288: How to Seek Out Unbiased Financial Advice with Jeff Levine

Casey Weade: Jeff, welcome to the podcast.

Jeff Levine: Hey, man, it is good to be here with you.

Casey Weade: Well, it’s weird. I feel like I know you already. I have seen your face show up over and over again between my inbox and my articles that I read. And I just love following you and the advice and insights that you offer the world. I think you’re really creating a lot of value in the world today, especially for the families that we work with as we communicate a lot of your research back to them. So, thanks for joining us. Really excited to have this conversation.

And I want to kick it off with something I recently read in an interview you did with ThinkAdvisor about a Japanese business philosophy you like to follow, Kaizen. Can you tell us a little bit about what Kaizen means to you? And for those that aren’t familiar with Kaizen, what is Kaizen? What’s that mean to you? And how do we apply this to our life and our well-being?

Jeff Levine: Yeah. So, essentially, Kaizen is this Japanese business philosophy of continuous improvement, the idea that you’re never done, there’s never a finish line, there’s never an end to the journey. And I really love that because every day, I wake up trying to learn something new and trying to do something different to improve others’ lives, improve the lives of those around me who I love, who I care about to make a difference for our community and the financial planning world and those who they serve. And I think, if you set yourself as a finish line, well, once you get there, what do you do? Like, I’m here. If you get to the top of the mountain, the only place to go is back down.

I just love that idea, it goes very similar to the idea of like 1% better each day, right? If you’re 1% better each day, then in the not too distant future, you are dramatically better than everyone else because of the power of compounding. So, that’s really the idea behind Kaizen is just this continuous improvement. There’s always something that we could do better. And obviously, you’ve got to spend your time figuring out where those efforts should be, where that time and effort and sometimes money and resources should be spent, but just this idea that there’s always something that we can do better. You’re never fully at your best. I love that waking up every day and knowing that there’s something today, I can do better than what I did yesterday.

Casey Weade: Yeah, and that’s where a lot of families that they’ve done very well financially, they struggle with that. They’ve done very well financially, they’ve accomplished a lot. Their goals have always been about retirement, accumulating enough so that they can actually step into retirement. Okay, I’ve got all my financial goals, I’ve checked every box, I have everything I need, and then it’s now what? Now, what do I do? Embracing this idea of Kaizen really has a parallel in the retirement transition when you say.

Jeff Levine: 100%, absolutely. And the research out there all goes to show that as you get older, you actually become happier to a large degree. And if you can harness that power of the general numbers and even further focus, another interesting study, we’ve always looked at– I was reading a book recently. I was talking about how most people, as they get older, their social circles begin to get smaller and smaller and smaller and smaller. And what the book goes on to describe is a research study saying like this has long been viewed as people who, as they get older, they just don’t have the bandwidth or the tolerance to deal with other people anymore or they don’t have the energy. It’s ascribed to some downside of getting older, the tightening of the social circle.

And the reality is the research has started to show that it’s not really that, it’s just the natural progression of what you would think in any sort of good decision making. So, for instance, an analogy is often used if you go to a new city, you don’t know any restaurants, right? Well, you have a choice. The first night, you got to go to a new restaurant. The second night, if you liked it the first night, you could go back to the same restaurant or you could look at any of the other thousands of restaurants, potentially in that city. And there’s kind of this trade-off of like explore or use. Do I use the knowledge I have? Or do I go out and acquire more knowledge? And the same is ascribed now to people in your life in terms of, as I get older, I tighten that circle because I don’t have as much time to benefit from my exploration.

And so, they asked young people like if you were going to be moving across the country, what would you do? What would you do if you had one night left? And they said, “Well, we spend it with our family.” But meanwhile, if you take away that restrictor of one night left, it’s like, well, we’d go spend it with some rich celebrity or something like that. Whereas older people naturally said, “Oh, family, we want to spend tomorrow with our family.” But when you told them there had a magic pill that they could live forever, all of a sudden that night where they would spend it with their family, they would do something else.

And so, all of this kind of goes back to the idea that in retirement, it’s not this end of the road. It is truly a new beginning. It’s an empowering time for a lot of people. And the more you can set yourself up financially, the more you have the freedom to explore all these other amazing things that retirement can bring with it. And retirement today isn’t even “retirement” for a lot of people, it’s just a 30 years ago where retirement was a moment in time, a ceremony. Here’s your gold watch, good buy. Go enjoy, whatever comes after this. For a lot of folks today, retirement is a transition, it’s a 20-year period maybe where they go from working, working, working, working to working, working, kind of playing, working, playing, playing, and then playing, playing, playing. It’s a much gradual process than it was just a couple of decades ago.

Casey Weade: It can be a very scary process and intimidating process and overwhelming process. And there is this kind of who just hustle to get as much information in the shortest period as they possibly can. So, now, I’m on Google, and now I’m reading. Sign up for Weekend Reading. I’m reading Casey’s articles you’re sending out or I’m paying attention to podcasts like this and just consuming as much as I can. And I want to talk about that because you are a prolific consumer of information in line with your goal around Kaizen. I mean, this is what you’re trying to accomplish. You always want to be growing and you’re a self-proclaimed super nerd when it comes to retirement and tax.

And I want to get to this question by first teeing up the question, but it really ties in well with a tweet that you had recently. And the question here is, and I wanted to ask this from beginning because I know how much, not just you know about how much you continually stay up to date on these things. And I want to ask, how do you stay up to date on everything? And furthermore, how could a do-it-yourselfer stay up to date on everything relevant to their unique situation and not get caught up in the clickbait or fall into bias traps? So, I want to come back to those questions, but I think we can get into that via this tweet, which was a response from you to Brian Portnoy’s tweet.

Brian had pointed out something around hypotheses. He said you have to have a clearly stated hypothesis. Without them, you’re haphazardly looking for patterns. With them, you can relatively quickly process to answer questions. And if you set your null H, you’re null hypothesis as a crisp form of the conventional wisdom, you’ll quickly know if you have something interesting. I’ve had Brian on the podcast before. Yeah, here’s another super nerd, and we have to dissect this because he’s not speaking everybody else’s language when he talks about knowledge, etc. And you responded with, you read or skim about 50 to 75 articles a day. I mean, I thought I read a lot. I thought I skimmed a lot of articles, but you’re absolutely blowing me away, 50 to 75 articles a day.

And you went on to say, and this is precisely the lens I use to decide where to spend my time. So, I want to just unpack that a little bit. Let’s talk about your null H. What is your knowledge? And how can someone else create that for themselves so that they can more efficiently and intelligently sift through the information as they’re trying to figure out what they should do in their financial life or their non-financial life, for that matter? But I think, in this respect, we’re probably focusing more on the financial side of things.

Jeff Levine: Well, I mean, I’d say at a high level, the null H, the null hypothesis would be everything is as I think I know it, right? Like it is my reality exists and my reality, personal reality, my perception is real. And so, there is that old expression, perception is reality. So, what challenges your reality? What’s something new to your thinking? What’s something that you haven’t heard about before? There are a thousand articles on why you should buy or sell Facebook, or whatever it may be. Like, there’s here’s just a lot of articles out there that repeat the same thing. Question is like, what’s different? What’s a new term? You just talked about null H, right? So, if I hadn’t heard null H before, I’d be like, what’s null H? Like let me go down that rabbit hole for a little bit.

And so, trying to find those new things that either you haven’t heard of before or a completely different take. And the analogy I would use here, and I’m recognizing we’re on Facebook Live and all that sort of stuff, I’ll caution saying, I try to be as objective as possible in my line of work. I cannot introduce large political bias, but also, to that extent, I try to watch. If I’m watching news, I try to watch some CNN, some Fox, some MSNBC because I think you always want to have your perceptions challenged. And even if you don’t agree with the way something is presented, there’s always something that you can glean out of that. There’s always some new information, some viewpoint that you hadn’t considered before that might allow you to frame your own decisions or own arguments better. They might allow you to see a point or downside to your own thesis that you had been concerned.

And in the financial planning world, this is incredibly important. With every action you take, there are so many different things that could come about. So, let’s give one example. A lot of people today, one of the most common questions that advisors and consumers have when they come into my office or when I hear from advisors about the clients that they’re working with is, should I be looking at Roth conversions today, right? Effectively, this play on tax rates. Do I pay the tax now? Or do I pay it later when I take it out of retirement? It’s a super high-level question, but it’s one that can go very deep. Like, well, we ascribe it to purely tax decision. Is it better to pay the tax now? Or is it better to pay the tax later?

The idea here of challenging your worldview, well, imagine someone came up to you and said, hey, even if you’re in a super low tax bracket now, you should not make any Roth conversion because there are other downsides. You might be like, well, what could that possibly be? I mean, if I have got no tax bill, how could it be a downside? In some places, just as one example, a traditional IRA may have much better protection from Medicaid than a Roth IRA. Now, we don’t get into that. We don’t even get into all the reasons why right now. The point simply being is that imagine I have no income, I have a ton of medical expenses because I’m spending it all on care. And so, my tax bill is zero.

The natural inclination might be, well, let’s convert my IRA to a Roth IRA because I could do it for free. I’ve got all these medical expenses to offset. And yet, if you do that and you make a tax-efficient move, you might find that you lose your entire account to Medicaid where you wouldn’t have before. And so, it’s one of those things where you say, you never know the full picture. Sometimes diving into other areas or taking another opposing viewpoint and really listening, really reading with interest and intent can help you. And then, there are a lot of things that are just regurgitation of stuff you already know. And that’s easy to skip over.

A lot of times, as humans, we get into this situation where we love to read things or hear things or consume things that just reinforce the stuff we know. From a political lens, from an educational lens, we’re like, oh yeah, I’m smart. I knew that. That’s great. And if you do that, all you’re doing is kind of congratulating yourself and patting yourself on the back, but you’re not really growing much. And so, that null H hypothesis is what differs from what I already know to be the case today.

Casey Weade: We’re really focusing here on avoiding confirmation bias as what we’re talking about, right? This is how we avoid confirmation bias. We all have our biases. I know I do. I know you do. We all do but having this...

Jeff Levine: In fact, you’re confirming that we all have our biases right now.

Casey Weade: Right. It’s like we’re all biased. It’s almost like sometimes I think about this so much because growing up, dad was in this business for a long time, and it was always variable annuities are bad, variable annuities are bad, variable annuities are bad. And dad would always say, “Yeah, but it’s the bestselling annuity product, one of the bestselling products in the world. Maybe there’s a reason for them to fit.” And he’d always say, “You always have to keep an open mind, always keep an open mind and revisit these things and make sure that you’re not biased in some way.”

And so, if someone says, well, my null hypothesis could this– you tell me if I’m right. So, this person says my null hypothesis is annuities are bad. Well, what does that person do? And how do they get started in really finding out? If they’re right, how do they test this? Are they hopping online and looking for articles that say annuities are good? What’s this look like in practice for someone in this specific situation?

Jeff Levine: Yeah, I think one of the most challenging things today is that information is everywhere. And the filtering process is one that is more important today than ever before. And you talked about tweets, one of the tweets that I have or things I said in Twitter before that I think is 100% true is one of the greatest skills a young person can have today is becoming a great Googler. And I don’t necessarily literally mean that in the sense of to go to Google. But there is an art to looking at 5 to 10 to 50 different things and saying, you know what? This one gets more attention. Is it credible? Is it not? Who am I getting this information from?

And today, more than ever, that last part is perhaps more critical than ever. Who is providing me this information? Is there some agenda behind this? Or is this really unbiased advice? One of the best ways I can always tell if this is truly an unbiased approach is even if an author or a speaker or anyone is describing a benefit or something they believe in, they will turn and say, you know what? But of course, nothing is 100%. Here are some reasons why it might not work or here are some downsides to that approach. And that is true, again, with financial planning. It’s true with just about everything else. There is rarely this silver bullet that just is perfect and has no downside. It’s almost unheard of.

And so, the idea of listening to people who do also challenge their own, who take the time to say this is what I believe or here is a great approach, but here are some things that if you fall into these groups, as opposed to this simply straightforward idea of everything is great or everything is bad, or this is only good, or we live in a world of grace and just about everything we do. And so, having someone who’s willing to present that to challenge, again, their own beliefs, that can be valuable. And then trying to figure out who the people that you follow follow, right? It’s almost like a positive pyramid scheme, if you will.

So, you mentioned I work with Michael. Obviously, you have trust and faith in Michael. You’re like, hey, Jeff is kind of on Michael’s blog here a lot. Maybe I should go check out Jeff, and then, well, who is Jeff going to turn to? Or what is Jeff going to look at? Let me start looking at, and that sort of tracing back who your sources, sources, sources, sources are, it’s time-consuming, but it gets you there. And so, the easy button for consumers is like, I don’t have time, I don’t have time to do all this research and whatnot. You got to find the few voices who you can trust. It kind of goes back to the information, the study I was sharing earlier, right? You’ve got to narrow that circle. You’ve got to go through an initial exploration phase and then you’ve got to use that information. Who are the voices you trust? How have you built that trust? And then you rely on those individuals, not without question, not as absolute fact, but you use them as a filtering lens for you.

Casey Weade: Well, we see that and doing our research, but what if we’re meeting with a financial planner or we’re trying to find a financial advisor? We want to find someone that’s unbiased. We want to find someone that actually knows what they’re talking about.

Jeff Levine: Also, good.

Casey Weade: And maybe we can get into this when it comes to barriers of entry and kind of what you would like to see in an ideal world in this industry. In my personal opinion, I think the barriers of entry to this industry are disgustingly low, but I don’t know that the consumer really recognizes or understands that. How would you like to see this world change in the future from a perspective of what it actually means to be a financial advisor or what it takes to be a financial advisor? And maybe, that will kind of take us back to the point, and okay, well, then that’s what I should be looking for if I want to find a good advisor.

Jeff Levine: Yeah. Well, let’s start with right there, barriers to entry. And you also mentioned the term like, what does it mean to be a financial advisor? That’s a great question. What does it mean to be a financial advisor? The term financial advisor has no real meaning, no real definition. Now, certified financial planner or certified public accountant, those things have actual meaning. But just not anybody can call themselves a financial advisor these days. And I’m not suggesting that one business method or one type of line of being in financial advising world is better than any other, but it is a very low bar.

And what a lot of people should understand is that the way that many people have gotten into this industry is they’ve been forced to earn enough to stick around long enough to learn enough. It is the earn before you learn. And it is one of the only places I know that has a career path that works like that. Like in most other places, you are supposed to go learn, and then you can earn. It’s learn first, then earn. In our financial advising world, so many, not everybody, and we’re getting a little bit better at that as an industry, but so many people are kind of thrust into this role saying you’ve got to earn first. And if you earn enough, we’ll keep you around here long enough that you can actually learn what you’re doing, which is a disgusting way of going about doing business. I mean, let’s call a spade a spade. You’re sitting down across from someone who has their life savings at risk. And you don’t have any real competency, any real knowledge, but you have to bring that person on as a client, you have to convince them that you do. Otherwise, you’ll lose your job. And if you lose your job, you’ll never learn enough about the industry.

So, it is a really backwards way of going about in that. There are some firms today that have career paths for hiring young talent that didn’t exist before where they’ll come in and they’ll be an associate advisor and then they’ll become a wealth advisor and then they’ll become a senior wealth advisor, like a true career path where someone can come in, and they’re not required to “sell.” And selling doesn’t mean just product. I think that is sometimes abused in our industry as like, well, those product people. It’s not just product people. You can also sell money management or sell “advice,” where you’re not really doing a great job, you’re just saying, hey, we’ll give you advice. I’m a great person who does financial advice. You have nothing behind it. It’s like the emperor has no clothes, but you’re great, you’re charismatic. You can get people to buy into it. Like you’re a salesperson at the end of the day.

So, what are you really doing for individuals? What have you taken to the CFP, in my opinion, is a future baseline for our industry, it is a minimum job requirement, or something equivalent to the CFP. I’m not saying that everybody in there has to have a CFP, but you need to have that scope of knowledge as a baseline, the CFP curriculum, if you will, as a baseline level of knowledge. And then, what are you doing beyond that? What are you doing to continuously advance your knowledge? And you mentioned something early on, you said like, “Well, Jeff is constantly looking at changes always happening.”

I mean, that’s one of the biggest things that as advisors we have to deal with. And truly, I don’t know as a consumer how I would go about keeping, like I always say, I don’t know how I’d do it if I didn’t have all this time to actually work on it myself because there are always different things, whether it’s macroeconomic changes, tax law changes, or state law changes. You could have changes in the investments that are available, changes and cost structures of different things. You have changes in state laws. I mean, we could go on and on and on and on, and each one of these kind of has like, it’s like throwing a pebble into a pond. There are all these ripple effects that spread out and spread out and spread out from the center. And it is really, really challenging to keep up on that.

So, having someone who not only has that baseline level of knowledge but who invests in themselves, right? One of the best questions that I would ask a financial planner who I was interviewing is what do you do on an ongoing basis to keep yourself up to date on the latest changes? I think that is one of the most powerful questions you can ask. And if the advisor looks back and goes, Well, ah...

Casey Weade: I do know everything.

Jeff Levine: Yeah, or like our company, I go to our annual meeting once a year, like it’s just not going to cut it today. Things change too fast, and it’s repetition, right? You’ve got to hear things more than once when they’re complicated to grasp them. It’s a challenging thing for advisors to do, but you need someone. When your life savings is on the line, you need someone who has that, or who at least has a resource to help in those regards. Like, that’s the other critical thing. You can’t know everything yourself. What are the resources that that advisor has at their disposal? When they had a question, who did they turn to to ask that question? That’s another really good kind of buying question for a consumer is when you don’t know something, when you have a question, who do you turn to to get that answer? And see what they say.

Casey Weade: Yeah. So, we’re really talking about education and experience here, but I don’t think that’s usually the way financial advisor firms, at least today, are marketed. It seems like much of the marketing today is around fiduciary responsibility or compensation structure. What are your thoughts on this obsession over compensation structure and fiduciary in best interest?

Jeff Levine: Well, I say at the highest level, if you’re not acting in someone’s best interest, you should just get out of the business and you should always expect someone should be acting in your best interests. Unless you’re going in and specifically saying give me X, which chances are, you’re not doing. No one walks into a financial advisor’s office and says, I would like you to buy me this, this, this, this, this, and this, because if that was the case, they just go and do it themselves today.

Casey Weade: That’s a big change in the last 30 years, 30 or 40 years, it’s evolved.

Jeff Levine: You just do it yourself. Of course, it’s easier than ever to do those types of things. So, fiduciary thing, I think, is brutally important that you are always acting in your client’s best interest, but beyond that, I think the idea of compensation model unless aggrieved by that. Ultimately, I want people to do what’s in the best interest of those they work with and how they are compensated. I do think it is worth understanding how your financial professional is compensated. I do think that certain types of compensation have more or less potential for conflict, but I don’t think it’s an absolute.

So, do I honestly think commissions can be more problematic by their nature than advisory fees? I do. They lead themselves to be potentially more problematic. That doesn’t mean anybody or everybody who uses commissions in their line of work is bad. Some people are doing it because, like, hey, I run a practice and all my clients need term life insurance, and I don’t want them to have to go to someone else who’s going to oversell them. I’ve done the financial plan. I know that this client needs $2.2 million of term insurance and not a dime more, and I can get it to them as cheap, like that’s different than where you see some people just using product as a way to generate large, quick commission hits.

And so, I’m not anti any one way. I don’t think fee only is the only way to go. I am part of a fee-only advisory firm, but I don’t necessarily ascribe that as the only or best way. I don’t think commissions are the devil in disguise as they are sometimes made out to be, but I do think they naturally lend themselves to be more subject to abuse. Doesn’t mean they are always abused, but more subject to abuse.

And finally, in terms of this infighting amongst advisors, I’ve honestly had it with that because every day, I go on and I look at all these different publications and whatnot and I don’t read these articles so much anymore because they’re just depressing, and there’s nothing I can learn. Like the other day, advisor sentenced to 20 years for swindling their father out of $3.3 million. Like every day, there’s something like that. And here we are fighting about while you charge a fee-only fee based on your AUM while you’re hourly. Hourly is better. Well, what if I take my time to do your work? Or you’re a retainer basis, well, how is that going to work over the long term when the work is more complicated? Yeah, like there are, in my opinion, holes in every compensation model. There is no one right way, but there are clearly wrong ways to go about serving clients.

And I think as an industry, we would do much better to focus on rooting out those who are truly doing wrong. Self-report more, whatever it may be, like if we find people who are truly abusing other individuals and taking their livelihood at risk and their savings at risk, that is where I think more– not to say that all these other things don’t matter, they do and they’re a great conversation. You should know how your advisors compensated. You should be aware of the potential conflicts that model creates. But if it works for you and it works for the advisor, and you understand it, so be it. It’s these other situations where everyone thinks that their model is the only way, and we ignore kind of all these much more egregious things that are happening in the world around us on a very regular basis where I start to get a little upset.

Casey Weade: That’s good. I have that same just daily frustration with just this obsession over these things. I truly appreciate that and I really want to make sure we get to some of our questions and a little bit more specifics around financial planning, but I have to ask this because I found this tweet so refreshing. You had a tweet in response to a CFP tweet saying someone said there was a CFP that said the only thing you should bring to your first financial planning meeting yourself. You responded, I understand the point of view, but always believed in the opposite approach. If you want me to set aside my time, let’s make it valuable for both of us. Bring your tax return estate docs, account statements, etc. This way, if you have a question, there’s a decent chance that I can answer it. This is something that happens to us, I guess, so maybe selfishly, I want to understand this. How do you handle someone that shows up with nothing?

Jeff Levine: I will say it’s generally on a case-by-case basis, and if someone’s truly interested in learning about you and what it is, like I am here, I just wanted to see you. You have a real office. You’re a real person. I understand there’s a lot of fear today, so I get that. I also think it depends how people arrive at your door. So, if your business is largely built on referrals from existing clients, for instance, there’s a much greater likelihood that someone is going to feel comfortable doing that than if someone sees an ad for you on LinkedIn or something like that because they’re responding to this, they’re reaching out, they’re interested, but there may not be that inherent level of trust or confidence because they don’t know someone else who’s been through that experience.

So, I try to look at it through the lens of, at first giving people the benefit of the doubt, like, you’re here, you’re generally interested. Now, it will be a much shorter meeting, and I will not answer what I call any of the S questions, should I or should I not. And also, there are a lot of times when people will come in with those questions or they will come in and they will ask questions, and I’ll be like, well, I need to see X, Y, and Z first in order to answer that. And that’s kind of it. Like, it’s a very quick meeting because they’re looking for the answer to something that can’t be provided without deep background. In fact, I would question any individual who was able to answer some of those.

Let’s go back to the question we posed earlier as a hypothetical, like, should I convert or not? There’s so much behind that. Not just what is my tax bill this year or whatnot, but what your tax rate is going to look like down the road. You plan to get married, someone sick where they might pass away, and maybe you go back to being a single filer as opposed to a joint filer, which changes your tax bracket status. And is there a Medicaid issue? There are a million things to unpack, and if you’re really doing your job, you generally have to see pretty much the full picture.

So, I understand, like I mentioned in that tweet, I understand the point of view of just come in, let’s get to know each other, etc., but what I typically found, at least in my career, was when people came in, it wasn’t just because they wanted to get to know me, it was because they had some specific questions, something, nobody wakes up in the morning and goes, you know what? Today is a good day to call a financial planner. Like, it’s just not– I mean, I would love it if somebody woke up in the morning and said, you know what? I’ve never done that before, and before it becomes an issue or before I have a problem, I’d love to reach out, but it’s almost always some driving factor, something that happened that– and it doesn’t have to be something bad. It could be I’m having a baby or whatever it may be, but there’s some reason that spurs on someone to reach out. It’s not just setting it now to have it in place later when they need it. There’s a driving reason why they are reaching out, and chances are that reason is associated with a whole slew of questions that they have. And I always felt that if I could answer those questions at a first meeting or as many as I could, it would be a show of good faith.

And ultimately, if they had questions now, they would have questions later. I know so many of my colleagues, like why you’re giving away the store or your– what was the old analogy? Like why would they buy the cow when they have the milk for free? Or the other way, why would they buy the milk when they have the cow for free, right? And I always look at that and say, but that’s ridiculous. These people are coming in, and they want information. If you can provide the information, they know you can do that. When they have more questions, they’re going to want you at their disposal to help answer those questions and work through the same things.

And again, there are always harder or difficult questions that can’t be answered. Usually, they are the S questions, the should I or should I not. Those may require hours of work behind the scenes. Oftentimes, the use of software to evaluate various opportunities or possibilities, but many times, these were like fact-based questions when people came in, like can I do this? Or what are the benefits of X? And those are answers that I could provide without doing a comprehensive financial plan. And that’s how I built rapport as opposed to like, well, my name is Jeff, I like long walks on the beach and all that sort of stuff, like just let me show you what I do, like, give me your questions and let’s start helping you figure out what you really need to answer in order to feel better about yourself, your family, your financial progress, etc.

Casey Weade: Well, it seems like we’re in a generational transitory period. We have a generation that is still feeling that, well, what financial advisors do is I give them money and they put me in these investments, right? So, they’re asking that question, what have your returns been in the past? Or I don’t want to show you anything, but what would you do with the million dollars? It’s like, we can’t answer that question. And I think it’s just something that seems to be evolving. I think we have more and more families that are showing up, going, okay, I’m here for financial plan, I’m not here for X, Y, and Z investment. And every single one of your clients is in something different. So, I can’t just ask, what have your historical returns been?

So, I think we’re in a transition period, and I really like where this industry is headed because it’s ultimately providing more value to the client. That’s what we’re trying to provide, not a product, not an avenue to get invested in the market, but truly comprehensive planning. So, let’s leave that there and let’s move on to some of these more tactical questions you might say. You talked about a 60/40 portfolio in a recent tweet. You said if you’re a 60/40 investor, and your portfolio is currently 72/28, your equity allocation is 20% out of WACC. That’s a pretty wide tolerance band that might be okay, particularly for a high-income person trying to minimize gains, but likely should have been adjusted long ago. Do you think investors really know that there’s a 60/40 investor? Does the average investor know the difference between 60/40 and 72/28? I think they surely don’t view it as, well, I went from 60/40 to 72/28. Now, I’m taking on 20% more risk.

Jeff Levine: Yeah, probably not. Most people are probably not aware of that. And in candor, like if we’re looking at that, there are two ways that that can happen. There are two ways your portfolio can kind of become out of WACC. One is a portion loses money, and the other is a portion gains money. And the challenge there is that in order to keep your portfolio in balance when you have a winner, you have to sell some of that winner, which is challenging for a lot of reasons. One is, as mentioned in that tweet, there could be some tax ramifications. And obviously, the higher up in the tax brackets you are, the more challenging that is or the more painful that may be, that tax bite, but the other thing is you’re selling a winner and you’re necessarily buying more of a loser or an underperformer if you will. And so, the idea of, well, this has done really well for me, and I want to get rid of it to buy something that hasn’t done well. It really goes against the general intuition of us.

Casey Weade: Yeah, how do you get them over that hump? And I guess that really ties into how do you best help someone understand the level of risk that they’re taking?

Jeff Levine: I think history is certainly some help here. Now, standard in our industry, past performance is no guarantee of future returns. We have basically that sort of disclosure on. I’m probably just about everything we do, every firm when they talk about some sort of rate of return will have a giant disclaimer like that because it’s true, just because it happened in the past doesn’t mean it will happen in the future. Now that said, history often is instructive of what might happen, and also just understanding where you are in various cycles. So, even at a high price to earnings rate, where market prices are considered historically high, it’s very difficult to figure out what will still happen over a short period of time.

The idea, like the market can remain irrational longer than you can remain in the solvent is one of those common phrases that rings true here. It is very, very difficult to figure that out, but I look and I say, what has history shown us for this? And then kind of what is the worst case that we’ve seen? What does this look like in a 2008 scenario? Or what would this look like if– you can model things out today. And again, it’s not perfect. We’re not looking into a crystal ball. I don’t profess to have any special ability that anybody else does not have, but I do think modeling some things can be of help, and presenting those models in a probabilistic manner. And what I mean by that because some people probably thought, what the heck does he mean by probabilistic matter? Saying something like, we are 80% confident that this is where your losses should be with it. Again, there’s no absolutes.

And it’s kind of if I gave you a dice and I colored five of the six sides red and I left the other one white and I said, “Roll this.” And I said, “Tell me how it’s going to come up.” You’d say, “Well, it’s probably going to come up red.” But what if I just told you like, “No, you have to tell me,” like, that’s not right because there’s still a chance it could come up white.

Casey Weade: You’re going to lose $100,000 if you got it wrong.

Jeff Levine: Right. Now, I don’t really want to roll the dice anymore. And so, there’s a probabilistic element of this where people need to understand, investing involves risks, but so too does not investing. And the chances are that if you are a long-term investor or a long-term thinker and you’re looking at a long life expectancy or reasonably well, like most people will need to take on some of that market risk in order to achieve their goals. Some people are so lucky.

Let’s take the extreme example, the lottery winner who wants to spend $50,000 a year in retirement, who wins $100 million. Alright. They can stick it in cash. They can let inflation, even at today’s higher inflation rates, they can let that eat into their buying power. They don’t have to worry about– like they can just put it in cash if they want. Most people are not that person. They will need to take on some risks. And while the market does have many risks of its own, so too does not invest again. Oftentimes, the risks of not investing will most likely, that probabilistic outcome are more likely to lead to problems for an individual than a well-diversified, correctly balanced portfolio.

Casey Weade: Well, let’s say that I am someone that understands this. Alright, I understand my risk tolerance. I understand that I’m taking on too much risk today. I need to rebalance. I need to reallocate for going from 72/28, we’re going to 60/40. Now, I’m talking about moving some money into fixed income or bonds, for that matter, in the traditional sense here. I think we need to kind of shift and talk a little bit about bonds today because we had several questions from our Weekend Reading subscribers prior to this interview on bonds and what we should be doing about rising interest rates and inflation. Gary asked, “I’m curious what Jeff’s opinion is on the bond portfolio allocation, knowing that there will probably be multiple interest rate hikes over the next year or so, and what the potential impact is on bond performance, as well as to maintain a diversified portfolio.”

Jeff Levine: So, let’s start with, at the highest level, I think you’ve got to decide why you have bonds in your portfolio. What is your general thesis on bonds? Are you trying to generate returns with your bonds? Or do you view bonds or fixed income as a safety net? And those are kind of two different things because on one side, you might look and say, “Well, we want to make sure that we’ve got high yield bonds.” Well, high yield bonds are not all that safe when markets are not doing that well, maybe not perhaps as bad as stocks, but they’re not a historical big defensive play, let’s just put it that way.

And so, the idea here is if you are looking more defensively, you are willing to give up some return. There’s always that natural tradeoff. So, shortening, for instance, time horizons can help here because if you have a shorter time horizon or shorter duration, let’s say, on your bonds, you have the ability potentially to roll that capital when it’s due, when your bond comes due. If you hold that individual bond, you can have that return of capital and redeploy it at the higher interest rate. And so, that in and of itself is one thought as individual bonds as opposed to bond funds.

Now, certainly need to look at whether you have enough dollars to spread them around to have a sufficiently diversified bond portfolio. You don’t want all your bonds or money in one bond or one type of bond, but if you do have enough, having individual bonds can give you that ability, plus, if interest rates go up, the price of that bond may decline. You can actually take that capital loss. If it’s in a taxable account, use that, go out, and yes, you will have had a loss, but you can offset other gains with that. Now, take the money that is slightly less because you lost and go buy something that pays a higher interest rate and effectively put yourself back in a relatively equal position as you were before when you look at total return but still capture that loss for capital losses today, which can be kind of powerful. And essentially, amounts to buying a little bit of tax deferral could also look at certain inflation-protected bonds, so whether that be TIPS, or maybe the best play out there today is the iBond.

Unfortunately, it’s fairly limited in the amount you can buy. It’s $10,000 effectively per person per year. And if you use your tax refund to buy some, you can buy an extra $5,000 or so. And that’s probably the best gig going right now in terms of inflation protection, but again, it’s super limited and it’s cumbersome. It’s another account. It’s kind of a pain in the neck. And a lot of people who have substantial balances say it’s not enough to move my needle. And so, I’m just not going to deal with it, and I understand that as well.

So, those are kind of a number of different ways that you could look at in mitigating the risk of rising rates. Again, that’s individual bonds potentially looking at shortening your duration. You could obviously just go to cash or things like that. That’s another one. And then looking at inflation-protected types of investments, such as TIPS which look, even if inflation goes through the roof, TIPS still may not be 100% principal, but they’d be pretty good compared to other things. And then, again, things like iBonds, those all can help in mitigating these concerns.

Casey Weade: Well, I think you addressed probably the other two questions we had on this very topic with that answer, around iBonds and TIPS and high yield. I think the one thing that we didn’t mention, and this was from a question from Jim, he also threw in there, “What about other alternatives?” He said REITs, equity income annuities. And I guess, my takeaway here is that bonds aren’t dead. Bonds aren’t dead. We can still use bonds. We just need to be smart about it and maybe look into some of these other alternatives.

Jeff Levine: Yeah. Having alternatives is a way that if you’re willing to take away the safety of the bond for the short term can add a little bit of risk-adjusted return to a portfolio. Obviously, you’ve got to do some more research on what those alternatives are. Unfortunately, the alternative space has been rife with very high costs, sometimes, or occasionally, very low-value products. So, you’ve got to do your research. There’s a lot. And alternative has a really great name going for it, like, hey, we want to do something, like everybody wants something different and unique. And the idea that you’re going to find something that no one else has any idea about values, it’s all out there.

But yes, having some other sorts of alternative, could be lending. There are lots of different things that can fall into the alternative space. It can provide you over long term, you would think that by mixing in some of those, you could enhance your risk-adjusted return and all these fancy ratios that financial nerds love to look at, but in a short window of time, those things can react volatilely in some cases, and over a short period of time, they may also correlate highly with equities. The goal is over a long period of time. You don’t have that. But take 2008, for instance, as a good example here. The biggest challenge wasn’t– well, I shouldn’t say that. For many, the biggest challenge wasn’t the stock market going down as much as it did. For many, the challenge was we had a convergence of correlations. Like everything tracked the market all of a sudden, everything pretty much went down, whether it was stocks or bonds or energy or like all real estate, everything fell off the cliff at one point.

And so, it’s important to realize alternatives may help, but they’re not a panacea. Now, do I have some of my own personal portfolio? I do. And so, like, I’m a believer in incorporating those into many portfolios. And I’m generally of the idea of if it’s good for me, not that it’s automatically good for you because all your listeners are different, but I would do for someone in my similar position as I would try to do for myself. And so, I do think there’s some benefit to having those, but it’s important to understand the downsides, too. You’re taking away from that short-term protection that fixed income does offer.

Casey Weade: Good stuff, Jeff. Darn, I wish we had another hour here, but we...

Jeff Levine: Let’s go for it. What the heck?

Casey Weade: But if we have a few more questions, we have a couple of questions that I want to make sure we got to from our Weekend Reading subscribers because you mentioned Roth conversions several times, and we had quite a few questions around Roth conversion. And I think we had a question from Alan and Mike, and I think we just focus on Mike’s or really get the answer that Alan’s looking for as well. Mike asked, “Is there an optimal percentage of Roth versus traditional IRAs to have when heading into retirement?”

To give you a little context, we have a little fun case study here because Mike said, him and his wife, they’re 59 and 53, they’ve got 425 in Roth, they’ve got a million in traditional, so about a 30/70 split. And he doesn’t want to convert all of his IRA or 401(k). Is there an optimal ratio to focus on over the next few years, so they are in a position where they’re going to be taking Social Security at 62, maybe 67? They’re not going to retire for a few years is the bottom line, and he wants to know what should I target? Is there an optimal ratio of 50/50 or 70/30? How would you answer that? I mean, the optimal ratio is 100% Roth, but...

Jeff Levine: Well, I guess if you could pay zero dollars to get it there, the optimal thing would be to have 100% Roth, yeah. So, at a high-level short answer, no, there is no optimal ratio. And in fact, I think that that question is a very similar question that many people ask, but it’s the opposite of how we should be thinking. The ratio, the amount...

Casey Weade: It’s like (A) what would you do with a million dollars? It’s the same question, right?

Jeff Levine: Yes. It’s like the idea of I should have X amount in Roth or I should have X amount in a traditional IRA doesn’t really work for me. Here’s the thing. The idea of diversification, like people talk about investment diversification, and then they use the same kind of terminology to describe tax diversification as if they are equivalent. The reality is by diversifying your portfolio, there is an inherent benefit. You can move closer to the efficient frontier. You reduce the correlation. You drive, you increase risk-adjusted return, like there is a benefit by the creation of the diversification.

With tax accounts, with Roth, with traditional accounts, etc., the diversification is not the means to the ends, it is the ends. Like when you diversify, the diversification is the means to get the ends of higher risk-adjusted rate of return, less correlation throughout the portfolio, etc. With Roth conversions, we’re talking about that is the idea here is, let me take a step back. At the end of the day, the single goal for an individual doing tax planning should be this. I want to pay the lowest amount of tax over my lifetime, and that is the key. And sometimes, it’s even beyond that. Sometimes, it’s over my lifetime and my kid’s lifetime. If I’m leaving a legacy with life insurance or Roth IRAs or traditional IRAs, we might extend the tax planning over multi-generations.

But the key here is it’s not he or she who pays the lowest tax bill in any one year, it’s he or she who pays the lowest tax bill over the course of a lifetime many years. And so, my question to answer the question is, do you think you will be in a lower tax bracket later in life when you would otherwise be pulling these dollars out? Or do you think your tax rate will be higher now? You just mentioned they have pretty significant retirement accounts, each of them, in total, like a million and a half dollars, you’re still working. So, my assumption, and it could be flawed that’s why we have to know people, but my assumption is that they are probably high-income individuals. It may very well pay right now to do no conversions and to have no more money in Roth and to wait maybe until they retire.

Maybe if they retire at 63, from 63, you mentioned, maybe they’ll take Social Security at 67. From 63 to 67, maybe there’s no income really coming in those years. What great years it would be to throw on conversion income? What great years it would be to add conversion income then? Because in those years, my current tax rate is lower than my future tax rate. But then maybe once they hit 72 and they’ve got Social Security and required minimum distributions and all that, maybe you stop the conversions, maybe you slow them down. This is where a good planner combined with good software, combined with an eye out on future potential tax changes, can really help make those decisions. I could not possibly give that individual an answer without knowing so much more. The only answer I could say is there is no goal ratio. Your goal is to figure out, make the best guess of when you will be at the lowest tax rates, and pay tax at those times.

Casey Weade: Do you think taxes will be higher in the future? You said, “Well, we have to take a guess on what those tax rates are going to be in the future.” For saying guess, does it all boil down to what do you believe in the heart of hearts is going to happen with tax rates in the future? And if that’s what it comes down to, how do I really know what tax rates are going to be in the future? How do I assess that level of risk? We’ve had this question in the past. If they can just change the tax laws whenever they want to change them, how can I possibly make a decision today? How do you talk somebody through figuring out what they believe the future of taxes are? What do you believe? Black and white, what does Jeff believe is going to happen with taxes in the future? What’s in your heart of hearts? And how does somebody else figure that out for themselves?

Jeff Levine: Alright. So, I believe tax rates are likely to rise. I do believe that is the case. But let me give you two examples. I was talking with an advisor recently who was working with a client, and they had the same thing. The same question was like, how much do you think we should have in Roth? And this was someone who in retirement, rather while they were working, super high-income executive, they’re tracking well north of the amount it takes to be in the highest bracket of 37% right now. And so, yes, in the future, while they’re working, they’ll be at 39.6%. Remember, if I say taxes are going to go up, all I have to do is bank on nothing changing because if nothing changes in the next four years, we’re back in 2026, the higher rate. So, I’ve got a good advantage on my side.

Casey Weade: You got a backstop. What if they go higher?

Jeff Levine: Yeah. Well, I mean, I think they can. And candidly, I think they will. Historically, the top rates are still relatively low. But like, for instance, this individual is at the 37% rate. The advisor projected that, given portfolio growth and all that sort of stuff, in retirement, they were looking to be in the 24% tax bracket. So, here’s the thing, do I think rates will go higher? Yes. Do I think that individual is going to go from a 24% rate now, where it’s projected, given that amount of income that they would have in their time, which, by the way, two hundred and fifty plus thousand dollars, like still a ton of retirement income? Like 99.9% of people in this country would love to trade positions with that person. But $250,000 of taxable income is a far cry from $700,000, $800,000, $900,000 that they are making while they were earning.

And so, for that individual, it’s like no, convert zero dollars right now. Even if they increase the tax rate that you pay by 20%, 20% on 24% is what? Like 5%, that takes you up to 30% roughly, it’s still way cheaper to pay taxes in retirement. If the rate goes up by 20%, then it is to pay taxes now at 37%. By contrast, a lot of people may be in the 24% bracket now while they’re working, and maybe in retirement, they think they’ll be in the 22% bracket, there, that’s a different story because now, I get into the idea of what I call tax insurance. And look, if I showed up at your door, Casey, and I said, “Congratulations, you’ve just won a 1971 Pinto.” You’re not rushing out to buy insurance for that car. Like, you’ll let it sit in your driveway. You’d be like, oh, look what I won from this competition, it’s kind of– but you’re not going to do anything.

But if I showed up at your door and I said, “You’ve just won a Ferrari,” you’ll go out and spend the money for the insurance on that because it’s worth protecting the va– not just worth protecting, but the amount that you would pay for insurance would be worth the potential benefit you could receive, right? And so, I look at and I say, a 24%, even if I think if my estimate is you’ll be in the 22% bracket, maybe that’s where I’m willing to buy “tax insurance,” right? And that’s the way I look at it, like, hey, we’re paying a 2% tax premium today. Are you willing to do that to buy tax insurance to know that it’s zero going forward? To know that if they change the tax rates, you’re done, to know that if one of you happens to pass away prematurely in the second, the survivor is back at single rates where you can have much less income to get to the same higher tax bracket, you don’t have to worry about those issues with this. Like there, I look and I say, but the goal there still, it’s not about tax diversification, it’s about am I willing to pay this premium today to eliminate a future risk? The same thing we do with just about anything else. Look, I have life insurance, I hope I don’t die so that the life insurance pays off. I’m willing to pay something on the hope that some things– I hope if I convert today at 22%, it’s the low tax rates go down. But if they don’t, I’ve bought some tax insurance, and that is conceptually the way I would encourage people to look at this.

Casey Weade: Love the Ferrari and the Pinto. Great analogy, insurance, all that’s really fantastic. And you’re just so great at simplifying the complex for individuals. So, thank you for that. Now, in a wrap-up with this final more philosophical question since we’ve gotten so technical here as of late, what does retire with purpose mean to you?

Jeff Levine: Wow, that’s deep. I would say retire with purpose to me is something that– and I think that this is a phrase used often, but I think it rings true here is you’re not retiring from something, you’re retiring to something. And for me, when I reach that point, I hope it’s to enjoy more time with my family and my loved ones to continue to make an impact, maybe in a little bit of a different way but to devote more of my time toward volunteerism, etc., to enjoy that last phase of life with the people I love and knowing that I can leave a legacy, not financial, that’s nice, but the ultimate mark is the mark that we leave on others in this world. And so, I hope to be able to do that with those who are close to me and beyond as well.

Casey Weade: Well, you’ve already done that with thousands of people, including our fans, myself. Thank you for joining us here today and look forward to doing this again.

Jeff Levine: Yeah, thanks for having me, Casey. I appreciate it.

Casey Weade: See you, Jeff.