that put my interests ahead of their own.    

The Fiduciary Standard 

A fiduciary is someone who acts on behalf of another person and has a legal and ethical obligation to put their clients’ interests ahead of their own.  SEC Chairman Jay Clayton defined the fiduciary responsibility this way, This duty  comprised of both a duty of care and a duty of loyalty  is principlesbased and applies to the entire relationship between the investment adviser and the client. When someone is a fiduciary, it applies to the entire relationship, not parts of it. It is the highest standard in the financial world.  

You may be saying, Okay. Great! Aren’t all financial advisors’ fiduciaries? Unfortunately, the term financial advisor is very nebulous and can apply talmost anyone.  In fact, most financial advisors are not fiduciaries.  Furthermore, more than half of respondents (53 percent) to a 2017 Financial Engines survey mistakenly believe that all financial advisorare already legally required to put their clients’ best interests first.    

Regulation Best Interest, aka “Reg BI”? 

Reg BI, effective January 1st, 2020, attempted to improve upon the suitability standard and move the ethical bar higher for anyone who calls themselves a financial advisor.  Instead of only having a suitable duty, they are now supposed to have a best interest duty. The regulation takes several steps to raise the bar (like having to disclose conflicts of interest); however, it does not change the dynamics of how a non-fiduciary advisor operates or receives compensation  

It is difficult to get a man to understand something when his salary depends upon his not understanding it.” ~Upton Sinclair  

I believe this is what Reg BI attempts to do. It tries to get brokers to act in the client’s best interest, but their salary often depends on him not doing so. I fear that many advisors will continue finding ways to put clients in funds that pay them a commission. Even in the regulation itself, the term best interest is ill-defined and very open to interpretation.  

Fee-Only versus Fee-Based 

The critical distinction is that an advisor operating under Reg BI castilbe paid by a 3rd party tpuclient’s money in certain investments or insurance products.  In other words, if an advisor gets paid by a third party (mutual fund company or insurance/annuity company) to put your money in certain investments or insurance products, then there is a conflict of interest.  And athat moment, the advisor needto disclose that they arNOT acting in a fiduciary capacity.      

Most fiduciaries operate in a fee-only manner.  This means the client’s fees are the onlsource of income for the advisor, and they are not paid commissions from third parties or outside sources that could bring into question the objectivity of the advice given.  Be sure to understand thdistinction between a fee-based financial advisor who may earn a commission and a fee versus a fee-only advisor.  The languagis very nebulous and confusing for a reason.   

Back to my personal journey in search of a trustworthy financial advisor; During one conversation, I asked, Do you have a fiduciary duty to me? What should have been a simple yes or no, was instead a bunch of hemming and hawing, but no real answer. Not to be deterred, I asked again. This time I received another vague response, so I asked once more. Finally, thiadvisor told me he only had a suitable responsibility (today, he would have told me he had a best interest responsibility).  Case closed! He may have been a great advisor, but he had no legal obligation to dwhat was best for my family and me 

 I wanted my financial advisor to do what was in my highest interest. Furthermore, I wanted someone whose advice was objective and had no incentive to put me in a particular mutual fund. For me, the fiduciary advisor is the answer.  

“How do you find out if someone has a fiduciary responsibility to you? This one is easy, ask.  

Ask the following question, If I hire you as my advisordo you always have a fiduciary duty to me?” If the answer is not a fairly quick, “Yes” I advise looking elsewhere. If it is, follow it uwith this question“To be clear, you never put on a broker hat and always have a fiduciary responsibility tme? The answer should again be, yes. 

Beyond asking, you should also be able to find out by looking at the disclosures on their website or looking at their Form ADV Part 2A/Firm Brochure or the new Client Relationship Statement (CRS) mandated by Reg BI. 

When I became an advisor, I knew I wanted to do it the right way and act as a fiduciary for my clients.  Thankfully, Leading Edge Financial Planning (LEFP) shares this belief. Our Form ADV Part 2A says this: 

Item 10: Other Financial Industry Activities and AffiliationsNo LEFP employee is registered or has an application pendinto register as a broker-dealer or a registered representative of a broker-dealer. LEFP only receives compensation directly from our clients. We do not receive compensation from any outside source, nor do we pay referral fees to outside sources for client referrals.” 

 If you have gotten this far and not fallen asleep, I thank you. As you now know, I am a fiduciary and vow to protect my clients’ hard-earned money with the highest devotion to their goals. Until next time, I hope you have only tailwinds and blue skies! 

Robert E. Eklund, CRD # 7317768 
Investment Advisor Representative  
www.leadingedgeplanning.com 

Robert Eklund

Financial Planner

Rob is a Southwest Pilot and soon to be retired Air Force Lieutenant Colonel. He grew up working on his family’s ranch in Colorado and went to high school in Alaska.  In 2000, he graduated from the United States Air Force Academy, earning a Bachelor of Science degree in Legal Studies.  Rob has served over twenty years in the Air Force, ten years on active duty, and over ten in the Reserves. During his military career he flew the C-130 while stationed in Germany and the KC-10 in California. Rob has accumulated over 700 hours of combat flying hours and participated in multiple Operations.  He was hired by Southwest Airlines in 2013 and became a staff officer at USNORTHCOM’s Domestic Operations Division in 2016. While holding this position as an Air Planner, Rob helped areas recover from Hurricane disasters; specifically, he was called to active duty to aid in recovery efforts following Hurricane Maria.

While studying at the Academy, Rob discovered his enthusiasm for the study of personal finance and investing.  As his military service comes to a close, he is excited to combine his passion for helping and protecting others with his enthusiasm for personal finance.  This culminated in 2020 with Rob passing the Series 65 Uniform Investment Advisor Law Exam and joining the Leading Edge team as a fiduciary advisor.  A fiduciary’s role comes naturally to him as he enjoys helping people whether that benefits him or not.  Rob knows the tremendous trust clients place in their financial advisors, and it is his goal to grow that trust through the highest level of transparency and integrity.  In his personal life, Rob married up to the love of his life and has been married for 18 years. He is overwhelmingly proud of his son, whom he recently donated a kidney.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this post will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 02/10/2021 and are subject to change at any time due to the changes in market or economic conditions.

Categories
Charlie Education

What Lies Ahead? The Top Ten Investing Principles for Getting Through the Next Market Downturn, Pandemic, Recession, etc.

Not even Hollywood writers could have created a story like we lived out in 2020. In this video, Charlie Mattingly and one of Leading Edge’s newest advisors, Rob Eklund, discuss what this year has taught us, how to better prepare in the future, and thoughts about the markets and economy going forward.   

Leading Edge financial advisor Rob Eklund, a First Officer for a major airline and a retired Air Force Pilot, review what investors can learn from mission planning in the Air Force anairlines.  Foexample, how can we be proactive instead of reactiveMany times, people may remark how pilots need quick reactions to be successful.  As Rob and I know, if you are frequently reacting as a pilot, it’s a good indication you did not plan sufficiently.  We believe it’s the samwith investing and retirement planning.   

Although, it is to prepare prior to a recession or market downturn, there are many things we can do during the event itselfVanguard posted the following graphic listing just a few of the value-added strategies that are critical to consider during any market decline.  

 

In addition to the checklist above from Vanguard, we believe there are ten essential principles to help all of us remained focused and less stressed during the next market downturn or recession.  

 

Embrace the efficiency of the markets in the long term.   

 

In the short term, the stock market reflects investor phycology (and many other unpredictable factors).  However, over time, equity prices tend to represent the future cash flows of a business.  We can all share in those future profits if we have the discipline to remain invested.

Don’t try to outguess the market. 

Although there is some debate within the finance community on the exact level of impact on investment returns, most will agree that strategic asset allocation and the amount of time in the market (not market timing) havthe most considerable influence on investor returns.    

Resist chasing performance.  

Do not select investments based on past returns.  Funds that have outperformed in the past do not always persist as winners in the future.  Past performance alone provides little insight into a mutual fund or ETFs ability to outperform in the future.  

Let markets work for you.  

The financial markets have historically rewarded long-term investors.  We have the opportunity to earn an investment return that outpaces inflation by supplying capital to the companies we invest in. (I.e., stocks, mutual funds, exchange-traded funds) 

Consider the drivers of returns.  

Evidence shows that buying investments at a fair price (value factor), buying companies that demonstrate a consistent trend of profitability (profitability factor), and companies that tend to be smaller (small-cap premium) point to differences in expected future returns.   

Practice smart diversification.  

Diversification helps reduce risks that have no expected return.  Global diversification can prove beneficial over the long term while reducing the short-term volatility of a portfolio.   

Avoid market timing.  

You never know which market segments will outperform from year to year. Time in the market is much more profitable than attempting to time the market.   

Manage your emotions. 

It’s challenging to differentiatthe short-term ups and downs of the market from the long-term returnneeded to outpace inflationIn reality, the most significant risk we face is losing purchasing power over the long-term, during retirement, versus the risk of short-term losses in the market  

Look beyond the headlines.  

There will ALWAYS be a news headline that could prevent you from investing in the stock market.  The news headlines will either attempt to scare you out of the markets or lure you into the latest investing trend.  Either strategy increases viewership, which in turn sells more commercials.   

Focus on what you can control.  

As we mentioned at the beginning of the article, just like pilots plan for their missions in great detail, we believe thorough planning is the best way to ensure a successful investing experience plus a fulfilling and prosperous retirement.   

Please don’t hesitate to call or email us anytime.  We’d love to hear from you! 

Charlie Mattingly

Charlie@leadingedgefinancialplanning.com 

865-240-2292 

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 12/18/2020 and are subject to change at any time due to the changes in market or economic conditions.

Categories
Charlie High Income Pilots Retirement Mistakes

Trust Your Instruments, Not Your Gut, When it Comes to Flying AND Investing!

​As a brand-new pilot, one of the first things you learn is how to mitigate the risk of the potentially deadly physiological phenomenon known as spatial disorientation or spatial-D. In pilot speak, spatial-D is when your body is telling you one thing and your flight instruments (and airplane) are telling you something completely different. Sadly, spatial-D has claimed the lives of many pilots.

In this video, one of our newest Leading Edge team members and previous Marine F/A-18 fighter pilot, Mark Covell discusses just one example of spatial-D.  Mark shares how carrier pilots tend to feel like they are pitching up as they are launched off the carrier at night due to the massive acceleration from the catapult. During daytime, VFR conditions this is probably a non-issue. However, in weather, or at night, this type of spatial-D is potentially deadly.

What does spatial-D have to do with investing and retirement planning? Personally, I feel like all of 2020 could be compared to being catapulted off a carrier at night and not knowing what is up or what is down.

During the heat of the battle from February until the markets settled a bit in early April, investor emotions were all over the place. Years of stock market gains evaporated in days, even hours. Furthermore, many people thought, and the news media quickly suggested we were headed for the second Great Depression. And don’t get me wrong, anything was (and is) possible. Sometimes, the unknown can be truly scary.

One slightly humorous example of investor spatial-D was early in the pandemic when the shares of ticker symbol ZOOM shot up due to investors buying up shares as quickly as possible. Zoom Technologies, a so-called penny stock had risen more than 240% in the span of a month before the SEC suspended trading. Unfortunately, the traders failed to realize the ticker symbol ZOOM did not represent the Cloud Video Conferencing company Zoom they thought they were purchasing – Ticker symbol ZM.

Here is the headline from MarketWatch.com dated February 27, 2020.

In the airplane, pilots must fight spatial-D by cross-checking and TRUSTING their instruments. If, as an investor, you did not trust your instruments during 2020, it may have been very costly.

So, it’s a dark night and the weather is terrible.  What are the instruments you trust?  What is your primary and backup instrument? Here are four instruments that I think can save your investments as well as your financial sanity during uncertain times…

1. Cash reserves – Emergency Funds.

    • Having extra cash can prevent withdrawals from retirement accounts or excessive credit card debt in emergencies.  Studies also show having cash in a bank account makes people happy. In an article posted on PYMNTS.com,  “Can Cash Really Make You Happier”, Joe Gladstone, research associate at the University of Cambridge in the U.K. and co-author of two recent studies about money and happiness said,

“We find a very interesting effect: that the amount of money you have in your bank account right now is a better predictor of happiness than your aggregate wealth,” Gladstone explained. “Having more money in their bank account makes people feel more financially secure, which leads to an increase in happiness.”

2. Have a working knowledge of financial history.

    • You don’t have to be an expert or financial historian, but I believe being familiar with financial history is akin to training before you go on a flying mission.  Pilots call this chair flying.  Athletes and musicians use a technique called visualization that helps them prepare for uncertainty and reduce anxiety for a sporting event or concert.

3. Admit that times are scary, and you do not know what’s going to happen.

    • This may sound silly, but I’ve seen many people get themselves into a “square corner” because they assumed that something was going to happen when in fact there was no indication or possible way of knowing what the future may hold.  We have heard investors say “my gut tells me…” many times.
      • Some of the best investors in the world invest with the mindset of preparing to be wrong. That’s why diversification is not popular or “sexy” because it’s like admitting you don’t know what’s going to happen in the future, so you must prepare for multiple scenarios.  However, diversification can feel disappointing but prove to be a profitable strategy over the long term.

BlackRock Investment Management Company posted the graphic below on their investor education website about diversification and “S&P Envy” over the last 20 years.

4. Prepare and Plan by having a clear vision of your goals and priorities.

    • If you don’t understand the “why” behind your investments as well as why you’re investing and saving in the first place, you will most likely bail-out of your plan during difficult and uncertain times.  Changing your investment plan mid-crisis creates a very high likelihood that your investment returns will be significantly lower.
    • Simon Sinek started a movement by encouraging businesses to “Start with Why.” It’s a powerful mindset that leads to trust, inspiration and success.  I believe the same applies to your financial and investment game plan.

5. Remember that you are invested in companies – not politics.

    • Sometimes our politics clouds the investment and retirement planning picture.  This rule falls under the axiom; “control the controllable.”  If you’re allowing your politics to affect your investment game plan than you may want to see rule number 2 above.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 12/09/2020 and are subject to change at any time due to the changes in market or economic conditions.