Capture the Upside Podcast

About this episode:

In this episode, we delve into the essentials of financial spring cleaning. We begin by discussing the easy-to-overlook costs of unused subscriptions, illustrating how small expenses can accumulate into significant opportunity costs over time. The conversation then pivots to a compelling client story emphasizing the importance of comprehensive estate planning and the hidden pitfalls in financial management. Highlighting the issue of “orphaned” 401k accounts, we discuss the complexities of retirement planning in the U.S. and the benefits of consolidating these assets for a more secure financial future. Wrapping up, we provide actionable advice for initiating financial spring cleaning, helping to navigate wealth management’s intricate landscape.

Episode Insights:
WSJ – The Real Reason You’re Paying for So Many Subscriptions

Connect:
Phone • 616.977.2639
Web • https://hillislandfinancial.com
Email • kevin@hillislandfinancial.com

Transcript:

Sean:
Hello, everybody. I’m Sean

Kevin:
I’m Kevin. This is Capture The Upside, a podcast brought to you by Tru West Financial for families with $2 million or more in investible assets.

Sean:
Kevin, this last weekend I did a little work this weekend. My wife wasn’t too thrilled about it, but I had to get all my books caught up, right? The tax season is coming up, business accounting. I had to make sure that all the expenditures were categorized correctly and, in the right spot. And that was kind of a very nice time to look back at the year and, and see things like at all the subscriptions that I forgot that I had, you know, I’m at the ballgame and you get a free, free T-shirt if you send it for subscription.

Kevin:
How much does Apple storage cost?

Sean:
Exactly. And, and oddly, the one that really stuck out was a $90 a month charge for the Chicago Tribune, a digital subscription, which is like a thousand dollars, right? Um, over the course of 12 months…

Kevin:
You know, I love this because we get this all the time, right? Like this is one of those like, Hey, by the way, blah-de-blah. And if you think about how much you effort you put into spending a thousand dollars, right? Like, this is why subscription models work, right? They’re great businesses. This is why we as investors love it, right? Like people get on ’em, we’re lazy, we never get off. And I will tell you, I did some math on that. If we take a look at your age, if you would’ve taken that $1080 is what it is exactly. Mm-hmm. ,right? Invested it, put it into the stock market, it would’ve cost you right around $32,000, right? Thank God, $32,000 for high quality Chicago Tribune, right? Ha ha. But if you’ve just taken that and shoved it into a Roth, right? The end value is actually kind of astounding.

$177,653. Wow. I mean, that is like, not, so this is not that podcast, but it is that kind of opportunity cost and the importance of actually doing that spring cleaning. So, I mean, I will say just getting your stuff in order is kind of an achievement.

Sean:
Mm-hmm, right?

Kevin:
That’s not a thing that happens every year. You’re like, ah, it’s kind of this. And when you think about our clientele and the families that we serve, when we talk about spring cleaning and cleaning things up, it has unbelievably huge consequences. I can’t begin to underline for anybody who is listening to this, every single one of you has this problem and needs another set of eyes to come in and say, Hey, did you really check that? Did, did you really go and and do this or take a look at it? And I wanna underline, I had a client who was referred to me, oh, probably 15 years ago and stands out and names will be changed to protect the innocent.

Let’s just say this client was Susie and Susie’s husband had passed away. Susie also had a daughter that had passed away. And they’d all passed away from some kind of painful stuff. And, mom now had, something where she had a diagnosis that was not great, right? But it was not necessarily terminal at the time that we met. So there were some life insurance proceeds, there were multiple properties. It was a fairly complicated estate. And we had gone through and we had changed all sorts of things cuz now we’ve got trust issues because it was a blended family, it was a second marriage. And again, when you start thinking about this, you’re like, maybe that applies to you, maybe it doesn’t, but you know, over the years you’ve picked up this piece of property. Well wait, was spouse there for the signing or is it only your name?

Right? Did we put this in the trust? Did we even have a trust? Do we know what we’re…right? So you go through all this stuff and there was a lot of work. I wanna say we had nine separate meetings. And again, same charge. The very first year putting things together for this client while Susie ended up getting a terminal diagnosis about four years after we started working together on our investment portfolio and cleaning everything up, and in the context of spring cleaning, we had discovered through a piece of mail that there was a life insurance policy on her that she had taken out at work and had never brought up to us. It was a paid up policy. He had named a sister to whom she was close at the time, as the beneficiary of the policy because the sister was gonna be the custodian of her babies. Sister had become an alcoholic and they hadn’t spoken for 10 years.

Sister didn’t attend the funeral, and now sister is named as the beneficiary of a $750,000 paid up life insurance policy.

Sean:
Wow.

Kevin:
…and we’re in a spot where our office negotiated between, again, blended family, right? So you’ve got step kids, you’ve got bio kids, you’ve got bio sister who is not operating in a healthy space, right? She’s already got acknowledged addiction diagnosis, negotiating because by law sister gets, it doesn’t matter what the trust or what the will says, right? And I bring up that anecdote because it has really served as a personal drive when I am dealing with people who have achieved a lot in their lives or have been in a position to have the responsibility of an inheritance. I am personally mission driven to go in there and solve for zero. And one of the things that often comes up when we talk about spring cleaning, and we’ve got about 17 different things that we do when we really look and say, Hey, let’s find out, because now we can go and look internally, we got, we became insurance licensed as a result of Suzy. And we can now go look at the insurance database and find out, does anybody have you, have you ever crossed through this database? And we can find it and we can find that even if the client forgets about it or doesn’t know it. Secondly, one of the things that we bring up is old 401k’s. And so the United States of America has organized unique in the world. If you live somewhere else, more often than not, that country’s government has some sort of a pension for you or requires the company to have some sort of a pension. So in the world, we have essentially said, this is a really hard thing to figure out; pensions and retirement, right? We’re not gonna necessarily force the individual to do that, but not in the United States. We have said, look, we are going to totally decentralize that, right? So you have F.D.R back in the forties saying, we’re gonna start a pension, right?

And then you have the eighties saying, we’re gonna take, take as much of that off there, we’re gonna get out of pensions, right? Companies are gonna stop doing pensions and now it’s up to each, you know, each of us to figure out if we’re gonna save up, if we’re gonna delay gratification, right? And so as a result, we’ve got this whole 401k IRA system that’s really hard. It is really complicated and it’s unbelievably easy to make mistakes. So because it’s really hard, you’ve got 1.35 trillion worth of orphaned four oh 401k accounts; money that people forget about. So when we take a look at that 1.35 trillion that is in 401k’s, right? Even if you’ve got 20 grand out there, 20 grand is gonna grow on its own or not if it’s left in a 401k. So if the one thing you take away from listening to this podcast is I bet you there is an old account out there, right?

I bet you there is something that you can find. Whole businesses have been made around consolidating these orphaned accounts out of plan sponsors. Because if the business, if you have a 401K and IRA under $5,000, they can discharge it, right? They can shove it off to somebody else who wants it. They’re paying the aggregator is paying for that IRA so that they can now have it on their books pretty well guaranteed that you’re gonna forget it and charge fees on it. And so as we go through spring cleaning, and again, we’ve got our detailed checklist, I want to really include in that a few other things, that are gonna be really impactful in terms of wealth. One of those is taking a look at, how you invest in your employer-sponsored retirement plan or any tax plan. Inevitably tax law changes occurred December 30 or December 31st of the year before they go into impact.

This past year there was the secure Act 2.0 which made sweeping changes, right? Change the requirement of distribution rules, allowed individual businesses to start up 401ks. One of the things we do in, right around now spring cleaning March and April, is you have an idea of what your taxes are. You have your taxes back. Let’s look and see is there’s something that has changed that we should do. For instance, every year, the 401k contribution amount changes, right? Every year the amount that you can put into your HSA changes, right? All of these different ways. And we know that putting in this cash allows you to put away an additional 20%. Similarly, distributing the cash out of them rules for Roth conversions, rules for what you can put into what type of a location, right? Do I put it into an IRA? Uh, or a Roth, a non-qualified.

All of those things have changed. And then we can also look ahead from a spring cleaning perspective and do some forecasts and say, right now, for instance, the estate law is going to radically change in 2026. Well, it’s 2023. Is there anything that we wanna do about your current gifting plans? Well, let’s kind of sure that we go through that beneficiary review checklist. Let’s make sure that we’re taking a look at 401k’s. Let’s make sure that we’re maximizing our opportunities. Doesn’t mean we have to change. This is not a way to say every year I want you to increase by 10 bucks. It does mean look, if you’ve got that $90 subscription that could turn into $200,000 in retirement, hey, let’s address it and let’s make sure that we’re on top of it.

Sean:
And I think those things, Kevin, having your house in order, checking things off a list, they always make me feel good. I feel fantastic clearing $90 a month, which is not a big sum of money, but it wasn’t wasted now, right? Um, we feel good when we have those things done and our house is in order, whether, you know, we’re cleaning out the garage in our spring cleaning or we’re, you know, recouping that life insurance investment. How long does, is this a long process? Is talk a little bit about how to get it started.

Kevin:
Yeah, that’s a really, really good point. I wanna build on what you said is, look, it’s not like people don’t want to do it, but we’re busy. We kids, we got marriages, we got work, we got yard work, we’re retired, or we don’t even know where to start. It’s all very complicated. If you’ve ever tried to do your own taxes from TurboTax and anything weird comes through on a 1099, you’re like, I don’t know, I hope I answered it right. Uh, and so it’s really helpful to have a coach, to have a guide to hire somebody. Uh, and again, you know, whether that’s a professional organizer in the house to figure out your closets, or in your financial life, they we’re gonna pay for ourselves, right?

Sean:
Mm-hmm.

Kevin:
…going and looking through all of these different things. And so to your point, it does feel good and you know, you’re not doing it.

You get started into it and then let it go, right? I mean, you know how this is something else comes up and you don’t get finished. Well that’s what we do. You delegate to our team. You’re like, look, take all this junk, sort it, organize it and make sure that there’s nothing wrong. I don’t want any surprises. And so I would say, when you take a look at how long some some of this takes, we do need some interaction from the client. But it’s just unbelievably helpful. And I think a big change, from a comparison to our competitors, we have one of the lowest client to advisor ratios into the, in, in the industry. So right around 62-to-1. So you get an actual advisor who is a partner owner who is fully licensed, who’s been in the business on average 25 years and can look and say, I know exactly what’s going on.

And then underneath that, advisor, there is a support staff that can make sure that things do get signed, that things do get organized, the things get the way they want to be. And so you’re essentially hiring, your own family office. You’re hiring somebody to be like, I wanna make sure that this gets taken care of. And every year it pays to go back and go through all the details and say, where are we at? Uh, what can we change? How can we get rid of something in, uh, as Marie Kondo would say, is this still bringing you joy?

Sean:
I was just about to say you’re the Marie Kondo of the financial industry. Her branding people would be so happy right now, , we think spring cleaning. We think Marie Kondo. Fantastic. Kevin, um, thank you so much for everything. Absolutely. I think this is all very helpful and um, made me feel a little better about the, the start I got on my financial spring cleaning. But, um, we will see you next week.

Kevin:
Uh, and I’ll be looking for that 90 bucks to start coming into your 401k. You let me know. Thanks. Take care.

The post Financial Spring Cleaning appeared first on Tru West Financial.

Transcript:

Sean:
I am Sean.

Kevin:
And I’m Kevin.

Sean:
This is Capture the Upside brought to you by Tru West Financial, a podcast for those with $200 million or more to invest. But it’s not 200, right? That’s way too much. Although I would trust you with my 200 million, Kevin.

Kevin:
Hey, I like this.

Sean:
Maybe dial that back to $2 million or more.

Kevin:
That’s exactly right. Where we have among the lowest client two advisor ratios in the industry. And we pledged to invest our own assets consistently with how we invest yours.

Sean:
10B5-1.

Kevin:
That’s right, actually. Right.

Sean:
That sounds like a license plate. Sounds like a Star Wars droid. What that has to do with insider trading, right.

Kevin:
It does. And my favorite part of that is that I happen to know in the Strimple household, if it was a Star Wars droid, no matter how esoteric or sideline of a character that was, one of your two children would know what Droid 10B5-1 intimately about that, but. They would know it’d.

Sean:
Be on the tip of their tongue.

Kevin:
All of the details. So the fact that you think star lights droid just so perfectly lets you glimpse this Sean’s world right there.

Sean:
I’m an eighties, kid. All right, This stuff sticks.

Kevin:
So yeah, if you are a person who is lucky enough to be an employee of a corporation and have risen to the top levels, or you you’re a lateral hire or they bought out the company, you’re often going to have a significant amount of your own net worth in company shares, whether it’s ESOS, Nso’s rescues, whatever it might be. And when you need to go and sell that to buy the cottage to, but to get through school to pay for the wedding because you are considered an insider, you can’t just go and sell. Especially because if you know, you just are trying to sell and then the next day the stock plummets by 20% and you had no idea. Well, it sure doesn’t look that way, right? So we have to inform the FCC and the FCC has given us official guidance for the last 20 years. They just updated it in 2023 that says, look, if you’re going to put these plans together, they need to be composed of these few elements. And it’s not hard. It does take experience.

They can be tailored very specifically to your situation. And you got to find somebody who knows what they’re doing. So for families with great wealth, they are going to be in touch frequently with insiders. The founders are people who are aware of transactions prior to them happening. Additionally, we are in a network of professionals, so as opposed to internally having the best tax person or the best attorney, we would argue that none of our clients are best served by whomever we’re going to be able to get in house in Grand Rapids, Michigan. That because we have clients across over across the entire United States and across a variety of different industries, we have the tax person over here, the attorney over here, the right person is, are you going to be living internationally? Are you in sports? Are you in a position, you know what what what’s your niche market? And because of that, we essentially have the guy who does all the taxes for McDonald’s executives, the person who does all the work for, you know, people who are in the supply chain industry. Well, you’ll have somebody call them up and say, I’m about to sell my company, and he’ll now know who he’s going to sell that company to and he’ll know who’s about to acquire that company. And so he’s in a position to be like, I’d like 100 shares of X, Y, Z. I happened to know it’s a good investment.

Again, just to kind of give a big picture here, meaning there’s fines, but then there’s 20 years jail sentences for insider trading. Right? So the free and fair market with equal access to information is a very big deal. The United States, right? It it is it’s it’s one of the most regulated things that we have. So bottom line is it is very normal for us to have a executive come to us with a concentrated stock position. Let’s say you got $20 million and $10 million evidence in company stock ups, Coca-Cola, whatever it might be. And if you’re considered a corporate insider and that’s something that your general counsel’s office is going to let you know right then We specialize in putting together S.E.C. Rule 10B5-1 plans. And so Sean, these are written plans that have three elements associated with them, right? They have number of shares that you’re going to buy or sell. Right. The price at which you’re going to buy or sell these shares and the timing that you’re going to buy and sell these shares. So, Sean, if you think about it, the intent here is to try and say, well, it’s fair for you, executive who has 50% of your net worth or 1% of your net worth tied up in one single stock to want to exit that position. Right. It’s not fair. Right. In a childlike sense of fairness for you to exit that position. You know, when you know things right, when you know, like, oh, we’re about to go up or we’re about to go down or ride to be able to take advantage of that situation. Now, the reason for this podcast is because the SEC revamped the rule in January of 23, right?

They first came out with this guidance in 2000. So 20 years ago, 2023, they re-upped the guidance and said, Hey, here, here’s how you do this. If you’re going to be an insider and you’re going to trade because we want to keep markets free and fair. And they made their first arrest of a corporate executive who was trying to use the new revamped 10B5-1 rules as a total smokescreen for insider trading.

Sean:
Tyrann Pizer right, is who you’re referring to.

Kevin:
That’s exactly right. CEO and chair of the board of directors of On Tracking. Yes. And he had filed a 10B5-1. And his broker said, hey, I don’t think you’re doing this right. And it came along. The FCC found him again. He, 63 years old. Right. multi-Millionaire already little bit of a checkered past. This is not a guy who is exactly a Boy Scout. Right. But between May and August of 2021, he avoided 12 and a half million dollars in losses by incorrectly following a 10B5-1. So essentially he would come into possession of bad news and it quickly put together A 10B5-1 sign and then trade or good news and same thing right in this situation. The bad news. The news wasn’t only bad. Right. And so when we take a look at this arrest, it’s a kind of a great example of, okay, how do we put together our plans and why do we maintain flexibility? We tailor these 10B5-1s. And there’s this concept, Shawn, that to be able to do these 10B5-1s, they’ve got to be really strict, right? They’ve got to be really stringent. They don’t have to be. They’re three elements, number of shares, right? Price and timing. So we talked about number of shares bought or sold, right? We can talk about a percentage of holdings because the amount that you have goes up and down, you get granted different amounts. So you can put in 10B5-1 and see if the next two years or the next six months. That’s the other thing. Timing we can talk about. This plan is going to be in place for a short period of time or for a long period of time, almost always from signing the 10B5-1 to when it first does a transaction. There needs to be a cooling off period, right? That’s what Mr. Prisoner did not get right was like, I filed the plan, I sold 10 minutes later. You’re like, Well.

Sean:
Nothing was cool. The start of the day.

Kevin:
The jig is up right? And you can also have it be around a life event. I’m going to sell shares when my child goes to college. When we buy a cottage. Like I’ve written that into a plan and you’re like, Yep, that made sense. They did. Now, you know, could you go out and buy? Could I have been like buying a cottage? Like, you know, But at least the plans in place, we’re like, it’s, it’s defensible. We followed the guideline, you tracked what I’m getting in, and so we will often put that in place from a timing perspective of when we take a look at prices. I don’t have to say I’m going to sell it at 50. I can say I’m going to sell it when my kid goes to school. As long as the price meets this minimum or I’m going to sell it at any one of these five prices, or I can even have it if it is 10% above the S&P 500, or if there is a big gap up in the price. Got you track it or if it underperforms this industry benchmark or overperformed.

Sean:
I was going to ask how malleable these plans are, how locked in to what they lay out you are. For instance, I have you know, a lot of the things you just mentioned were market factors, right? Things that I don’t necessarily have control over What happens when my wife passes away, I get a divorce. How does time in life affect these plans and am I beholden to them regardless?

Kevin:
No, we have great flexibility. And again, it depends. A lot of people don’t just have straight up shares. Right. So in other words, if you’re just sitting there on straight up shares, it’s one thing. But usually we also have to look at this through a tax liens, right. Of these NSLs I ourselves IRS use, right. Do you not I mean what’s the story in terms of how these are granted? But no, we can suspend a plan, change a plan. We can have it be a life event. The key, though, is once like, let’s say the divorce again, if you are in possession of material and information, you’re like, let’s get divorced. I’m going to trigger the plan. You know, it’s kind of like, but if you’ve got a plan and you’re clearly entering into it, having the conversation saying, yes, this makes sense for the next two years, the next six months, the next whatever. Right. Like the FCC is going to say, looks like it quacks like a duck, that is a duck. It just so happens that you sold and then the stock went down. Right. And go along. And you’ll often see in the news this is one of the things that’s important about a 10B5-1 we will publicize 10B5-1, right? Sean Strimple, CEO of Simple Inc, has published a selling plan in order to fund his kids college. Right. And you’ll see sometimes if you read the Wall Street Journal like a nerd that I am, you know, hey, company executives had sold 10% of their shares as part of an ongoing long term plan. Right. So they’ll still mention that like like they got out and. Right. But they got out because it’s part of long term Plan B and that’s their 10B5-1. So the intent of this podcast is to say, look, if you are an insider in a publicly traded corporation and you’ve got a concentrated stock position, or even if you just want to be able to understand your options, you do need help putting together 10B5-1.

Kevin:
And you need somebody who’s done it and somebody who’s actually lived through it and we’ve lived through it, both with the tech bubble back in ’02 and in ’08. You really have to deal with this carefully, somebody who knows what they’re doing and he’s had experience with it. And you can count on our office to be able to guide you for that.

Sean:
Sounds like time and transparency, really kind of your friends. And the sooner you start these conversations and more transparent, you are the less of a chance you’re going to get a phone call and knock on the door or a letter from the FCC. So how can people get a hold of you and start these conversations?

Kevin:
Anybody can have a jet cabin at Tru West financial dot com or my website, my phone number and the show notes and let’s chat through your situation. And again bring some experience to writing your 10B5-1.

Sean:
Thanks, Kevin.

Kevin:
Hey thank you Sean talk to you soon.

About
Tru West Financial is a fiduciary focused on goal-based guidance to help you tackle today’s challenges and achieve your dreams. Our wealth management services team is here to help!

No commitments are ever made based on our first conversation. Instead, we will provide you with a list of actionable to-dos to get you started. If you decide you’d like help implementing anything on the list, we’re here to help, but we will never pressure you.
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Tru West Financial, LLC is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.

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• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.

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The post 10B5-1: Avoid Insider Trading Legal Risks appeared first on Tru West Financial.

Capture the Upside Podcast

About this Episode:

In this podcast, uncover the strategic advantages of Roth IRAs for your financial planning. Learn how to utilize Roth IRAs for tax-free growth, estate planning, and securing a prosperous future. Kevin will guide you through maximizing your investments and navigating the complexities of Roth IRA contributions and conversions. Whether you’re aiming to enhance your retirement savings or optimize your estate, this episode provides essential insights into making Roth IRAs work for you.

Episode Insights:
• Lord of the Roths: How Tech Mogul Peter Thiel Turned a Retirement Account for the Middle Class Into a $5 Billion Tax-Free Piggy Bank
• Grand Rapids: Furniture City USA

Connect:
Phone • 616.977.2639
Web • https://hillislandfinancial.com/
Email • kevin@hillislandfinancial.com

Transcript:

Sean:
I am Sean.

Kevin:
And I’m Kevin. This is Capture the upside brought to you by Tru West Financial for families with a minimum of $2 million to invest. We have among the lowest client two advisor ratios in the industry, and we pledged to invest our own assets consistently with how we invest. Yours. Today we’re going to be talking about that humble piggybank savings account, the Roth IRA. Sean, do you have one of those?

Sean:
I am humbly embarrassed to say, no, I do not.

Kevin:
That’s clearly because you’re in my in trouble. And, you know, you’re such a high income earner, right? Like you’ve never been eligible to be able to put into a Roth. I mean, when you are.

Sean:
Well, we’ll go with that. Yeah.

Kevin:
So I know getting in your tax bracket, that might be a brilliant strategy. Taxes have actually gone down over the last 25 years, believe it or not.

Sean:
So it’s my my letter to my lethargy paying off.

Kevin:
I was exactly right. Procrastinate, I think, to come back in time. But today we’re talking about a Roth IRAs for rich people. And again, a lot of times this humble account that is intended for lower income earners just gets ignored. You never been able to contribute to it. You’ve always made too much money. And we use it all the time For clients that have states under $25 Million. It’s a really powerful, versatile tool. Now, you may have noticed back in 2021, middle of the pandemic, who knows? That line could have passed you by ProPublica released some information it wasn’t supposed to have about rich people and their Roth IRA account balances and again, Roth IRAs, just to make sure that everybody understands withdrawals out of a Roth are totally tax free.

It’s a really great you put the money in there. You never pay taxes on an ever again. And I can get into all of the different ways in which withdrawals when you take them aren’t subject to net investment income tax. There’s a million different really positive things about a Roth IRA fundamentally. Right. They’re supposed to be for people in lower income tax brackets. And this guy, Peter Thiel, had 5 billion with a B billion dollars that he had in a Roth IRA, which cut all the headlines. And by the way, it should. That’s just an amazing amount of of capital to be able to avoid taxes on whoever suggested that he put his startup shares and PayPal in there. I mean. Right. That was that was it was a great move. But if you kind of really read between the headlines, one of the other people that they pointed out was a guy named Ted Weschler. Ted Weschler is one of the co managers out of Omaha, Nebraska, of Berkshire Hathaway, famously, Warren Buffett’s fund and Ted Weschler actually responded to ProPublica when they said, Hey, how did you get over $260 million in an account where normally you’ve only been able to invest a couple of grand every year?

And he says, Hey, I’ve invested entirely in opportunities available to the public common stock. None of this is some sweetheart deal. And when you start looking at that and start thinking about our clients and goals they may have for their portfolio in terms of inheritance, leaving some money to the kids in terms of their own withdrawal strategy, we use the Roth IRA as a tool on a regular basis. And again, you wouldn’t expect it because if you think about the Roth that began as an idea back in 1989, they created this concept called the IRA plus turned into ten years later. So Delaware Senator William Roth had the account named after him. And it was, you know, put in a couple of grand. Pay your taxes now and you never have to pay taxes again. But you have to be under certain income levels. You’ve got to be like under $100,000, something like that back in the day. And it’s kind of grown a little bit. In 2010, they took the limits off to do what’s called a backdoor Roth conversion. Now I got to do a big disclaimer on this episode. Every situation is individual. This is a complex strategy that is intended for high net worth individuals. You really do need to consult with your tax advisor on this one. When we talk about that backdoor Roth conversions strategy with no income limits, that is often where we use the tool. But there are kind of two ways. So John, you can actually take private Equity Founders Capital and put it into a Roth IRA.

So that’s what Peter Thiel did with his PayPal shares. They were point one and he put them into the Roth IRA account when you can only put in a couple of grand. And they took that couple of grand up to 5 billion. Right? This backdoor conversion is the tool that we use much more often with our clients. If you are going to do private equity, if you are a founder, it again in general, the folks that we work for, they’re going to be multigenerational family wealth or they’re going to be founders, entrepreneurs that private equity does take some savvy. You got to have some talents to be able to understand what’s going on. You can put that into a custodian controlled, self-directed IRA. You can use a self-directed IRA that’s essentially called checkbook control, where we create an LLC and open it up at the bank. But if you’re going to do it, there is some really clear prohibited transaction rules with the IRS. And I understand this is not the most compelling conversation, but it’s possible you want to be able to get 5 billion totally tax free for yourself, pass on to your heirs. It’s worth getting into the details to understand, Hey, I’ve got this opportunity with these very low cost basis shares. Sometimes the best place for those is going to be putting them into a Roth. We just have to figure out how do we get it there? And then you got to figure out, well, how do I actually withdraw that? How do I actually potentially get that to the kids if that’s a goal of yours? So we talk about conduit trusts, accumulation trusts, the pros and cons. There was a recent legislation that got passed Secure Act 1.0 that got clarified and secure x 2.0 that, yes, you do have to take out a required minimum distribution depending on the age of the IRA owner, and that required minimum distribution of the Roth.

It is tax free, but you can’t wait all ten years, then withdraw it at the end of ten years. It’s a very easy tool to incorporate primarily as an inheritance vehicle, but additionally as a way to give yourself a nice pot of money for the one time withdrawals that don’t impact in your long term. Cap gains or any of your IRA for one year withdrawals. Let me give you an example. This past week we were talking with a recently retired Steelcase executive. Now Steelcase is the publicly traded office furniture maker. Side note, did you know that Grand Rapids, Michigan, is known as Furniture City USA?

Sean:
I actually did know that.

Kevin:
Congratulations. 100% wins that big.

Sean:
Huge. I think you told me that.

Kevin:
But I may have. I’m proud of it. But I think it’s got a cool and you can really actually get access to some really cool furniture. Herman Miller is around here anyway, so now getting back to it, we were dealing with this retired executive and it’s important because this executive retired relatively young. He had a concentrated stock position and had saved up in four one KS also had a variety of different rentals that he’d picked up at a great price, 28 And we were looking at not only how to best support their income needs while they were retired, but also take the wealth that had been created in this G one or the first generation and pass it down due to three. So if you think about my example where we have Ted Weschler using publicly available rules and investing in common stock, having a $260 million Roth here, we’ve got an example of somebody who is relatively young, doesn’t need to necessarily start taking their required minimum distribution. So they’ve got four or $5 million in a trust called non-qualified. So in a non IRA account. So their taxable income is that plus rental income, right? We can do some interesting things with those that rental income, depending on what we need to deduct, we can adjust given a specific year if we’re going to do some capital improvements. Given COVID and the huge increase in housing prices, we’re starting to liquidate that portfolio.

So we’re essentially saying between now and the time at which Congress is going to force him to take a required minimum distribution from his 41k or his. Therefore, with Social Security stops increasing, we have this window of very controllable income. Given that opportunity, there are some really interesting planning strategies you can engage in One of those if your goal is to ensure that your children are going to get the most money they possibly can from the estate doing a conversion. In this situation, all the kids are in a higher tax bracket than mom and dad are right now, even though they’re worth 10% of what mom and dad are worth. Right? If their kids are making $250,000, they’re paying more in income taxes than my retirees are living on. You know, capital gains, dividends and some rental income. Right. So we’re in a situation where we’re able to do an IRA two Roth conversion at a preferred tax rate.

And as I said at the beginning, you know, whether you’re doing $100,000 or you’re doing $300,000, I mean, you are looking at more than doubling the amount of money that you would have otherwise had. So when you think about this as a tool, more people than you might expect actually with the extension of the required minimum distribution or delaying your Social Security until age 70 are in these interesting sweet spots where we can go ahead and do this. Side note, you do want to be aware, and this is a big deal if we do these conversions, there are these Medicare Irma rules that increase your Medicare premium. So it is a complex transaction to be able to understand, okay, not just is it a tax calculator that somebody’s got to do, they need to understand the full implications of these conversions and make sure that we’re getting out ahead. And in general, oftentimes they do come out ahead. Employing the tool is a strategy, whether it’s for their own income or it’s for an inheritance work.

Sean:
So how can people get a hold of you to start having these conversations?

Kevin:
Kevin My information is down below in the show notes. My email is Kevin at Heel Island Financial dot com. I answer all my fan mail and it’s absolutely worth having a conversation to see if this is an opportunity and if it is, how much and when.

Sean:
Fantastic. Thank you very much. Kevin. This has been captured. The upside. We’ll see you next time.

Kevin:
Sounds great.

About
Tru West Financial is a fiduciary focused on goal-based guidance to help you tackle today’s challenges and achieve your dreams. Our wealth management services team is here to help!

No commitments are ever made based on our first conversation. Instead, we will provide you with a list of actionable to-dos to get you started. If you decide you’d like help implementing anything on the list, we’re here to help, but we will never pressure you.
We look forward to getting to know you.

Important Disclosures

Tru West Financial, LLC is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.

• Investment Advisory and Financial Planning Services are offered through Tru West Financial, LLC, a Registered Investment Advisor.

• Tru West Financial, LLC does not offer tax or legal advice. Consult with your tax advisor or attorney regarding specific situations.

• Opinions expressed are not intended as investment advice or to predict future performance.

• Past performance does not guarantee future results.

• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.

CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.

AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.

CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.

The post The Roth IRA…small peanuts or enormous opportunity? appeared first on Tru West Financial.

Capture the Upside Podcast

About this Episode:
In this episode, we discuss the nuances of upside and downside capture ratios in high net worth investing, tracing the evolution from speculative methods to the analytical frameworks introduced by foundational texts like “The Intelligent Investor.” It critiques the reliance on capture ratios as limited in predictive power, advocating for investment strategies that prioritize client goals and values. The conversation highlights a shift towards data-informed index and factor investing, underlining a proactive approach to financial planning and wealth management.

Show Notes:
Upside Capture… It’s a way to measure financial return. It’s also an insightful podcast for high net worth investing hosted by Thomas Kosner. Does either instance matter?

Episode Insights:
What are upside and downside capture rations?
Benjamin Graham: The Intelligent Investor

Connect:
Phone • 616.977.2639
Web • hillislandfinancial.com
Email • kevin@hillislandfinancial.com

Transcript:

Sean:
Hi, I’m Sean.

Kevin:
And I’m Kevin.

Sean:
This is Capture the Upside brought to you by Tru West Financial. For families with a minimum of $2 million or more to invest (high net worth investing).

Kevin:
We have among the industry’s lowest client two advisory ratios, and we pledge to invest our assets consistently with how we invest yours.

Sean:
So we’ve gotten or we’ve had a lot of questions both internally and externally. People we work with and people we know ask about the name, capture the upside. Kevin We I know we went through several options and this one kind of stuck out to you a little bit. What about it? I’m kind of brought capture the upside to the forefront for you.

Kevin:
Capture the upside in investing is a statistic, a measurement statistic from modern portfolio theory used to judge a manager. So I’m going to get into that explanation, but I want to kind of give a little bit of a historical arc. So if you think about investing as an industry, as an as a as an are there good or bad ways to invest, you can go back in time investing.  For the longest time was entirely speculation, market timing, guessing, right where you would say, I think it’s going to be a drought and I think I’m going to, you know, save up my wheat and then sell it at a higher price than a drought or this train is going to do better than that train or I’m going to invest in this land area.  And I think it’s going to grow. And it does or it doesn’t re entirely speculation. I’m not doing any research. I’m not understanding any of the data or looking at any shareholder calls. I’m just like actually it’s going to be successful, right? And then in the twenties, a guy named Ben Graham, famously a mentor to Warren Buffett, who’s the well-known investor out of Omaha, Nebraska, going to Berkshire Hathaway days.  Ben Graham writes this book that is called The Intelligent Investor. It’s on the bookshelves at the office. All the analysts have to read it. And essentially he would say, look, we don’t have to just guess you can actually do some academic research and say, look, I think that Coca-Cola, is it going to outperform Pepsi or vice versa? And you could do it based on their accounting.

You could do it based on a variety of different pieces of information. And this gives rise to, you know, Mr. Goldman and Mr. Sachs. Mr. Marilyn. Mr. LYNCH Right. You get the idea that different places are going to come along and say, Hey, Shawn, we have better research than our competitors, right? Why don’t you pay us money to pick your stocks, pay us money to decide what goes in?  And so that’s kind of the next 50 years of investing. And then you start in the late seventies, having Dr. Sharpe and Dr. Markowitz do some studies famously and say, you know, guess what? None of them are terribly predictive, right? In other words, there there isn’t somebody who’s got the best research strategy or knows how to make more money than the other guy.

Now, look, there is exceptional ism and it’s somewhere in the ballpark of 15%. And again, if you get into the academic research, it’s confusing. But when you find a fund manager that is outperforming consistently, right, you can take a look at all of the different pieces of data. And we have tons of big data now that can say we think this idea is going to do better than that idea or trend to give us predictive value. And very few of those pieces of data have as powerful a predictive capability as manager tenure, right? So in other words, if Shawn is the guy who’s the exceptional guy and you want to know the minute that that guy stops working, there is that for that fund reliably, statistically significantly, is going to start performing differently than it had in the past. Makes sense. So exceptionalism doesn’t does exist, right? Unknown whether or not they’re using anything from Ben Graham or intelligent investor. But there are guys who are like savants at their stuff. They’re just few and far between. And the vast majority of us, you know, you can’t really retire on that because at some point they’re not going to be doing it anymore. You track what I’m getting them. So again, you go big picture, you got speculation, market timing, you got research, you do. Then we’ve what are called fundamentals, the intelligent investors. And then we come along and find out that actually doesn’t help at all. And then you have the index investing revolution and modern portfolio theory. And modern portfolio theory essentially says that over 90% of your returns are predicted based on your allocation. high net worth investing

In other words, did you own stocks and had you on bonds, not which stocks you picked, but if you bought these different types of stocks and again, they’ve been sort of identified stocks and measured them based on different what they called the classes, the large mids more bottom line is modern portfolio theory came along index funds came along as an idea.  And again, all the people who are making a lot of money saying, pay me for my research, I’ll pick better stocks. Hated the index funds, but the index funds Vanguard, Schwab, they ultimately won the day, right? So now you have index funds being the most popular way of investing. And in fact, we’ve moved beyond just index funds to also factors factor investing there.  It comes out of the University of Chicago, believe it or not, your hometown. Right. So University of Chicago has got tons of Nobel laureates. They do a lot of good research. They’re identifying these factors that say, well, it’s not just indexes, it’s indexes and a factor based on the price to book ratio, based on cash flow, based on this, you know, and we have these abilities to determine this factor when placed into a portfolio and filtered, say, I’m going to do 100 stocks, but I want them all to be able to qualify for this factor. (high net worth investing)

Well, now your portfolio is going to either underperform or outperform the benchmark or the baseline based on that factor. Right. So again, you’ve got speculation for ever and then you’ve got research on fundamentals. You throw out research on fundamentals, go to indexing modern portfolio theory, asset allocation, and now you’ve got factors. Well, on this asset allocation, on the factors, one of the ways we measure a portfolio manager or an index fund is through modern portfolio statistics. So it’s things like Sharpe ratio R squared, right? Treynor ratio, standard deviation understanding. Also one of those statistics is upside and downside capture ratio. And so upside capture ratio does if the market or the baseline, the comparison went up 10%. Did this fund go up 110 right then you’d have a new or excuse me, go up 11, then you’d have 110% write upside capture ratio goes down ten and you go down eight. (high net worth investing)

You get an 80% downside capture ratio. It’s a fairly appealing measurement, right? You would say, Well, I would like the fund that has a 0% downside capture ratio and a 200% upside as a get me too right. And this is one of those classic kinds of things where it makes sense. They do an upside capture ratio. The reason I named the podcast after it is because they published a wonderful academic paper in 2021 that essentially said, Hey, look that as a measurement is kind of a salesy marketing tool. It actually has very little predictive capability if you’re putting it into a fund or into something and saying we have a great upside capital ratio or downside capture ratio, that’s actually not the case. It’s highly correlated to what you call a fund’s beta. And I chose to name this podcast, capture the upside for two reasons. One good insider joke on look upside and downside capture ratio is actually an entirely false marketing tactic that mutual funds use, right?

It is actually not a meaningful measurement. And so capture the upside is like, well, look, the way to capture the upside is to do the hard work of getting along into a client case brief, deciding what they need invested, and then putting those investments to work and not necessarily paying attention to whether or not it’s in comparison to the benchmark, you know, capturing the upside of the downside. And then secondly, it’s a general outlook of optimism. I mean, truly, all kidding aside, I like to be like, hey, look, when you talk about money, there’s a lot of anxiety, there’s a lot of fear, there’s a lot of unknowns that’s captured the upside of whatever your situation is. All right. Let’s just take a look and be like, hey, every case, I run into their opportunities to improve in their opportunities, to live in alignment with your goals and your values. (high net worth investing)

Sean:
It also seems to me, Kevin, it implies some aggressiveness. The word capture, meaning you have possession, the ability to go out and make some of these things happen. As an investor. It’s not just look for the upside, it’s no, it’s capture, it’s go out and get it. We had a soccer coach in college that said luck was 99% preparation, right? You got to put yourself in a position to be lucky. Now, 1% is the payoff, but it was the 99% which you just spoke about that is going to put you in the position to capture the dark side, to be lucky, to have a good result. And I just thought that when we talked about that term capture, it was it was taking the car, it was taking the conversation under control, not being passive, but going out and putting yourself in a good spot to be successful. So well done. (high net worth investing)

Kevin:
None of this stuff happens by accident. I mean. Right? It’s adulting and it’s not. Nobody wakes up in the morning and it’s like I am going to put more into my 401K and that brings very few people and that’s going to bring me joy, right? And so it is capture the upside, right? Like get out there and take control no matter what your situation is. And I want somebody who’s going to walk. I mean, this sounds like a commercial song, but I want somebody who’s going to treat my car at the mechanic like their car. Don’t charge me 250 bucks for something that is could cost five, Right? Act like this is my money and treat me how you would. And that’s why, you know, I’ve retired over 215 times. I’ve sent over 300 kids to college. Right. We’ve given away over $300 million in philanthropy gifts over the course of the years with clients. I can tell you what it feels like. I can tell you what I’ve seen work, what I’ve seen, not work, what clients have been more satisfied, less satisfied. So there’s this element too, of like, well, I think I want that. (high net worth investing)

Well, I don’t know. I can tell you what a jet has felt like to other people. I can tell you what you know, the third home has felt like two other people, right? I can walk you through kind of like it the encourage the kid to go to the expensive college or not. Right. I can walk you through how that feels. So I think that I like that go out there and capture the upside, be aggressive.

Sean:
So whether whether you’ve got you just starting, whether you have 200 million or whether you have 2 million, how can how can people reach out and get a hold of you and your team whole island?

Kevin:
Sean, anyone can always contact me Kevin and he’ll Island Financial and I respond every email personally and you can take a look down on the show notes my phone number is down there and also our website. Dub Dub Dub Dub Tru West Financial dot com.

Sean:
Amazing. Thank you very much. I’ll talk to you next year.

Kevin:
Sounds good. John. Thank you.

About
Tru West is a fiduciary focused on goal-based guidance to help you tackle today’s challenges and achieve your dreams. Our wealth management services team is here to help!

No commitments are ever made based on our first conversation. Instead, we will provide you with a list of actionable to-dos to get you started. If you decide you’d like help implementing anything on the list, we’re here to help, but we will never pressure you.
We look forward to getting to know you.

Important Disclosures

Tru West Financial, LLC is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.

• Investment Advisory and Financial Planning Services are offered through Tru West Financial, LLC, a Registered Investment Advisor.

• Tru West Financial, LLC does not offer tax or legal advice. Consult with your tax advisor or attorney regarding specific situations.

• Opinions expressed are not intended as investment advice or to predict future performance.

• Past performance does not guarantee future results.

• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.

CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.

AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.

CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.

The post Capture the Upside: A Podcast for High Net Worth Investing appeared first on Tru West Financial.