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Not Just Numbers Honest Conversations with a Financial Advisor and Lawyer Episode 4

Not Just Numbers: Honest Conversations with a Financial Advisor and Lawyer – Episode 4

Introduction

Madison: Hello everyone, and welcome to the 4th episode of ‘Not Just Numbers, Honest Conversations with a Financial Advisor and Lawyer’. I’m Madison Damora, and I’m here with Mike Garry, the founder and CEO of Yardley Wealth Management, a firm he founded in 2006. We are located right outside of Philadelphia in Yardley, Pennsylvania, which is in Bucks County. Mike, in the previous episode, we spoke a little bit about our firm, and I was wondering if we could speak a little more so our listeners can understand a bit more about us.

Mike: We certainly can.

Madison: Okay, so we’ve spoken about how we get clients and how we start with the financial planning. Do you want to talk about how we actually invest for the clients?

Mike: I would love to. That’s a great idea. And I think that even some longtime clients really don’t understand what we do. It’s a little bit of a black box, and we are going to open that up today. Right. So, first, as part of the financial planning process, we try to figure out the right asset allocation for clients. Asset allocation refers to the percentage in stocks versus bonds versus cash, if cash is necessary, and if bonds are necessary. Right. And so we look at clients risk capacity and the risk tolerance and the returns that they need in order to meet their goals to come up with what we think is the right asset allocation. So risk capacity means their ability to take risk. Right. Not like this kind of ability, not like their emotional ability. Risk capacity means, like, okay, Maddie is a generation younger than me. She has more time to make things up, so she can probably take more risk than me. Probably. We don’t know that. Risk tolerance is how people are affected by the change in their investments due to the volatility and the ups and downs. Some people have extraordinarily high risk tolerance. They could be like going to a casino and putting a million dollars on black and walking away. They don’t care if it doesn’t work out. Most people are not like that. Other people, though, have a fairly high risk tolerance. They think things will work out and they’re okay having that high risk. Other people have a low risk tolerance, and they only want things to be insured or very safe. And most people are in the middle somewhere. And I think the risk tolerance does depend on what the purpose is. Right. So if you’re saving money for house, like we talked in the last episode, the risk tolerance for that is low, insured and government savings vehicles. That’s it. For money that you need at a known time in the immediate future or the intermediate future has to be invested very safely. But for investing where you’re talking about investing over a lifetime, then your risk tolerance probably shouldn’t be at government bond levels. Probably should be somewhere between that and the guy that would throw a million dollars in that blackjack table or roulette wheel, whatever. And then we also look at what returns they might need to meet their retirement goals. And we do all of that to come up with an asset allocation of some mix of stocks, bonds and cash. And for the most part, it does kind of limit. Most people will have at least 50% in stocks, and we don’t use margin or futures or options or whatever. So at the top, it’s 100% stocks. So most people are somewhere between 50% and 100% in stocks, zero and 50% in bonds, and zero to maybe 5% or 7% cash, depending on what their cash needs are. All right, so sorry for that big rambling thing there, but it’s a little bit complicated. When we buy stuff, we don’t buy individual stocks or bonds, because there’s something called idiosyncratic risk. So the risk of that one issue going default or bankrupt. So we don’t ever buy any individual stocks. So we buy mutual funds and exchange traded funds. We don’t ever buy gold, and we don’t buy annuities or non traded risks or business development companies, because we think all these alternative asset classes, I think that for the most part, the issuer and the seller of those makes a higher amount than they should, and it makes the returns available for investors lower than it should. And so we tend to buy broad based baskets of stocks and bonds in different asset classes in proportions that we think make sense for our clients. Does that make sense?

Madison: Absolutely. So you said mutual funds and exchange traded funds is what you usually use. So what’s the difference between them? And why do you buy both?

Mike: Okay, sure. Good question. And so, in a sense, there’s not much difference between them. So they’re both baskets of stocks or bonds or both, where investors pool money and a manager buys the stocks or bonds or both, according to the mandate of the company. So it could be a large cap growth fund or a large cap growth ETF, and they could have the same types of investments, they could hold the same investments, they could have the same purpose. The difference is in their legal structure. And so when you buy or sell a mutual fund, an open end mutual fund, there used to be closed end mutual funds. I don’t know if there are anymore. But if you buy an open end mutual fund, you buy it directly from the fund company. So if you go to buy a vanguard fund or a fidelity fund, you are buying that from Vanguard or Fidelity. You buy it at any time when the market is open, the trade settles at the closing price of the market. And then. So if you were to log on now and buy $1,000 of the Fidelity S&P 500 fund, you would put the money in, you’d see tonight, you’d see that that trade closed after the market, and you got it for whatever the closing price was, and then you own those shares. An exchange traded fund is a little different in that you will buy or sell that from another investor on the market. And it happens right away at whatever the market price is. And so say you wanted to buy the Fidelity S&P 500 ETF, and you went on right now and bought that. You would own that in about 10 seconds. It happens pretty quick, and you would pay whatever the price is now, and you would be buying it from whoever you sold it to. That will take two days to settle, and mutual funds only take one day. But that’s really the main big distinction. And then there’s one other difference, is in the structure exchange traded funds can do. They are more tax efficient because of the way that they’re structured. The issuer does not have to distribute all the capital gains that a mutual fund issuer would have to distribute. One other thing is we buy stuff at the Schwab or TD Ameritrade. We have to pay like $24 to buy a mutual fund at Schwab and $999 to buy a mutual fund at TD Ameritrade, but nothing for ETF’s. So they trade like stocks where there’s no cost. Doesn’t mean that Schwab and TD Ameritrade don’t make money from that because they get payment for order flow. That’s a whole separate issue. Could be a whole podcast in itself. So nothing is ever really free, although we’re going to talk about free money later.

Madison: So why don’t you use all ETF’s?

Mike: So we don’t use all ETF’s because they’re newer. The oldest ETF is now 30. And so there are some huge ones, but a lot of them have been formed in the last few years. And we like to see a fund out in the market for three years before we invest in it. And one other thing is that we have mutual funds in a lot of places in taxable accounts where people have unrealized gains. And so if we were to just swap out that mutual fund for the ETF, for the supposed tax benefits, we would have people incur a huge tax liability in selling. And so what we’re doing is we’re slowly introducing in retirement accounts, we could just bring them in, but in taxable accounts, what we have to do is when we’re doing rebalancing trade, if we’re selling from the mutual fund, because it gets to be higher than it should be, we don’t sell out the whole thing, we sell the incremental part, that is too much, we’ll sell from the mutual fund. But then if it gets to be too low as a percentage of allocation and we needed to buy it, then what we will do then is buy the ETF. So in a lot of accounts now, people will have both the mutual fund and the ETF for large cap core or small cap value or whatever it is, if they have taxable accounts. And so I would prefer not to have two of all those different asset classes. But the reality is, if we could save a little tax money, why not, right? We should do it. If it makes the portfolio a little bit more efficient tax wise, and that tax goes right to the client and the investor, then we should do it. And if it makes it unfortunate, it makes the statement look a little sloppier having 15 holdings instead of 10 or 12. Yeah, well, if it saves $5,000 a year or $3,000 a year, well, then that’s worth it. I’d rather have three extra lines on the statement. Does that make sense?

Madison: Absolutely. So when it comes to deciding if you’re going to do mutual funds or etfs, is that something the client decides or is that something you suggest to them?

Mike: Well, so that’s something that we decide we will have a portfolio allocation for somebody and it’ll be based on the funds that we’re buying at the time. And so when we start the relationship with clients, we figure out, we say, “hey, we think this asset allocation for you should be, let’s say, 65% stock funds and 35% bond funds”, we talk to the client to make sure they’re aware of what the expectations are for that portfolio, the risk and return expectations. And then once we agree that client and we sign an investment policy statement, and the investment policy statement will say that we’re going to have those allocations, they might deviate up to 20% on those because we’re not going to be buying and selling every day to keep it exactly 65 35. And that asset, that portfolio statement, investment policy statement will also specify some other things like we’re not going to short, we’re not going to use margin, we’re not going to buy venture capital or hedge funds or private equity. The clients give us discretion, right, to go buy what we think makes sense for them, but we want to let people know at the outset that we think there are a lot of things that really don’t make sense in most cases, and so we’re just not going to use them. And so that’s all in that investment policy statement. It’s a short document, it’s only two pages, but it really specifies that we’re going to be buying mutual funds and exchange rated funds, and that’s it. Maybe we’ll buy a t bill or something, or a CD or something there, here and again. But really, the bread and butter is mutual funds and exchange rated funds.

Madison: All right, so, Mike, are we ready to get into today’s topic of discussion, free money?

Mike: We are. Who doesn’t want to talk about free money? Maddie?

Madison: All right, let’s get into. All right, so, Mike, last episode we started talking about free money. What was that all about?

Mike: Savers keep their money in a handful of largest us banks, like five or ten banks, have a giant percentage of overall deposits. Think like Wells Fargo, Bank of America, Citigroup, and those banks pay their depositors a tiny peanuts compared to what’s available on the market. And so those banks wind up averaging like four tenths of a percent in yields in their accounts. And there are other banks that will pay much more. And so the free money is that, and I saw an article recently about that, and it’s in the news all the time. So it’s something habitually people do. They’ll go to that Wells Fargo, because it’s right at the corner, the atm is right there, and they’ll keep their money there even though it’s costing them a lot of money. Every day. Every day. You can go to a high yield savings account. Well, most banks, well, first, most banks, the easiest thing is most banks will have some sort of premium yield account that probably has a minimum. So if you have more than you need to have in your checking and savings to make sure you don’t have fees in it, most banks will have some sort of premium yield account or a high yield account that will yield more than their regular savings. So that’s the easiest thing people can do, right? So if say you have, say you spend $5,000 a month, and so you need to keep your checking account balanced at a multiple of that, whatever you’re comfortable, let’s say you keep 10,000 or $15,000 in that. But then you have another $50,000 that is saved and you’re earmarking for something, or it’s just going to be your savings. Right. In case something comes up. Right.

Madison: So that’s in the savings account?

Mike: And that’s in your savings account. Apparently, millions and millions of people do that and keep that in the savings account at that Wells Fargo. That will pay four tenths of a percent. The first thing is that almost all banks, if not all banks, have some sort of premium yield account. So if the regular savings is yielding 0.3 or 0.4, they probably have something else that’s yielding more. And so log into your bank and look to see what that is. And it could be as easy as click $50,000. Click moving to another thing and getting an extra 2%. Well, an extra 2% on $50,000 is an extra $1,000 a year. That’s free money, and that couldn’t be easier, right? Anyway, at most institutions, it shouldn’t be too hard to move money into like a separate account within the bank. Maybe you’d have to do some paperwork, or maybe you could just do it online. We use the police and fire credit union, and it’s very easy to move stuff online. And so they have a couple of different savings type vehicles, but that’s the easiest start within your bank. But then once you get substantial savings, that is, by substantial, I mean more than what you would need in a given month or three or whatever. So say you keep three months worth of your bills in your checking account, just in case, or whatever it is that makes you feel comfortable. The next step is seeing if you have a high yield account at your bank, because that’s easy, right? And they might. But then if they don’t, where you would look is you pull out your googler and you Google nerd wallet. Best insured savings rate, or bank rate, best insured savings rates. And they will both give you a list of like ten banks that are insured, half of whom you’ve heard of and half of whom you may not have heard of. But they’re all insured, so it doesn’t matter if you haven’t heard of them. And right now, they’re all paying between three and a half and 4%. That’s a big difference. If your bank is paying three tenths of a percent and the high yield one is paying 3.6, that’s twelve times as much interest. Twelve times as much interest, that is a big difference. And so yeah, if you only have like $500 or $1,000. Yeah. So that’s not going to make a difference. But if you have $20,000 or $50,000 or $100,000 or more, that can make a giant, giant difference, and it’s just a couple of clicks. And the thing is, this podcast, this is coming from like a Wall Street Journal article from the end of the year in January. But they run that article every year. You’d find that, and it’s just mind boggling to me because I guess people are just busy and they’re not really sure, and so it’s hard to know what to do. But you could open one of those online accounts pretty quickly, pretty easily, and then you can move the money back and forth via ACH. There may be limits on how often or how much you can move with the online banks or your own bank. In our best yield account at our credit union, you could only do it a couple of times a month, but it’s for something, you’re not going to do it ten times a month, it’s for savings. So you’re not going to buy ten cars in a month, you’re not going to do things that require that. So, yeah, it’s just mind boggling to me, and it could be easy.

Madison: So would there even be a reason to have a savings account then? Couldn’t your savings account technically be the high yield savings account?

Mike: So that’s actually a great question, Maddie. So at our credit union, you need to have $5 in a savings account. And so the savings account is like S1 and the checking account is like S4. They have different names for it. And so we need to have $5 in that savings account. And then the other money you could put in your checking account, and you get yields up to a certain thing, and then you could put more. Other accounts have like minimums and then have those restrictions. But most banks have some level of those things. And so, yeah, you just have to see what the rules are for your institution. And if the rules aren’t great, switch your institution. Right. So that’s another thing. So we’ve been using the police and fire credit union since, I don’t know, since Rachel and I got together. Her dad was a firefighter, my grandfather was a police officer. And so we’re both eligible to have accounts there. And it’s great. And I would highly recommend looking into credit unions for your everyday banking instead of like the Wells Fargo or Bank of America. There are all sorts of credit unions. A lot of them, you have to have some sort of affiliation. Like there’s some sort of requirement, but there’s a lot of them and a lot of the requirements are pretty nominal. And so for everybody, there’s credit unions that could meet their needs. And so I would look into that if I was you or anybody else listening who uses one of those traditional banks. We’ve used that credit union forever. We get money from the ATM at Wawa. Doesn’t cost anything. It’s easy. And then we have had mortgage loans and car loans through the credit union. They’re always very competitive rates. People are great to deal with. You get like a sense of community or affiliation with them. They treat us nice. I don’t feel like customer number 54376. It’s a good thing. Highly recommend people look into credit unions, and a combination of a credit union and maybe a high yield account at one of those online savings could be a great thing. And it’s just making your everyday money work a little harder and it winds up, Maddie, it’s not free in the sense that you have to do something for it, but you have to do a very little bit and you can have, like, giant returns from it. I couldn’t speak more highly of the police and fire credit union, and I would think about it and recommend it.

Madison: All right, well, this was great. This was awesome. Do you have anything else that you wanted to talk about?

Mike: No. What I’d say is what happens is inertia. People get an institution relationship and they just stay there because it’s easy. And we’re all busy, our lives are all overly complicated, and so we put up with stuff. I can’t tell you how many Wells Fargo clients or customers we’ve had come in and we’ll rail about it, complain about it, and then they’re still there because it’s a little bit of a pain in the butt. If you want to open up a new checking account, yeah, you got to open the account. You got to start paying your bills from that account. You need to move money to it while still waiting for all of your old checks to clear from your old account. Now, one thing is that’s way easier now than it would have been 20 years ago. Since people write very few checks compared to before 20 years ago, you might have 15 checks outstanding. You have to wait for them all to clear and make sure it happens before you move the money out. Now, most things happen pretty immediately. So you open up the new account, you have your bills and your mortgage and whatever bills that you have that go out automatically through it, set up on the noob thing, and yet take a little bit of time to move that. But you’re not moving banks every week or every month or every ten years, necessarily. I think it’d be well worth it to spend a couple of hours searching for the other financial institution that makes sense for you and then taking the steps to move it forward. And, yeah, I just think it’s free money, Maddie. Free money.

Madison: You just got to get over that little hump, the transition. And once it’s done, you’ll be happy that you did it. Right.

Mike: Like so many things in life, people are held back by unknown fear and anxiety. What’s on the other side? What if I don’t like that bank? If you complain about something for ten or 20 years, maybe the other side is not so bad, right?

Madison: Yeah, absolutely. And we do have the advantage. You could Google, you have a lot of options. You could do your research, figure out which one works for you.

Mike: Yeah. You know what? I’m so glad that you used the word advantage, because Schwab has their value advantage money fund, where it’s not quite as easy because you have to actually purchase and sell the money fund. So it’s like a mutual fund, but right now the yield is almost four and a half percent. That’s pretty good. That’s worth a little bit of work, especially if you want to lock up savings for a home purchase or a car purchase or something. Somthing that’s going to be coming up soon and you’re trying to get your money’s worth. That’s a good thing.

Madison: All right. Is that it for free money today?

Mike: I think that’s it for free money. Can only talk about that for so long. Yeah, I’m itching for some free money.

Madison: Thank you, Mike. I really hope this reaches the right people and gives them the motivation, even if they’ve been thinking about it for 20 years. Like you said, hopefully this gives people that little push to you to just do it. You could be happy that you did. All right, well, this was great. So for more information on Yardley Wealth Management, you could visit our website, yardlywealth.net. You can also follow us on socials at Yardly Wealth Management. This podcast has been produced by Madison Demora and Mike Garry with technical and artistic help from Poe Productions.

Michael Garry Yardley Wealth Management

Author Michael Garry Yardley Wealth Management

Michael Garry is a CERTIFIED FINANCIAL PLANNER™ practitioner and a NAPFA-registered Financial Advisor. He is a member of the National Association of Personal Financial Advisors (NAPFA) and the Financial Planning Association (FPA).

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