Quantifying the Value of a Financial Advisor with Mark Kenney — EP 025

Keith Ellis, Jr.: Welcome back to another edition of the Retirement Road Map podcast by SHP Financial. Today, we’re joined by Certified Financial Planner, Mark Kenney. Mark’s been with us for quite a few years, helped many families around New England, either retire, get ready to retire, prepare for retirement, and ask and help them solve many, many issues that come along with retirement planning.

And that’s what we’re going to spend today’s show on is really understanding and maybe kind of quantifying what a financial planner is or what that means to the layman, why hire a financial planner. And Mark, dealing with so many folks that come into the office, I guess, maybe first start with giving us kind of a lay of the land. What are you seeing right now, some of the major maybe concerns, questions, or just what are you dealing with at this point?

Mark Kenney: Yeah, I think, in any professional service industry, you have to try to quantify the advice that’s given and it has to be some multiple of the fee that you’re paying. And I think in financial advising, the cost of being wrong can be so detrimental. Let me illustrate it with a story. So, let’s picture a 55-year-old guy out for his morning run. And just like every other day, he’s running two or three miles and he has a little bit of chest pains.

And he taps it up to maybe it’s just a cramp. But the cost of being wrong there is huge. It could be his life. So, what he does is he goes to a doctor and he gets diagnosed. He passes that on to a professional that knows the industry because, again, the cost of being wrong, the cost of it, not seeking advice is huge. And what we’re going to try to do in this episode is try to quantify the value, the advice that a financial planner can give to you over the course of your retirement.

Keith Ellis, Jr.: And it’s interesting because when folks come in and visit, a lot of times, we’re seeing folks either trying to obviously do it themselves and kind of figure out and create their own kind of path forward. But most folks are working with an advisor and they’ve never gone through this exercise. And maybe they’re looking at it as, okay, I’ve had this relationship for 5, 10, 15 years, or my account was 500,000 in 2008. And now, it’s a million and a half in– so they’ve seen their account values go up.

So, it’s been more of that set it and forget it or autopilot-type thought process when it comes to really digging in and seeing what type of advice they could potentially be getting, or let me put it a different way, maybe should be getting. And here at SHP Financial, what we do is we have a process called the Retirement Road Map where, like I said, most folks will either come in and they’re managing their own investments or they’re working with an advisor that’s managing their investments. And that’s the sole bit of advice that they’re getting. And to us, that is a massive gap when it comes to what should be expected in the industry.

So, in the Retirement Road Map, we look at building first and foremost and we’re going to touch on each one of these – an income plan, an investment plan, a tax plan, a healthcare plan, and then making sure like an estate plan or a legacy plan. Now, within each of those plans, because that sounds very basic, okay, an income plan and investment plan, but within each of those plans are subsets in so many different questions and so many different things that need to be addressed. And it could be three, four, or five different questions. It could be 10 or 15 different questions.

So, what we want to do on today’s show is kind of break down each one and really dive a little bit deeper. So, in here, like I said, to do so is Mark. So, Mark, when it comes to income planning, like I said, dealt with hundreds of families, really What have you seen the landscape maybe shift to, or some of the questions you’ve been getting over the last five, seven, ten years?

Mark Kenney: Yeah. So, that’s why we lead with the income plan because now, you’re transitioning into retirement where you have to pay yourself, right? You can’t afford to make any mistake and you want that consistent, reliable, steady income in retirement. So, what an advisor, what we will do is look at a client’s situation.

Now, if you were to do it on your own and you were to say, well, how much should I pay myself, there is an old rule out there that says you don’t take out 4% of your portfolio, you should never run out of money, where we will try to build an income plan that obviously gives you quantity but also quality of income. What do I mean by that is, some people don’t value $150,000 at age 85 like they do $95,000 at 65. You get one chance to do this retirement and you want to make sure that it’s done right and it’s done properly.

So, what we’ll do is sometimes we will build more of a top-heavy distribution plan. And what I mean by that, and I hope you’ll understand that a lot of these categories overlap, like how you feel about legacy may determine how much income you take, what your investment portfolio is and how much risk is, can change how much income you can have. But I have a lot of clients that, especially nowadays, are retiring early or younger. Especially going through COVID, they value time. Time is the most precious commodity that we have, and yet no one can tell us how much we have.

So, they may want a little bit more of income at 62, 63, 65, and we’ll say, “Okay, we’ll develop a little bit more of a top-heavy plan. Maybe we’ll give you a 5% to 6% of your portfolio if we can control that volatility.” And if it be the worst-case scenario, maybe you know that we have to take a reduction in income at 75, 85, and they don’t care because they want to maximize those really good years, and again, coming up with a strategy that looks at that.

So, to quantify it, I think sometimes we’re able to add 1% or 2% more in a portfolio. And when you think about that, let’s say you have a million-dollar portfolio and we’re able to develop an income plan that will give you $10,000 or $20,000 more in income now versus the old strategy of just taking out your required minimum distributions at 72, and then that requirement distribution goes up and up and up. And so, you’re getting more money later on in life when maybe you can’t derive as much enjoyment out of that money. And I think that’s the real value that income plan can bring to someone.

Keith Ellis, Jr.: Yeah, you’re absolutely right. Health and time are the two unknowns, right? So, you do see folks retiring earlier. You do see folks wanting to enjoy their healthy years and things in times when, obviously, we wish people could live to 90, 95, every year, be healthy. But time goes on, and wear and tear continue to happen. And at some point, the body starts to break down and you’re not able to do the things that you maybe could do at 60, 65, 70 years old. So, we do see that quite a bit, building something a little bit more top-heavy.

And I think you said it best is first and foremost, it’s so important when you retire to retire with a mapped-out strategy and a plan for the rest of your life. Now, that doesn’t mean that that’s going to be kind of set it and forget it. It means that there’s going to be an advisor working with you to adjust that plan, to maximize that plan, to make changes to that plan as the environment continues to change, whether it’s the market environment or the legislative environment because there’s going to be different hurdles that come along the next 15, 20, 25 years of your retirement. And if you have that set-it-and-forget-it mentality, there’s an opportunity that’s missed.

But I guess one other thing that really struck me of what you said is, if you’re working and when you’re working, a lot of times you don’t think about, hey, look, I’m going to go out to dinner because you can afford to just do it. You just go and do it. You do the things that you want to do. I feel like retirement should be like that, too. And how you do that is you create an income plan.

Mark Kenney: Yeah. You have to remember, Keith, that a financial retiree’s number one concern is running out of money, right? And what an income plan will do is map out where and when you’re going to take that money so that you can enjoy retirement. There’s nothing worse than thinking, man, I can’t take that trip, I can’t go out to eat, I can’t spend more time with the grandkids because I’m afraid of running out of money. What an income plan will do is give you that peace of mind to know that it’s run through different analyses.

We know that you can take this income as long as we control the investments and, again, the overlap there and the different plans, you get one chance to do this, right? You get one chance to live your retirement. We want to make sure that you maximize the value and get the income when you want it instead of being forced to take out more and more as you get older and older and maybe can’t enjoy it, and obviously, has a knock-on effect on taxes and everything else. So, we want to make sure we nail down that income to give you the retirement you deserve.

Keith Ellis, Jr.: Yeah. To now pivot to investments because, as you know, income, investments, obviously, the market over the last few years has been pretty tumultuous. We went through the pandemic. Now, here we are in 2023, 2022 just wrapped up. Give me a little bit about how an advisor can add value in that realm or in that level.

Mark Kenney: Yeah. So, I think there are a few key points here when you’re building a portfolio. First is fund selection. Now, a lot of clients will come into us and they will be under the impression I’m not paying a fee, right? They don’t realize that they’re in mutual funds that are costing them 1% to 2% in internal expense ratios, which are basically hidden fees.

Being independent, being an independent advisor, we can select from any investment in the world. And a lot of the times, we will look at what you’re paying in fees now through your 401(k) and I promise you you’re paying fees and what you’ll be paying with us because we’re using low-cost funds because we have everything available to us. And a lot of times, that can be savings of half a percent up to 1%. Moreover, even if you might have a variable annuity that’s costing you 2% or 3% in there. So, that’s huge in what investments are you utilizing it.

And remember, we’re not paid to sell you investments. We’re paid, our product is our advice, right? So, we’re going to show you what you’re paying now, what you’re getting for it versus what you’ll be paying with us. And a lot of the times, we can actually save you money because you’re unaware of the funds and the cost inside of 401(k). I think another feature that we will add a lot of value is controlling volatility.

Keith Ellis, Jr.: Definitely.

Mark Kenney: Remember that you may have started your 401(k) in your 20s or 30s. And you had a long runway to grow those investments. Now, you’re 20, 30, 40 years older, and now you’re in the distribution stage. And we need to control that volatility, and really, that means is the number of possible outcomes. And at SHP Financial, we believe in a bucketed investment strategy. Not all your money is going to be utilized next year. You’re going to need some money for safety, some money for income, and some money for growth, and creating that bucket strategy will allow you to take more income, going back to the income plan, and not worrying about the market.

And another huge thing is the emotional bias. Why do people, when they manage their own money, consistently underperform the market is because they get emotionally tied to their money. How many people in March of 2020 were calling us and trying to sell at the bottom, right? And we have to bring it back to the plan and say, “Listen, we can’t control this, but selling now, we have a loss.” And many people come to us in 2013 when the market is at an all-time high and actually want to buy.

Warren Buffett has a famous quote that says, “Be fearful when others are greedy, and be greedy when others are fearful.” And I use that a lot with my clients because we have this herd mentality that we want to do what everyone else is doing. When we know that the markets are going to move, we can’t control that, but what we can control is setting up a plan allowing us to take from investments that aren’t as risky, allowing our growth portfolio to grow. It will give us those double-digit gains inevitably, I may not feel like it after this last year, and that’s going to save you 1% or 2% right there. The average investor will underperform the market by 1% or 2% because of these emotional biases.

So, if I could quantify it in building an investment plan, it’s that bucket strategy. It’s looking at the funds that you’re utilizing and making sure that they have low expense ratios, right? And it’s also about creating, controlling the volatility in your portfolio. You don’t want to be pulling off your growth bucket in March of 2020 because you’re relying on that paycheck. It’s about creating that bucket strategy.

Keith Ellis, Jr.: Yeah, you could have put in any better. To me, it’s really about creating purpose around investments, right? So, if you know why you hold this more aggressive bucket, that’s obviously probably a smaller amount than the more conservative or more income-oriented. It’s because it’s there for longer-term growth to offset distribute, you know what I mean? So, it’s making sure that you do use that bucket at strategy. And then you as the investor, along with your advisor, understand what the purposes of each of these buckets in the time horizon because that’s really the true power of creating that investment strategy.

Mark Kenney: And that’s why you need a customized plan, right? So, there’s no cookie-cutter solution. I got clients in their 30s who are in the growth stage. And I kind of look at this as a buying opportunity. Everything’s on sale for 20%, 25%. But that’s all the same strategy for a client who’s 75 and is relying on his money, his portfolio to create him an income paycheck. And that’s what you have to have understand the client’s goals, objectives, risk tolerance and build out that bucket strategy. And that’s going to give them the income when they need it and control the volatility.

And again, you said it, every piece is going to have a certain purpose, right? And we bring it back to the plan to make sure that there’s full transparency there and they understand why we have a growth portfolio, why we have an income portfolio.

Keith Ellis, Jr.: I mean, so we touched on income, touched on investments. That’s two parts of a five-part true retirement plan. And the next part that we wanted to touch a little bit upon is tax planning and tax strategies. And one thing that I have experienced since I’ve been doing this is so many folks get concerned about market risk, right? That’s out of most people’s control.

Mark Kenney: Correct.

Keith Ellis, Jr.: What is in your control is trying to eliminate tax risk.

Mark Kenney: That’s right.

Keith Ellis, Jr.: Because that’s legislative. And you know what kind of the playing field that you’re playing on. So, maybe you could touch a little bit on tax risks, tax strategies that we look at, so on and so forth.

Mark Kenney: Yeah. Keith, we always say this. This is the most underserved area in financial planning, and it’s probably where we add the most value that’s not being added by your financial advisor now. And why that is, is most of us were led to believe that we’ll retire in a lower tax bracket, right? We were led to believe that taxes will go down in the future. And so, at one point, 20, 30 years ago, you started putting money away, tax-deferred.

And what that meant was you took a tax deduction When you put that money into your 401(k), your IRA, you then take on the risk of growing that investment for the IRS and that you’ll be taxed when you take that money out. Well, we know that taxes are going to go up under the Tax Cut and Jobs Act, that all tax brackets are due to increase on January 1, 2026. So, why aren’t clients looking at their situation and saying, “Listen, how can I mitigate this strategy? Where am I now in my tax bracket? Where will I be in the future? And how do I buy out the IRS?” And a lot of people will think, oh, well, I’ll just wait till required minimum distribution.

Keith Ellis, Jr.: Yeah, all the time.

Mark Kenney: I’ll wait till 72 and I’ll just kick the can down the road. And we know this isn’t the best strategy. One, you’re forced to take out more and more as you get older, right? It starts at roughly 4% of your account at 72, and then you’re forced to take out 5% or 6%. I have clients well into their 90s, they’re forced to take out close to 10% of their accounts. And what that does is create more taxable income, can have an effect on your Medicare premiums, and you got to be looking at…

Keith Ellis, Jr.: You lose control.

Mark Kenney: You lose control. We take a more proactive approach instead of reactive approach, right? If we know taxes are going to be going higher in the future, we want to look at where you are now, how much can we buy out the IRS at, and make proactive moves to mitigate potential taxes down the road because, as you said, taxes, they’re going to go up in 2026. It’s in my opinion and most people that they’ll even go higher in the future because of all the spending that’s been going on through government.

Keith Ellis, Jr.: Well, it’s funny. It’s like you’re kicking the can down the road. You’re compounding your tax issue. So, let’s say you’re 60 years old, 61 years old, and you’re not looking at this. And it could be right for you, it could not be. But it’s important to know. And now, your RMD is 75 because the new laws have been passed in the future. You’re going to compound your tax liability over the next 14, 15 years into– this is the scariest part, in my opinion, into an unknown tax rate.

Mark Kenney: Yeah, it’s correct.

Keith Ellis, Jr.: Because what are the tax rates going to be down the road? So, I always say, “Look, here’s the playing field we’re playing on. If you believe taxes are going up in the future, it’s a good time to start to really consider this, really get your arms around it, and really look at getting proactive,” like Mark said.

Mark Kenney: Yeah. And what we do is we will utilize a process called a Roth conversion. And really, what we’re doing behind the scenes is, remember the IRS only looks at your income in one-year snapshots. What you made in 2021 and what you will make in 2023 has no bearing on the taxes that you’ll pay year to year. So, we want to look at opportunities where your income might be lower in one year and start to buy the IRS out.

And to quantify that, right now, if we can buy the IRS out at 12 cents on the dollar, that’s 12 cents, that’s your 12% marginal tax bracket. Remember, that’s going to 15% on January 1, 2026, right? That’s almost 20% higher if you don’t do it now, if you wait. And of course, that can go even higher down the road because as there are unknowns. I know it doesn’t feel like it, but Keith, we’re in a low-tax environment.

If you look at where marginal tax rates have been in the 1940s, and I highlight the 1940s because you have to remember 1945, the top marginal tax rate, I think, was 94%. And what was happening in the world then was we were coming out of a war, right? And wars cost money. And I would argue that we all just went through a global war for two years that cost a lot of money. The enemy was invisible, but it costs a lot of money. And there are no IOUs.

The IOU is going to be them raising tax revenue down the road in a situation where you’re going to need all your income. You don’t want to be paying more taxes when you’re in your distribution stage because that’s less income or less discretionary income to you. So, we want to buy out the IRS as cheaply as possible if we can do so in an efficient manner.

Keith Ellis, Jr.: And you said it best. I mean, you talk about an underserved area of retirement planning. And like I said earlier, market risk is market risk, right? And I don’t want to sound generic because no one likes that. No one likes to see the market go down. Everyone loves it when it goes up. No one likes to see the market go down. But with that comes opportunity. You can convert at a lower rate. I mean, you can convert at a discounted market and buy tax-free dollars. So then as the recovery happens, you’re recovering tax-free as opposed to tax-deferred.

So, it’s almost like you’re trying to look for different opportunities as an advisor to take a situation and make it the best that it could possibly be. But 100%, it is the most underserved area. And to me, it’s one of the most important because there’s market risk, but then there’s tax risk. And tax risk is huge because it’s guaranteed.

Mark Kenney: That’s right. And that’s why CPAs are great, but you remember CPAs look back one year.

Keith Ellis, Jr.: Rearview mirror.

Mark Kenney: Rearview mirror, right? They’re looking at one-year increments. We are looking ahead over the next 20 or 30 years. And we want to be proactive. We don’t want to look back in 20 years and say we should have done this. We want to do it now. Knowing that we’re basically in a low-tax environment is only going to go up from here.

Keith Ellis, Jr.: So, we touched on income, investments, taxes. Now, we’re going to pivot to healthcare, which is we talked a little bit about Medicare and how that’s changed over the last five years. But what are some of the things and questions you’re getting around healthcare, Mark?

Mark Kenney: Keith, this is scary, but statistics says 72% of people, that’s three out of four people almost, will need some sort of long-term care assistance. Now, that’s not saying they’re all going to a nursing home, but maybe they have a nurse come into the home. That’s a statistic. And what a lot of people think is that Medicare will cover that. Unfortunately, Medicare doesn’t cover it.

So, we want to come up with a plan that could potentially cover the cost of long-term care planning. I can tell you in doing research that the average duration in a nursing home is two and a half years. And yet the average cost of a nursing home is around $8,000. You quantify that, that’s $240,000 in possible spending that you could be drawing down on your portfolio.

We want to have an open conversation and say, “What do we plan on doing?” Now, this isn’t something everyone looks forward to doing, right? No one says, “I can’t wait to go into a nursing home. I can’t wait to talk about it.” But if we’re not having a discussion on how we’re going to possibly cover these costs, then we’re not doing our job because we’re leaving you a $240,000 bill on the table that could potentially eat into your portfolio or eat into your legacy. And we want to have that conversation.

Keith Ellis, Jr.: Yeah, I mean, think about it, husband and wife out with two friends. So, there are four of you at a table. Three of you raise your hands, which three are going to go to the nursing home? Obviously, none of you want to raise your hands because none of you want to go. But that’s the reality of the situation, and that’s what the statistics say is, it’s a roll of the dice. And I would say that roll is not in your favor.

So, just like tax planning, you want to be a little bit more proactive when it comes to looking at solutions around healthcare, around long-term care, around asset protection. And there are some ways to mitigate risks. It’s just you have to be proactive. You have to raise your hand. You have to get in front of it.

Mark Kenney: Yeah. I mean, so there’s no one solution here. So, what we will do is we’ll sit down with you, we’ll understand your income, we’ll understand how important legacy is to you, we’ll understand your health needs. And why we do that, can you get underwritten for insurance? A lot of times, we will not pivot to long-term care insurance. It’s expensive. The premiums go up. In fact, that’s probably the least utilized solution that we utilize.

But it’s about having that conversation, about coming up with a plan. Maybe we earmark your Roth IRA, right? I have had clients where a legacy is really important to them. They want to leave money to their kids. And I’ll say, “Listen, you have X amount of dollars in your Roth IRA. Remember, you’re not required to take any of that money out. Let’s have that grow over 20 or 30 years, tax-free. And if, by fact, you need that money for long-term care, we can withdraw it, tax-free. And if you don’t, if you’re lucky enough to not need long-term care, that is going to pass on to your kids tax-free.” The truth of the matter is people are living a lot longer lives, but that also means that more people are going to nursing homes later on in their life and that your advisor should be having this conversation to come up with a solution that mitigates that risk.

Keith Ellis, Jr.: I really think when it comes to healthcare, comes to this type of planning, it’s simple. It’s about understanding options and knowing your options. So, we touched on income, investments, taxes, healthcare. The final piece that we really want to address here is what we call legacy planning or simple way to put it is estate planning and some of the things we’re seeing there.

Mark Kenney: Yeah, huge. Legacy means different things to different people. I have had some crazy answers here.

Keith Ellis, Jr.: No question.

Mark Kenney: People will tell me what I plan on bouncing that last check before I move on to the next life. Or some people say, “Listen, I really want to save X amount of dollars for my child or for my heirs.” And that’s important to them, right? We just want to understand what your goals and objectives are, and we want to make that legacy the most efficient possible product in the most efficient way.

And the first thing we want to do is look at your life insurance, right? There have been times where I see a lot of people are way underinsured, and sometimes, I have told people they’re way overinsured. And here’s what usually happens. You buy a policy upon the birth of your first child and you’re in your 20s or 30s and you just keep throwing money at that. And no one has looked at it, right? No one has looked at what liabilities do I have. What is the loss of possible income? Should I have even been paying this policy? The premiums will keep going up, and you’ll just keep paying it without consulting an advisor and saying, “Do I even need this anymore?” Okay. So, that’s the first step in developing a legacy or estate plan.

The second is you have to understand we’re in the state of Massachusetts. We have the lowest threshold for potential estate taxes in the United States. You have a half-decent house, a 401(k), a life insurance, and your heirs could be paying tens, if not hundreds of thousands of dollars to the Massachusetts Department of Revenue. We want to mitigate that. And there are ways to do it, whether it be gifting, whether it be creating a trust. We want to go over those options so that your heirs aren’t paying tens, if not hundreds of thousand of dollars to the Massachusetts Department of Revenue because the estate tax is so low.

Also, I want to look at avoiding probate. How many people have been through the probate system? And it’s a long, tedious process. And who gets the money? The lawyers, right? The lawyers are charging hourly. Now, with the court system backed up after COVID, we’re looking at the average duration to get through probate is like a year to two, and the fees are just being eroded out of the portfolio. We want to look at probate avoidance. None of our clients says that we want our assets to pass through probate, right? And that’s a total mistake is that thinking it will…

Keith Ellis, Jr.: It’s clunky.

Mark Kenney: Clunky and inefficient, right?

Keith Ellis, Jr.: That’s the word.

Mark Kenney: And so, we want to avoid probate. And let me tell you, folks, having a will is not the solution. A will guarantees probate, and all a will does is tell the judge how you want the assets to be passed out. Well, probate is a public system and what most of our clients want to do is create a trust. And again, that has tax efficiency. It will get the assets to your heirs more efficiently.

Keith Ellis, Jr.: It’s private.

Mark Kenney: It’s private. It will allow you to control how the money is spent, right? Do we want our children to get a million dollars? Are they financially literate enough? Most people want to keep the money in the bloodline and make sure those assets are used efficiently in upon their passing. And that’s what a trust can do. And again, to quantify this, I mean, we’re talking tens, if not hundreds of thousands of dollars, especially being in the state of Massachusetts.

Keith Ellis, Jr.: I think it’s just important for folks to understand all these different things. You’ve really touched on some very, very important points in the estate planning realm itself. So, it kind of ties up the show here. We talked about the Retirement Road Map process, income, investments, taxes, healthcare, estate planning. And as you can see, I mean, those little titles are just the tip of the iceberg. There’s a lot that we drill down on and a lot that goes into each one of those areas. So, Mark, any kind of parting words or any other thoughts before we sign off here?

Mark Kenney: Yeah, I’ll say this, I mean, there are reasons if you happen to go to court, why you hire a lawyer. There are reasons why when you sell a home or you inherit money, you hire an accountant because, again, the cost of being wrong in that situation can be so detrimental to your situation. You want to pass that. You want to pass that on to experts, to the advisor. And why would the financial advisory industry be so different? We’re not going to be for everybody. But what we try to do is provide value and we try to quantify that value in dollar terms so that you can make an informed decision and see if hiring a financial advisor is right for your situation.

Keith Ellis, Jr.: Well, Mark, thanks so much for joining us. It’s been a great show. Really appreciate it and look forward to a successful 2023 beyond.

Mark Kenney: Let’s go.