transcript

Speaker 1:
[00:00] This is The White Coat Investor Podcast, where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.

Speaker 2:
[00:16] This is White Coat Investor Podcast number 468. Today's episode is brought to us by SoFi, the folks who help you get your money right. Paying off student debt quickly and getting your finances back on track isn't easy, but that's where SoFi can help. They have exclusive low rates designed to help medical residents refinance student loans, and that could end up saving you thousands of dollars, helping you get out of student debt sooner. SoFi also offers the ability to lower your payments to just $100 a month while you're still in residency. If you're already out of residency, SoFi has got you covered there too. For more information, go to sofi.com/whitecoatinvestor. SoFi student loans originated by SoFi Bank, NA member FDIC, additional terms and conditions apply, NMLS 696891. We've got a fun interview, a fun episode for you today. We're going to get into the weeds a little bit. We're going to do some nuance today. We're going to talk about things like direct indexing and maxing out retirement accounts and all fun topics like that. We're going to talk about whether or not you should bother doing a backdoor Roth IRA. But before we get into that and we get our guests on the line, I wanted to let you know about a few things. First of all, our Financial Educator Award. If there's someone that's been teaching, their peers, their colleagues, their trainees about finance, we want to recognize them. Please nominate them for the Financial Educator Award at whitecoatinvestor.com/educator. This Saturday is the last day to nominate them, and if you have the winning nomination, you win too. They can get 1,000 bucks and the recognition. You can get a WCI online course. So we'll bribe you to make a nice recommendation for somebody, a nice nomination. And if you're interested in being a financial educator, we're going to give you some resources. I put together some slides, update them every year or two that you can use, and you can modify as needed for your own presentation. You can find those also, whitecoatinvestor.com/educator. You have until April 25th to nominate somebody for this year, and I hope you do. Okay, our quote of the day today comes from Thomas Stanley, right? Of Stanley and Danko fame, the millionaire next door, right? Who said, wealth is what you accumulate, not what you spend. So important to understand the difference between income and wealth. It's important what you're doing every day. That's why we thank you for it. It is wonderful work that you do. We want you to do well while you're doing good. That's the whole point of helping you become financially educated, helping you become financially literate, helping you worry less about your money so you can concentrate on what really matters in your life. Your practice, your patience, your family, your own wellness. Let's help you quit worrying about money so you can spend your time on those things. Like I said, our guest today is got a few pet peeves. So let's get her on the line. I want to talk about her pet peeves. Let's get into some nuance about some of the things we talk about here on WCI all the time. My guest today on the White Coat Investor Podcast is Amanda Harrell. Amanda is the Senior Wealth Management at FPL Capital Management who also does IQ 401k. Amanda, welcome to the podcast.

Speaker 3:
[03:36] Hi, thanks for having me.

Speaker 2:
[03:38] So, this podcast grew out of a dinner conversation. I was able to go to New Orleans actually twice this winter. I went once a couple of weeks before Mardi Gras and once a couple of weeks after Mardi Gras. I had to go speak to thoracic surgeons at the first one. I spoke to a rheumatologist at the second one. But at the first one, I got to spend a dinner with the folks at FPL Capital Management, which is always a pleasure and I'll tell you why. White Coat Investor has been here for 15 years. It will be 15 years in May. Guess who our first advertiser was? It was FPL Capital Management. So we're grateful for that relationship. They were there at a table in the tiny little hall outside the first WCI con in Park City. They've been along for the long ride. They help a lot of White Coat Investors with their 401Ks. IQ 401K is this high touch but low cost service for those of you putting a 401K in at your practice. And in fact, when we changed over from an individual 401K, when we changed all our independent contractors to employees and we needed a real ERISA 401K, we contacted all the people on our list and guess which bid came in the best? It was IQ 401K. So they do our 401K. If you've heard about the best 401K in the world, WCI 401K, these are the folks that run it. So Amanda, thanks for all your help with my own 401K. You helped me do my make a backdoor Roth every year. And I appreciate it very much.

Speaker 3:
[05:12] I do have to say, you did want to fact check us at dinner. You were like, you were not the first advertiser and out. Michael was like, look it up. And sure enough, you emailed us that night and you're like, okay, you're right.

Speaker 2:
[05:25] Well, part of the issue is the brand was different. The brand changed. In my defense, the first banner ad on the site did not say FPL Capital Management, but it was you guys. So, totally agree with that. Anyway, the discussion we had at dinner, which was a great dinner, by the way, so a fine choice. Thank you very much. Next time, we're going to have to go to the Mob-Owned place, which I'm really looking forward to. But this place was great. But we had a discussion. Amanda's like, there are so many pet peeves that I want to come on your podcast and talk about so that I can point to this podcast episode when I talk to White Coat Investors and they only believe what you say. So we're going to hit a whole bunch of those topics today. It's going to be great.

Speaker 3:
[06:07] Absolutely. I remember the first topic I brought up and I was like, this is your fault, Dr. Dahle. This is your fault.

Speaker 2:
[06:14] All right. Well, let's get into it. Let's hit that topic to start with.

Speaker 3:
[06:18] All right. So I remember I was like, biggest thing that I have a pet peeve about is clients, investors, doctors, not wanting to roll over their 401k, because they don't want to lose the ability to do a backdoor Roth contribution. I mean, we can weigh all the pros and cons, but they're like, Dr. Jim Dahle says, I need to do the backdoor Roth, therefore, I cannot lose the ability to, and it's like they clung to this idea. And then they overlook other aspects, the pros of doing it.

Speaker 2:
[06:55] So let's give an example of somebody for whom it would be a terrible decision not to do an IRA rollover of an old 401k, just to be able to do a backdoor Roth IRA.

Speaker 3:
[07:08] Perfect example, someone approaching retirement. So they switched careers, they wanted to go to a different hospital system that's going to give them more flexible schedule, maybe they're going part-time. So now they have a 401k, 403b that they can rollover and they don't want to. The reasons that we recommend them rolling it over is to start introducing other asset classes, private markets in particular. So with the 401k, you have your traditional fixed income exposure, and then your equity exposure, and that's it. Not everyone has a 401k plan like you guys do, where you have the flexibility to purchase anything that's available on Fidelity's platform. And I think that too, it's even more relevant today. And I'm going to, I guess, knock on your listeners for a second, but you do have a very like, bobblehead type of audience. And even Vanguard is predicting long-term capital market assumptions for equities. I think it's like four to six percent. So I think it makes private markets more relevant today.

Speaker 2:
[08:12] Okay. So one reason why somebody might want money outside of their 401k is just to get different investments, right? And there are still 401k's out there that suck. It's fewer than there used to be. But there's a lot of 401k's that are terrible. They're filled with one percent plus expense ratio actively managed mutual funds. And hopefully that's not the 401k's of anybody's practice out there, right? Because you got liability there. If you're offering a crappy 401k, you can be sued for it. And this is the way you get your 401k changed, as you subtly mentioned to HR or whoever's in charge of it, that you got some liability here offering such a crappy 401k and maybe they will change it. But that's one reason you might want to be in an IRA, especially if we're talking about you're rolling over a $2 million 401k into an IRA. You're like, oh, I don't want to do that because I want to be able to put $7,000 into a backdoor Roth every year. Well, the backdoor Roth is chump change.

Speaker 3:
[09:12] Exactly.

Speaker 2:
[09:12] Compared to the $2 million in the 401k, right?

Speaker 3:
[09:16] I also think too, they need to consider that you can accomplish the same goal, even when you roll over the 401k. So let's say that every year I'm going to convert 7,500 to my Roth, and instead of putting a backdoor Roth contribution, I'm going to invest that efficiently in my taxable account. So you're accomplishing the same goal, essentially to work out the same tax benefits over time. But if you take it a step further and say that like, my husband's 401k, it's with Boya. They don't allow in-plan Roth conversions. So let's say the market's down 20 percent. I want to do a Roth conversion for him. I can't. If you rolled it over to the rollover I write, you can do the Roth conversion whenever you want, and market's down 20, 40 percent. I mean, it just makes sense.

Speaker 2:
[10:03] Yeah. Not all 401ks allow Roth conversions for sure. Yeah. So those are some of the reasons why someone might want to consider. There are also reasons you might want to consider keeping money in a 401k, right? In some states, you get more asset protection by keeping the money in the 401k, and so that's one reason why it's maybe good to leave it in the old one or to move it to a new 401k. Also, the rule of 55 instead of 59 and a half, right? If you separated from the employer, you can get to 401k assets without that 10 percent penalty starting at age 55, not 59 and a half. That's a good reason to leave money in a 401k. And of course, you can keep doing backdoor Roth IRA process each year if you don't have any money in a traditional IRA. But I agree with you, especially if we're talking about millions of dollars, it's a pretty small benefit you're getting for being able to do your backdoor Roth IRA every year. And it's not like you can't still save that money for retirement. You just got to save it in a taxable account. And if you want more Roth money, you can still do Roth conversions of that IRA. Points well taken. What else do we got to say about that topic? Anything else?

Speaker 3:
[11:11] I think that if you look at 2022, so equity said dips, was it 27 percent, bonds dipped 13 percent. That was an unprecedented year. I think the reason that I'm so true about this topic is that I specifically remember a client who I was like, we were trying to introduce private markets. And he's not unlike many other people, like where all of their assets are in a 401k or in retirement, maybe they have a smaller taxable account. And we were saying, you're pushing retirement, you really need to start introducing these other asset classes. Well, all he had was bonds and equities, his entire accounts down. We wanted him to have access to the private markets. Some of those diversifiers, I think private real estate index was up 8 percent, private credit index was up 6 percent in 2022, when everything else was down.

Speaker 2:
[12:01] Part of this discussion is a discussion of nuance and the value of nuance. Perhaps the most popular financial podcaster on the planet is Dave Ramsey. The thing people criticize Dave Ramsey about is lack of nuance. There's no nuance. All debt is bad all the time. This is how you invest. You go to my recommended advisors who all charge you commissions, there's no nuance in it. Obviously, that means he's wrong sometimes because there's a lot in personal finance that is nuanced. But there's also value to getting rid of nuance. These are the baby steps. If you follow these, you'll be fine. There's some value to not having the nuance either. Because if all we ever did on this podcast was get into the wheeze, we spent all our time in the weeds, people would think, oh, all this detail matters a lot, we really got to know about this, or worse, this is too complicated for me, I'm not going to do it. I think we have to be a little bit careful to recognize that, yes, there's nuance and oftentimes nuance matters. But we got to be careful not to get into too much nuance, or it just ends up spoiling the pie. Let's move on to your next pet peeve.

Speaker 3:
[13:20] Advisors pushing direct indexing.

Speaker 2:
[13:24] Direct indexing. All right. This is a little bit of a hot topic. I have had a WCI, I'm talking to your WCI sponsor as well. I've had another WCI sponsor on here, Freck, talking about the benefits of direct indexing. A little bit of pro con here. Tell us what your problem with direct indexing is.

Speaker 3:
[13:43] I think that it is being pushed hard by advisors. I'm getting phone calls every day, maybe a few times a day about the direct indexing. This is my issue, is that what is the benefit? I don't think any person benefits from traditional direct indexing. I think it's sold like it's some magical unicorn, and it's lipstick on a pony.

Speaker 2:
[14:08] Hot take. Tweet it out, Amanda hates direct indexing.

Speaker 3:
[14:12] Please do.

Speaker 2:
[14:13] Okay. What's the issue with direct indexing? I mean, there's an expense. I had this discussion with the CEO of Freck about expense and he's like, you're right, if somebody is paying 0.6, 0.7 percent, it's not going to pencil out. The benefits not going to be there long term at whatever they're charging, nine basis points, I think. He's like, I think we can make the case much better. So part of its expense, a lot of people out there doing direct indexing are just charging you a lot for it. If you're hiring an advisor and paying them 1 percent a year to help you do direct indexing and that's the only reason you're hiring them, you may not be getting that sort of value out of it. But there's more to it than just the expense. Tell us what other problems you have with it.

Speaker 3:
[14:55] So you mentioned benefits long-term. There are no long-term benefits to direct indexing. We're talking about tax loss harvesting benefits that taper off after three years. I just don't think that it's a unique benefit. So let's say you have SPY in your taxable account and you're consistently adding new money. You're naturally going to have tax loss harvesting benefits just from everyday equity market volatility. I think right now statistics is once every two years, the markets dip in 10 percent and then maybe four to five years, a 20 percent dip. So you're naturally going to have those benefits if you're continuously adding money. So I think that's my biggest issue is there is no benefit and there's definitely no long-term benefit. Then I think that you're also signing up for underperformance. I don't know about Freq's performance, but I've looked at Parametric. They're one of the biggest in the industry. They're US Large Cap Core, which is basically indexing the S&P underperform 3 percent over 1, 3, 5, 7, 10-year numbers. So you're signing up for underperformance. No one goes into direct indexing saying like, they're going to provide excess market return or I'm here for the overperform. That doesn't exist. You hope they perform in line with the markets and get some tax-less harvesting benefits, but why pay for someone when you could do it yourself?

Speaker 2:
[16:20] Okay. So let's divide this into two topics, because I think it's really two topics.

Speaker 3:
[16:25] Okay.

Speaker 2:
[16:25] The first one is, what's the value of the losses to you anyway? For a lot of people, more losses don't help. Right now, I'm carrying forward seven figures of losses. How much can I take against ordinary income every year? $3,000. I've got four centuries of $3,000 per year saved up. If that is the only benefit you're getting from tax losses, you don't need that many and you can get all the tax losses you need just by tax loss harvesting every year or two, and the market is dip 10 or 20 percent. Tax loss harvest your last few lots that you bought, that's going to give you a lifetime. Up $3,000 per year. So other uses for losses. Well, if you end up not liking your portfolio, you can change your portfolio without a tax cost for it. There's some benefit to that. Other uses. In retirement, if people need to sell some shares to fund their retirement, they generally sell stuff that they've owned for at least a year with the highest basis. If you combine that with some tax losses that you've been carrying forward, you can get a lot of spending money out of not that many tax losses. And maybe if you had more because you've done direct indexing, maybe that process could last longer. But whether you need it to last longer or not is very individual. It turns out like six out of seven retirees aren't spending as much as they could anyway. They're just mostly spending their income. They're not realizing any capital gains anyway. And so they don't need more tax losses. They're not even going to use the tax losses they can get just from tax loss harvesting at the fund level. Other things you could use tax loss harvest for, if you move and you've got a really expensive house. The problem with the stupid personal home exemption is it was never indexed to inflation. It's still $250,000 single, $500,000 married. It's been that for as long as I can remember, since it was put in place, I think. It hasn't been indexed to inflation and certainly the value of White Coat Investor houses has gone up dramatically. If we sold now, well, maybe not with all the money we put into a renovation. But if we hadn't done that, we'd have a substantial above the $500,000 exemption, capital gain and it would allow us to move or downsize without having to pay taxes on that. So that'd be a benefit. But I think the main benefit is people that are entrepreneurs like me. I've got this business whose basis is basically zero. So if I ever sold WCI, the entire value of it would be taxable. 23.8 percent federally plus 4.5 percent or whatever it is in Utah State. So any tax losses I can come up with would offset that gain. So I go, well, because they do argue and I think the argument is valid, that you can get more losses from direct indexing than you're likely to get from just tax loss harvesting at the fund level. Somebody like me, maybe those losses would be worth it. But it is going to cost me at least nine basis points. As we get to the second part about potential under performance, it might cost me a whole lot more than that. But the point is most people aren't like me. They don't own a WCI. How much use do you really have for more losses? This is a discussion I have when people come to me and ask me about direct indexing. I'm like, well, how much value do you have to more losses? If they just get really vague that we think it'd be a good thing, I basically tell them, don't do it, because you probably won't have that many gains to deal with.

Speaker 3:
[20:10] I think we're talking about the tax loss harvesting benefits tapering off after three years. I don't think that advisors are telling clients what you're stuck with after those three years. You're stuck with a portfolio of 200, 500 individual stock positions.

Speaker 2:
[20:27] That's assuming you did an S&P 500 fund. If you did this with a total stock market fund, or worse, a total international stock market fund too, now you might have 12,000 individual securities that you got to sell to get out of it. It's a little bit like whole life insurance. It's a lifelong decision. If you want to do direct indexing, not only you pay in somebody to do that the rest of your life, but you're probably doing direct indexing with that taxable account the rest of your life. Even then, your heirs are going to have to clean up those 500 stocks or whatever.

Speaker 3:
[20:59] What you just said was key is you're agreeing to a lifelong relationship with an advisor, and I think that's why they push it. It's because it creates that stickiness with them. What am I going to do with 500 positions? They're overwhelmed. They don't know what to do, so they'll stick with that advisor.

Speaker 2:
[21:17] I had this discussion with the CEO of Freq. I'm like, well, what happens after three or four years if you want out? You want to reverse this decision. Basically, his argument was this. Let me summarize it. The argument was basically, well, the truth is, you probably only, if you got these 500 stocks or whatever, maybe it's not 500, maybe it's 250, you've really only got substantial gains in maybe 24 of them. You're not stuck with 250, you're really stuck with 24, and that's much more manageable. That was part of the argument. The other argument was, well, you can use all those losses to offset the gains.

Speaker 3:
[21:56] So I'll walk with nothing.

Speaker 2:
[21:58] Now you didn't get any benefit.

Speaker 3:
[21:59] It reads underperformance.

Speaker 2:
[22:00] At least you can unroll it and get out of it. But his point was, most of the gains you're going to have are relatively few securities, and yes, you would be stuck with those if you want to keep the losses that you did this whole thing for. But I think maybe there's some people out there that don't understand why the losses are all so front-loaded. So let's explain that a little bit better. Why do you get whatever it is, 80 or 90 percent of your losses in the first three years after making an investment?

Speaker 3:
[22:28] Yeah. So it's going to be the same with direct indexing or even if you just own, let's say, SPY, as you tax loss harvest, you're lowering your cost basis. So I think this is also too like a misconception with doctors, physicians is market dips 10 percent and they're like, are we tax loss harvesting? No, your cost basis is so low. So that is why you see the benefits taper after three years or so.

Speaker 2:
[22:56] Yeah. Because the market rises and especially if you tax loss harvested at once, the market is never going to be at the level which you bought those shares. You don't tax loss harvest the same shares over and over again. You're tax loss harvesting whatever you bought in the last year or two. When you tax loss harvest, that's what's being tax loss harvest, whether you're doing it at the fund level or whether you're doing it at the individual security level. Part of this problem, why direct indexing exists at all, is the Stupid Investment Company Act of 1940, where basically the funds can't pass the losses through to you. Because if they could, the funds could do the tax loss harvesting for you, and you could get these losses passed to you. The worst part about it is they have to pass the gains to you, and they can't pass the losses to you. Now, they can use their losses to offset their gains, but it's really kind of, you feel hosed when you have a fund, especially you have some relatively high turnover, actively managed fund in the taxable account, and nothing happened during the year, you got your 8 percent return or whatever, and all of a sudden, the fund gives you a 24 percent capital gains distribution. At the end of the year, and you're like, what is this? I'm only up 8 percent, now I got to pay taxes on all these capital gains. So part of it is just the nature of how mutual funds are designed. Okay, let's turn to your other point. Your other point was about at least potential under performance. And I quizzed the CEO of Freq about this, and I'm like, well, if you're not following the index exactly, which you can't be if you're taxless harvesting all these securities, you're going to have some tracking error. His argument was that you were as likely to have positive tracking error as negative. You're arguing that you think performance is going to lag long-term, the majority of the time, most of the time. Explain why you believe that.

Speaker 3:
[24:50] Well, I think that when you're looking at these managers, a lot of times they're quoting this after-tax return, and I think it's hilarious. I think they're trying to beef up their numbers. It's misleading. They're basing the taxless harvesting benefits they're getting for someone who's in the highest tax bracket in California. I mean, I did laugh out loud when I was looking at parametrics, the S&P direct indexing strategy where in 2020, the after-tax return was still lower than the S&P. So what does that say? You would have been better off just owning SPY, even if you didn't have a single lot to tax loss service, not even a dividend reinvestment, you would have been better owning that than doing the direct indexing strategy with however many positions. I just I don't see it. And the after-tax return, it's very misleading.

Speaker 2:
[25:44] I agree with that. I mean, the only after-tax return that counts is your after-tax return. Those losses are not very useful to you. You're not getting a lot of benefit out of that. But here's the deal, right? If underperformance is an issue and you're at least paying an expense, you know, even if it's only nine basis points, you should expect on average performance nine basis points lower. But if it's worse than that, if it's 25 basis points, it was 50 basis points. And you run that out over decades, because remember, this is a lifelong commitment to direct indexing. You run that out over decades, you may have enough underperformance on this multimillion-dollar portfolio to eliminate all the benefit from those tax losses that you harvested, you know, in the first few years when you move money into this sort of portfolio. So you got to be real careful about underperformance. Underperformance could eliminate all the benefit of those losses, especially if you're one of those people that doesn't get a lot of benefit from those losses. Okay, have we beat that horse to death? You got anything else to say about direct indexing?

Speaker 3:
[26:46] I do think that, you know, when it comes to like an individual investor not working with an advisor, the idea of tax loss harvesting seems overwhelming. They're not sure exactly how to accomplish it. Like, does this mean I need to log into my account every day? And I think simple solution or like a simple strategy that anyone can follow is any of your custodians, Schwab, Fidelity, Vanguard, you can put an alert. So you can put in an alert for like, you know, SPY, send me an email or a text when it drops 10% from the high, 20% from the high, and then you use that, you know, entry point or that period in time to go and do your tax loss harvesting. Keep it as simple as that. You don't need to be a day trader, you know, trying to harvest these losses. And I think at the end, you'll be better than if you did direct indexing.

Speaker 2:
[27:35] I don't even know that you have to have to do that. I mean, when there's a tax loss harvesting opportunity, you know the markets are down because everybody's talking about it. It's on the news, right? When I look back in the last five or 10 years, when I've actually harvested losses, I did it in 2020, March of 2020, right? Nobody missed that. I did it in 2022. I think I harvested a little bit of losses last year. I guess maybe that one, the news wouldn't have been blaring about it. You know, if you pay a little bit of attention, I am not looking at my portfolio more often than every three months-ish, right? The other thing is people start thinking about this frenetic kind of tax loss harvesting. They come up with like six tax loss harvesting partners for one asset class. And I'm like, what are you doing? You're missing the point here, right? They tax loss harvest and three days later, they go to another fund and seven days later, they go to another fund and they're like, I need another fund. I've been through six and it hasn't even been 30 days yet. And I'm like, you're missing the whole point. I never tax loss harvest more frequently than every two months. I don't even look for two more months because additional losses aren't that valuable to me, number one. But you don't have to get every dollar of losses that are out there. And if you wait at least two months and you never run into the 60-day dividend rule, you never convert dividends accidentally from qualified to unqualified, and you're certainly never going to run afoul of the 30-day wash sale rule. So I think you don't have to be frenetic about tax loss harvesting. Now, what percentage of the losses that I might get if I was direct indexing? Am I getting just by doing that occasionally at the fund level? I don't know, but even if it's only 50 or 60 percent, it's probably enough. Like I said, I've been carrying losses forward for a long time already and haven't used them. So barring a sale of WCI, I'm going to carry these tax losses to my grave and they're going to disappear.

Speaker 3:
[29:30] Yeah.

Speaker 2:
[29:31] Okay. Now I think we beat it to death. Let's talk about something I ran into the other day. This is a little bit related. I mean, you guys help WCIers with their 401Ks. A lot of people are like, your 401K sounds awesome. I want one like yours. They don't realize that in order to get increased 401K contributions, in order for practice owners to be able to put $72,000 in their 401K, that often means paying penalties for their non-highly compensated employees.

Speaker 3:
[30:07] I hate when you use that word.

Speaker 2:
[30:09] Right. Penalties is an extra bonus. It's a bonus for your employees into the retirement account. I totally agree with you there. And I am fine paying bonuses to my employees into their retirement account. So I'm okay with these penalties. What a lot of people don't realize when they hear about our 401K, is they don't realize that we're paying tens of thousands of dollars every year in penalties to our employees. So talk a little bit about that. People come to you guys, they want a 401K, and they've got three front office staff in their dental clinic or whatever. But they want to put $72,000 into their 401K. What insight do you give them?

Speaker 3:
[30:49] I think you have to even take a step back. I see a lot of practices who aren't even doing the safe harbor match, and then therefore they're not even able to put the full employee contribution of what, $31,000 because they're not doing the safe harbor match of 3% to the employees. So like that's step one. Even when you're doing, you want to any type of contribution, an employer contribution to the employees, you have the TPA run the numbers. So if I do a 3% safe harbor, if I do a 6% profit sharing, if I do this, they'll run the calculations. This is how many dollars you're going to need to contribute. But here's the tax benefits. They will break down the exact tax benefit you will receive as the employer. And it's going to be based off of your contributions to the plan and then the business tax deduction standpoint. I think that seeing the numbers written out on paper is more palatable than to just say, hey, you're going to have to give thousands of dollars to your employees. So that I would say is step one. Then I think when you're going to look at doing like the defined benefit plan, those sorts of things, those are going to be more commitments. But with the profit sharing, your safe harbor match, it's not a commitment. Each year, you can go to the TPA and say, hey, I want to max out. Hey, I want to see the max. Can we bring it down 50,000? It's not something that's set in stone, like the defined benefit plan or the cash balance plan.

Speaker 2:
[32:18] But I think that's something people have got to realize. If you've got a solo 401k, you have no employees, yeah. As a doc, you're going to be able to get your $72,000 in there. But once you have employees, this is no longer a do-it-yourself project. There's CPAs and actuaries and everybody involved, and recognize that in order for you to save the max, it's going to cost you something. It may or may not be worth it to you, depending on how much your employees value those contributions. You have mentioned before one-stop shops, and a problem you have with one-stop shops. I think your main beef is they end up, yes, you can go to one place and get everything done, whether that's taxes and financial planning and asset management and estate planning and asset protection and everything. But I think your argument is that if you go to a one-stop shop rather than getting the best of each of these categories, you end up with mediocre in three or four of them.

Speaker 3:
[33:17] Absolutely. The best CPA or even a mediocre CPA does not want to come work for me, a flat-fee advisor. They're going to own their own firm. It's something like my sister mentioned the other day, like, the fidelity team is going to do something with my taxes. I'm like, stop right there. You're trying to start a business and you're going to use fidelity's tax advisors? Absolutely not. They are not working for fidelity. They're going to own their own firm. I see the argument about, I'm super busy, it makes my life easier. But I think you're giving up something in return. And I think, like, let's say you're working with an advisor, they're not a one-stop shop. It's just to see with like, hey, who do you recommend as a CPA? There may be a CPA firm or a few CPA firms that can work seamlessly with your advisor. That will make your life just as easy, but you're still getting the best. You're getting the best wealth manager. You're getting the best CPA, the best estate attorney. So I think there's ways to get it done without, you know, getting mediocre services.

Speaker 2:
[34:21] But you understand the draw, right? To have one money guy, right? Have your family planner, or not family planner, your financial planner, manage all these guys so you don't have to deal with it. You only got to talk to your financial planner. I get the draw. I mean, it's super attractive to have a one-stop shop. There's a cost to it though, isn't there?

Speaker 3:
[34:41] Absolutely. I mean, I couldn't quote exactly what they're charging, but definitely AUM fees. Who knows what other? It's just the one-stop shop. You have an AUM fee plus an annual tax consultant fee, or an annual estate planning fee, even though you just needed estate documents one year. I don't know the cost, but definitely is not going to be the most cost-effective route for sure.

Speaker 2:
[35:05] Well, it's interesting because you look at the going rate for a financial planner and asset manager right now, something like $7,500 to $15,000 a year. If you want a real good tax strategist, you might be paying another $12,000 to them, right? So I get it. People are like, I'm already paying somebody $15,000 a year and they can't do my taxes too, or at least give me tax advice. I understand the frustration people have. They're like, really? How much do I really have to pay for this? Because I only make two or three or $400,000, and now I got to spend $40,000 on advice and service?

Speaker 3:
[35:44] I mean, I can't see a tax. I don't know what you refer to them as charging. How much did you say? 12? For a W-2, that would be outrageous.

Speaker 2:
[35:56] Well, to be fair, I think most of the people that charge that $10,000 or $15,000, they don't take people that just have a W-2. You're not right for us. If you don't have complicated practice and 18 K-1s, and you're not a good candidate for our firm to be fair. But yeah, there absolutely are firms that, and oftentimes they can say people mourn taxes than the cost of their fees. So I get it, but it's the attraction of a one-stop shop, I understand, because this is the way we think. We're like, well, why shouldn't I be able to get that? I'm spending thousands of dollars a year. I should be able to get that. But I guess in a lot of respects, you're not going to get your pulmonary advice from your family practice doc.

Speaker 3:
[36:40] Thank you, yes. And I do, like I said, I think the middle ground is, is your advisor who you've worked with, who you trust, or the CPA who you work with, who you trust, is seeing who they work well with. That could save you a lot of time and effort.

Speaker 2:
[36:55] Now you've talked a little bit about a fictitious family office. Tell me what you mean by that. What's a fictitious family office?

Speaker 3:
[37:03] True family office service is not available to your regular high net worth individual clients. It just doesn't exist, but it's just like, I could start calling myself, I'm family office services. What do I do? I do asset management, wealth management, but everyone else is calling themselves family office service, family office boutique. It's just a hot topic. It's fictitious.

Speaker 2:
[37:27] How would you define true family office services? What are you getting that you're not getting from a financial planner?

Speaker 3:
[37:34] A true family office service is going to be your quarterback. Here's a good example. You have a client who you're doing the asset management, you're doing the wealth management, but you're also doing payroll for their house staff. You're also arranging their private jet. Every financial aspect of their life, you're controlling.

Speaker 2:
[37:55] In order to really be interested in that service, should you have enough money that you've got a private jet, at least, you know, net jets? Yeah.

Speaker 3:
[38:06] Exactly.

Speaker 2:
[38:07] I mean, where would you draw the line that someone ought to start thinking about family office services? Is there a net worth or is there a number of generations involved?

Speaker 3:
[38:16] 100 million plus.

Speaker 2:
[38:17] 100 million plus. And do you think it matters how many generations that are involved?

Speaker 3:
[38:22] No, I don't think so.

Speaker 2:
[38:24] Because I've seen at least one person who looks at your complexity of your life, and they looked into how many businesses do you own, and how many generations are involved, and how many trusts are there, and what's the net worth, and you put it all together and try to decide whether it's complex enough to justify that sort of thing. Because when you're paying for family office, there's typically a six-figure amount you're paying every year. There are people that that's their job, is to run your family office, even if they're also running another family's family office as well or something.

Speaker 3:
[38:56] But you have to see just like FPL, family office services, that's not real.

Speaker 2:
[39:03] So there's a lot of people out there advertising family office when they're really not doing it.

Speaker 3:
[39:07] They're in the last manager.

Speaker 2:
[39:09] That's your beef with it.

Speaker 3:
[39:10] Yes.

Speaker 2:
[39:11] Okay. Let's look at another one I've been thinking about. That is this drive to always max out retirement accounts. Right? You're doing it wrong if you're not maxing out your retirement accounts. Now, in general, saving more money is generally a good thing. Your money is going to grow faster inside retirement accounts. You're also going to get some asset protection there. I'm a big fan of using retirement accounts. I'm a big fan of saving. Most people, including most doctors, aren't saving enough money, so encouraging them to max out retirement accounts is generally a good thing. When is it the wrong advice?

Speaker 3:
[39:47] That's a great question. I think it's the mentality of, like you said, shoving every single dollar into retirement. What is the benefit? What's the benefit of an IRA versus a taxable account? So you have, let's just put $5,000 to invest. You can put it in a retirement account, get the pre-tax deduction. It's going to grow. You're going to withdraw the funds. Your earnings and your contribution are going to be taxed as ordinary income. Now versus the retirement account, it's been taxed already. You're going to invest it in a taxable account. You buy SPY. When you withdraw the funds, it's going to be taxed as long-term capital gains. I don't see what is the huge benefit of a retirement account in that scenario.

Speaker 2:
[40:33] Well, I mean, there's a benefit. The money grows faster because it's not being taxed as it goes along. So there is benefit to it, but I guess a few issues I see with it. One, sometimes they have better use for their money. They're like, I have to max it out. I've got a 403B and I got a 457B, I have a 401A and we got to do our backdoor Roth IRAs, and you add it all up and it's 35 percent of their income. He's going into retirement accounts. I've got a pretty good situation in my partnership. I could put in as much as $120,000 into a defined benefit plan and $72,000, I guess 80 now because I'm older, $80,000 into the 401K profit sharing plan. So that's 100 and whatever that is, $190, $200,000, I could put into retirement accounts. I didn't make $200,000 clinically in the last couple of years. And so obviously, you're not going to put everything in there. You got to live on something. And I think when people do this, they make a couple of mistakes. I think the first one is that they just save too much. Right? Whereas they'd probably be happier if they actually spent more money. So I think that's the first issue with always max out retirement accounts. Yes, it's generally a good thing. But here you are at 67. You still got a side gig and you're putting money into a solo 401k. You're at the stage of life when your net worth maybe ought to be decreasing. You ought to be spending more than you're making. You ought to be giving it away. That sort of thing, this whole die with zero philosophy, and you're still saving like crazy. The other thing is you might have a better use for your money in some other type of account. Maybe that taxable account would work out better for you due to its flexibility. Maybe there's a better chance this money is going to go to charity. Maybe it should be a 529 or should be an HSA. I'd be going towards some other use for money rather than 529 accounts. The classic example is this partner I was talking to the other day, where he's been doing a great job saving for a long time. He's like, we'd really, I think, be happier if we were in a bigger, better house. So he's like, I think I'm going to cut my, I think I'm going to cut how much I put in the profit sharing plan this year. He felt guilty about it. He felt bad about it. He felt like he had to justify the decision to me. We're just chatting in between patients. I think people get into this, I have to max out my retirement accounts. I have to do everything I can. Really, you got to come back to your goals every time and go, what is your goal?

Speaker 3:
[43:11] I think another good example in there is when I see physicians face with the non-governmental 457 accounts. They want to shove the max in there, and we're like, you'd be better off saving in your taxable account. Well, why? There's limited flexibility in that non-governmental 457. You hope that that plan allows you to push off the taxable disbursement until after retirement. Sometimes they don't. Sometimes they force you to take it within 90 days of your termination. And then it's very rare that I have a physician client who truly believes that the hospital system that they work for is in a great shape and that it will be around for the next 40 years or 20 years. That's really rare. So yeah, in those examples, we try to push client. I think you'd be better off saving the taxable, but they want to get as much of a tax deduction as they can.

Speaker 2:
[44:09] I think they always max out retirement accounts things. A thing is often a symptom of over-optimizing. There's optimizers and there's satisfizers. The satisfizer is like, it's good enough. It's going to reach my goals. I don't want to spend any more time or effort or whatever on this. Whereas the optimizer, there's always something you can tweak. It might take a little more of your time, might be a little more effort. We had something come up on the WCI forum talking about trying to step up in basis in your irrevocable trust by naming the generation before you, your parents, as one of the beneficiaries of this trust. It's just this massive optimization. I started running the numbers and I'm like, well, that could be a lot of income taxes. I could save somebody a generation or two from me because you lose the step up in basis in the irrevocable trust account. I'm like, I don't know that I want to go have this discussion. With my wife's 93-year-old grandfather, about adding him as a beneficiary of our trust. You know what I'm saying? I mean, the optimizing can sometimes get a little bit crazy. How should people find a balance between being an optimizer and being a satisficer?

Speaker 3:
[45:23] I think just weighing out the pros and the cons, and then choosing a strategy that works for you, instead of trying to chase tactics that they heard on a podcast by Dr. Dahle or read on a Facebook blog, is truly just weighing out the pros and the cons. I mean, I think that's with every decision.

Speaker 2:
[45:45] Sometimes we focus too much on the pros and we blow them up as to be in this big thing, and we minimize the cons. Let me give you an example. We did some optimizing this last year. My daughter's, it was a UTMA account. Now she's 21, so it's her taxable account now. I'm like, Whitney, you're in the 0% long-term capital gains bracket. We should do some tax gain harvesting. We should update your basis in all these funds, and then when you eventually sell them, you'll save all this money in capital gains taxes. Well, it's true. I did the numbers right and we only realized as many gains as she would get in the 0% long-term capital gains bracket. We owed no additional money in federal taxes for updating her basis. But you know who we owed money to?

Speaker 3:
[46:35] The state.

Speaker 2:
[46:36] Yeah, we owed money to the state because there is no 0%. There is no long-term capital gains bracket in our state at all. All incomes taxed at one rate in our state, and so she owed some money on that. Now, the federal tax savings, assuming she would be realizing those gains at 15% down the road, would have outweighed that. But that's assuming, number one, that those taxes would have had to be paid eventually, whereas she might go to another state that has 0% income tax rate and never had to pay those state taxes on those gains. She might also realize those gains within the next few years before she really is into the 15% bracket. So maybe I'm updating basis that doesn't matter anyway, and she'd never get that benefit from it. So it's classic, questionable over-optimizing, just to get this benefit. I'm like, oh, this would be great. We'll save you $7,000 or something in future long-term capital gains taxes, and instead it cost $1,000 in state taxes, and maybe we'll never actually save that $7,000 in long-term capital gains.

Speaker 3:
[47:47] I love that example. I can't wait to use it.

Speaker 2:
[47:50] All right. Something else you had mentioned, was being afraid of market all-time highs instead of having a plan to capitalize on them. Tell me what you mean by a plan to capitalize on dips in the market.

Speaker 3:
[48:07] Since we made this shift in our firm and what we've done for clients, I've just noticed a huge sigh of relief of clients. People will say the news is all-time highs, all-times high, and they're like, we know the market's going to crush, and we know there's going to be a correction. We need to pull some risk of the table.

Speaker 2:
[48:23] Even though the market's at all-time highs most of the time.

Speaker 3:
[48:26] Yes, correct. We've instituted something where we have a plan when the market dips, we're going to capitalize on it. I think I mentioned the strategy and you said I was nuts, but it's worked out so well for me so far.

Speaker 2:
[48:42] This makes for good podcast content if we just do it about something. This is good.

Speaker 3:
[48:47] Market dips, instead of having the mindset of like, oh no, I'm missing out, our clients are now shifted into the mindset of like, oh yeah, I can't wait to capitalize on this market dip. I'm going to enhance my return. We're picking up leverage. We're picking up leverage market exposure. For example, SSO, it's two times the market. Now, when it's going down, you're getting two times down. When it's going up, you're getting like one and a half percent because of the decay in those leverage funds. But it's a plan to capitalize on the market dip. So now they're sort of excited. The markets dip, they saw, here's a perfect example, March market started dip, I think it was 10 percent, April dip to 20 percent, and by July 1st, we're closing out. We're back at the market all-time high. So it was a quick little turn. So the market was down, what, five percent this week or something like that. They're excited like, oh my goodness, are we going to get to deploy or two times the market strategy? So it just changes the mindset. I think that if more investors would embrace something like that, then they wouldn't be scared about markets all-time high. We're going to get a correction soon.

Speaker 2:
[50:04] Well, there's so much involved there, right? There's investor behavior, right? There's behavioral aspect and we know that personal finance is about 90 percent personal and 10 percent finance, right? The behavioral aspect matters a lot. If having a strategy like this sitting out there helps somebody to not only stay invested, but to continue investing their money, you're probably helping them even if the strategy is a losing strategy, you're probably helping them from behavioral aspects. I like that part of it. But as far as capitalizing on a market dip, well, if you're in the accumulation years and you're periodically investing, you invest something every month, you're capitalizing on dips anyway, right? You get excited, a chance to buy more shares for the same amount of money. That's exciting and maybe that helps you to stay the course and not be afraid of dips. Or some people go, well, if it dips, I can get some tax loss harvesting and that helps me to stay the course, but I guess I worry with the strategy like the one you're describing because the market timing aspect of it is hard, right? If you're introducing leverage as the market goes down, well, let's say the market goes down 20% and you're like, okay, market dips, let's leverage up a little bit, whether you're using a leverage DTF or whether you're borrowing against your house or against your portfolio or whatever. Well, what happens now when the market drops another 30%? It turns out this is 2008 instead of 2022. Now, you've leveraged your second drop. Well, what's that going to do not only to your portfolio, but to your behavior and your ability to stay the course?

Speaker 3:
[51:42] Yeah. Whenever we're going to deploy a strategy like this, we always say we're going to set a commitment. We may be introducing it at negative 10% drop, but if it goes to negative 20, you need to be ready to deploy an equal commitment or equal amounts and then also at negative 30 and at negative 40. So it's a commitment. If it goes down further, you got to be ready.

Speaker 2:
[52:05] Don't go all in at minus 10?

Speaker 3:
[52:07] No.

Speaker 2:
[52:07] Because you might have to put more in at minus 60?

Speaker 3:
[52:09] Exactly.

Speaker 2:
[52:14] Sounds like it wouldn't be that hard for someone to get in trouble with the strategy. Do you think it's easier when you're managing somebody else's money to follow a strategy like that?

Speaker 3:
[52:23] One thousand percent. I don't necessarily have an emotional tie to placing the trades. Even when I go to place my own trades, I second guess things and I'm like, what am I doing? Yeah. Definitely, I think having someone else do it, takes the emotions out of it, makes it more easier to execute.

Speaker 2:
[52:43] On that same aspect, I looked at investing my kids' money, right? 529 money, their Roth IRAs, their UTMAs. It wasn't my money. So it didn't bother me as much to see it go down in value, as it bothered me to see my retirement money go down. So behaviorally, I'm like, I can invest their money really aggressively. So our 529s have always been invested very aggressively. I got kids in college now, 529s are still invested very aggressively. And so it's interesting, so much of investing is behavioral, right? And recognizing that your enemy is the person you're looking at in the mirror every morning. And doing all you can to recognize who your real opponent is when it comes to investing can sometimes be a good thing. Okay, Amanda, I think our time is up. I think we've hit your pet peeves. You can refer clients now to this podcast. This is number 468. And I think we got into nuance today. And whether that's good or bad, for someone who this is their first WCI podcast, they're not all like this, I promise. But for those of you who've been looking for something new and maybe a deep dive into some topics, I hope we did that for you today. Thank you so much for being willing to come on, Amanda. If you are interested in talking more to Amanda, you can go to FPL Capital Management. She'll talk to you all day. They can help you with your 401k. They do asset management. They've been sponsoring us for 15 years. Thank you for that sponsorship and thanks for being on the podcast today.

Speaker 3:
[54:18] Thanks. Have a good one.

Speaker 2:
[54:21] Okay. I hope that was fun. That grew out of a dinner time, dinner table conversation. I was eating seafood at the time. It was very good seafood in New Orleans. But we talked about being on the podcast and I said, Amanda, if you have good content, that's not a podcast sponsorship, that's an episode. She's like, I'd be so fun. I said, well, let's bring you on. Let's have this great episode. Let's talk about these topics because it is good to point out nuance where nuance exists. I don't want to confuse people with nuance. I don't want to make them feel like this stuff's too hard for you by making it too complicated and too nuanced. But the truth is there is nuance in life. If you go Dave Ramsey style, no nuance, all debt bad, all investing should be done this way. Growth stock, mutual funds is the only way to invest. Well, you lose something. You lose something when you don't acknowledge the nuance. We'd like to acknowledge the nuance here. Even if we try to keep things as simple as we can and recognize that 90 percent of the stuff out there when it comes to personal finance and investing can just be totally ignored, then you can still be financially successful without doing anything we've talked about in this episode today. I think if you can understand the big picture, then the nuance becomes a lot more fun to talk about, dabble in a little bit, etc. As I mentioned at the beginning of the podcast, SoFi could help medical residents like you save thousands of dollars with exclusive rates and flexible terms for refinancing your student loans. Visit sofi.com/whitecoatinvestor to see all the promotions and offers they've got waiting for you. One more time, that's sofi.com/whitecoatinvestor. SoFi student loans originated by SoFi Bank, NA member FDIC, additional terms and conditions apply, NMLS 696891. Don't forget about that financial educator award. You go to whitecoatinvestor.com/educator to get the slides, to help you give presentations, to nominate somebody that's done a great job that you know of, and potentially to win yourself a free WCI online course for the best nomination. Thanks for those of you leaving five-star reviews. Thank you for telling friends about the podcast and the resources of the White Coat Investor. Not only does it help us to build our business and to reach other people with this important message, but more importantly, you're helping your friends. We won't let you down. We're going to give them good advice just like we gave you good advice. We're going to connect them with the good guys in the financial services industry just like we connected you with the good guys and gals in the financial services industry. We want to deserve your trust. If there's ever a time we don't deserve your trust, please send us an e-mail. Obviously, we like negative feedback, negative criticism privately just like you do. Send us an e-mail, editor at whitecoatinvestor.com. Let us know how we let you down. Let's see if we can't fix it so it doesn't happen to somebody else. In the meantime, give us five-star reviews. It helps spread the word. A recent one came in. This one came in from Q Brill. He said, informative and entertaining. Great advice for physicians. From a physician, follow your doctor's advice and listen to this show. It is informative and entertaining. Five stars. Short and sweet. I love it. Thank you so much. Keep your head up and your shoulders back. You've got this. We're here to help. We'll see you next time on the White Coat Investor Podcast.

Speaker 1:
[57:41] The White Coat Investor Podcast is for your entertainment and information only, and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principle. You should consult the appropriate professional for specific advice relating to your situation.