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Halftime 2021: An Interview with Steve Osterink Jr., CFA®,CFP®

Updated: Apr 3

HALFTIME 2021: A Discussion About the Economy and Markets

For those who don’t wish to watch the full length interview, you can find an unedited transcript below:


people, inflation, tax, investments, money, business, planning, taxes, Steve, happening, return, thinking, wealth management, advisors, ross, real, assets, talking, impact, equities


Michael Baker, Ross Marynell, Steve Osterink, Jr

Michael Baker  13:01

Thank you, everyone that is hopping on here. We have got a very special guest for this month’s webinar. His name is Steve o stirring Jr. Steve is the Chief Investment Officer of advisory alpha. And if you work with our firm, advisory alpha is a registered investment advisory firm that we work with. And we have been working with Steve, since Ross and I were like little minnows in this business. I was trying to think Steve the other day, like the first time I actually met you, it was like we were just trying to figure this thing out how we’re going to launch our firm. And then we meet Steve Osterink, Jr. and, man, it’s just been a ride. We’ve been working with you for years now. And obviously our practice has grown, but so has your firm. So welcome. Thank you for joining us.

Steve Osterink, Jr  16:09

Absolutely. Yeah, thanks for for having me. And you’re right, I think it’s probably been close to a decade, which is crazy to think about. But we’ve built an awesome relationship. And we’ve helped a lot of people and have both grown a lot in our ability. So, it’s been a lot of fun.

Michael Baker  16:25

Yeah, absolutely. And so, for everyone that’s on here or listening. The idea behind these webinars, we decided to start doing these this year, mostly because of what happened last year. And during COVID, everyone was told, hey, go home, lock yourself inside, you know, behind your doors don’t go out, don’t do anything.

And for a large portion of last year, business, relationships, meetings all went virtual. And a lot of people felt like a fish out of water. They weren’t familiar with the technology, a lot of business owners for the first time were trying to figure out how they could keep their business open operating in a virtual world. Investors, savers planners, people trying to figure out their financial lives, or going to the internet online for information because you couldn’t go to you couldn’t go to in person workshops, you couldn’t have in person meetings for the longest time.

And so, I said, you know what, we need to have something out there that people can use as a resource to cover various topics where they could either watch us and participate in real time. Or they can go online on their own time and watch it and cover it. So that was the spirit of what we’re doing. And so today, this is going to be pretty much an informal chat, this can go multiple different ways. We don’t have a preset agenda. But the ideas just kind of it’s about we’re right at what we would call halftime 2021. We’re getting ready to start July, which will be the beginning of the third quarter 2021. And so, a lot of stuff happening first half of the year, second half of the year, and there’s multiple different areas we can go. But Steve, you and I know one of the things that we’ve talked about. And I think that it’s on a lot of people’s minds right now. And the news media continues to push this topic out there is this idea of inflation. And so, one of the things I just love to hear from you is like count, what are you looking at? And you guys at the firm advisory alpha? What are you guys watching? And what are your preliminary thoughts and some ideas about inflation? From your team? Yeah,

Steve Osterink, Jr  18:34

we have, you know, we chatted on this, and this is there’s so much packed into that into that topic. I mean, its kind of there’s a lot of tentacles that kind of span out from that that word inflation. And now the media is, like you said, blown it up. And I think causing a lot of a lot of questions from any clients. You know, I think maybe just to start, I think like, why, why is it Top of Mind now? Why is it such a big deal in the media? I mean, there’s a couple of things that that hit me that I think it’s kind of noteworthy I mean, number one, what kind of maybe the catalyst of this was the CPI numbers that came out that showed inflation tick up about 5%. that’s a that’s a larger number than we’ve seen in a while. And but at the same time, I kind of thought to myself, like why, why is everybody getting all getting all, you know, excited and bothered over that? Because we’ve seen that in the past, even in the recent past? I mean, but or intermediately recent past not like, you know, 40 years ago type thing. But what I think what hit me was, I think why people are so interested is it’s kind of like why we got here, like what has happened over the last decade to lead us to this point. And then that combined with the fact that now we see an uptick in inflation. I think that’s what’s creating the buzz and if you’ve Think about what’s happened coming out of oh eight, we entered this period of time of just massive, massive monetary expansion and aggressive monetary policy. And it’s almost like you’re kind of playing with fire back then. I mean, I remember when tarp came out, and it was like, however many billion dollars that everybody’s like, oh, holy cow is that. And now it’s like, what we’ve got how many trillion dollar like stimulus plan? And it’s like, it’s, it’s crazy. Yeah. But you know, but you kind of get to the point, it’s like, there’s been this evolution of all this spending and all this monetary action. And then we see a 5% inflation number. So, it’s kind of like, it’s not just the 5% inflation number, it’s we’ve known we’ve been messing with fire here for the last 10 years. And now we see the impact of it start starting to kind of, you know, occur. So, I think that’s what’s causing the buzz. I think that’s really the reason why it’s top of mind. And I think it’s worth just understanding that perspective, because it’s not just the fact that it’s, we saw 5% inflation, that’s not the reason for it. The reason is, we know what we did to get here, you know, I’m

Michael Baker  21:12

saying, absolutely. And, you know, it’s funny that you mentioned tarp, because some of the people now that are going back, you know, because obviously, we’re practically a decade removed from that. So, everyone’s had ample opportunity to go back and really study what happened and the ebbs and flows during that time, which, you know, some of the some of the critics are saying that they didn’t go big enough during tarp. And so, they didn’t want, you know, from a fiscal perspective, to make that same mistake again. And I think that could be playing into why, you know, we’re throwing around now trillion dollars here, trillion dollars there. And the other thing, too, that I think was interesting, and I’ve had conversations with others about this is, there, there wasn’t a lot of direct stimulus to the consumer, during the financial crisis, I think there was maybe one small little something. But this time, we there were multiple rounds that went out to people. And, you know, one of the big criticisms of that was money was in a lot of cases given to people that didn’t need it. You know, but when you’re rushing through legislation, things always get missed. And I think they tried to hone that in a little bit on the later rounds. But, you know, you had Pete some people who continued to work within they got several $1,000. And, you know, one of the things too, is, you sit People at home, now, they’re now they’re looking at their home projects that they wanted to do, and now they’re dealing with, and so we saw, you know, a lot of spending, I think, as a result that in the financial crisis, you know, money was given to, you know, lots of people, but it didn’t always make its hands directly, you know, didn’t always make it to directly to the consumer, you know, their banks weren’t as, you know, lending as much out in this case, they said, we’re giving money directly to people, and I think that could have, you know, an impact as well.

Steve Osterink, Jr  23:13

Yeah. And I think it’s, it’s by nature that the problem, right, like back then it was there was a financial institution lockup, I mean, they needed liquidity for institutions to lend and have that money available in this situation with COVID. It was a kind of a consumer driven problem. I mean, consumption was halted. I mean, because of activity. And so, I think they tried to direct it more to consumer, some of that makes sense. But nevertheless, right, it’s like, money expanded in all cases. I mean, we there was aggressive monetary policy, for now, different reasons. But that has compounded over the last decade, and now all of a sudden, here we are. So, I didn’t answer your question. Where are we going? I don’t think inflation is going to go out of control. It’s not some Zimbabwe, right? Like, where we’re going to have like 2.8 million percent inflation over the next like, you know, couple of years. I don’t see crazy, crazy, crazy inflation. I but I do see higher inflation and what we’ve been accustomed to, and I was looking at some charts, I actually just did another presentation on inflation, particularly recently. And yeah, it’s just we’ve been in this environment where two to 3% inflation has just been normalized. And when you’re in that environment of two to 3%, inflation, it’s almost so arbitrary. So nominal, it just doesn’t even come on people’s radar. It’s like it’s just so boring, right? And now all of a sudden, it’s like, oh, man, like even if we hit 5% or 6% inflation, it’s that’s now meaningful. But it’s meaningful, not only because it’s larger than two or 3%. Inflation, it’s meaningful because returns are compressed, you know, when you look at interest rates for fixed income, and that impacts equities as well. We’re it We’re in a low rate environment. So now you can buy in a low, low return environment with even slightly elevated inflation, then all of a sudden, we have a larger problem on our hands. And I threw out this term, more recently, probably a term that people are maybe familiar with. But it hasn’t gotten a lot of attention, because of what I just said is the idea of real returns, real returns versus nominal returns, it’s just adjusting inflation out of your returns of what you’re receiving from an investment. Now, real returns versus nominal returns hasn’t been a big deal, because again, inflation low, historically, returns have been higher, okay, now we’re at a lower return environment, inflation is even ticked up a little, all of a sudden, the difference between real return and nominal return on any investment is a, it’s going to be a part become part of kind of normal vernacular, because we have to know what that investors need to know exactly what those differences are, because now it is a really meaningful difference. And so I think just some of this is just psychological, right? I mean, it’s just under I mean, these are not new, new terms, or new thoughts or new breakthrough, you know, thinking, but it’s just the landscape is shifting, and it’s, it’s going to hit financial advisors and investors in a way behaviorally and psychologically, that I think just people need to prepare for.

Michael Baker  26:24

Absolutely. And because you bring that up, that was a perfect segue into kind of the next thing that I wanted to talk about was, you know, how should people be thinking about positioning their assets, I mean, of course, we’ve got the grand idea of, you know, we fully believe in planning and having a financial plan. So of course, you know, some of this stuff is a little bit needs to be individualized. However, with the concept of real returns, there’s a lot of people that sometimes because of market uncertainty, or fearfulness or emotions, or whatever the reasoning, will, will tend to hoard cash and hold cash and these low yielding investments like money market accounts, savings accounts, even, you know, stable value funds inside of 401, K’s now, may not be able to give you a real rate of return, where you’re actually maintaining the purchasing power of those dollars. So what do you think folks should be thinking about, as far as you know, right, sizing a cash position, or maybe looking at their overall investment structure? And with a longer term mindset, you know, in place versus, you know, hey, I’m just more nervous about some short term market volatility. Yeah,

Steve Osterink, Jr  27:49

you know, I think it First of all, it starts with a change of thinking, a change of perspective, I mean, because of kind of what I had touched on, about inflation not being a real a real thing. Over the last kind of while, it almost conditioned investors to think that it’s not a thing, to the point where they don’t even give that thing, any consideration. They don’t give that thing any thought as to when they make investment decisions. They don’t, you know, give inflation just any, any time of day. And the challenge with it is, it’s like it Yeah, on paper, your investments might look okay, being in cash, but what you’re not seeing is the deteriorating value of what that cash can buy. And if that is changing at a pace that you’re not accustomed to it, it can have a significant impact, but you don’t even really, you know, see it, you know, which is kind of crazy. So, I think, first of all, you have to just retrain your mind a little bit, even me, I mean, it’s professionals, whatever, it’s just worth it. If you’re sitting on $50,000 or $2 million of cash, whatever that number, is it or like you Baker, you know, maybe $10 million, whatever.

Michael Baker  29:03

But yeah, it’s supposed to tell people the secrets of mine.

Steve Osterink, Jr  29:06

Well, so you know, but whatever that money, that is, you look at it on paper, and you’re like, that’s is what it is, yes, that is what it is right now, but in a year that can buy five or 8% less of what it could buy now earlier, you know, and so like that thinking, it’s, it’s hard. I mean, it’s hard to adjust that because I think so many people have become found a lot of comfort in what’s written on their account statement. And again, maybe that’s okay, at that point in time. But if you’re losing value, every minute, every you know, day, you got to prepare yourself for it. So yeah, I mean, the challenge is kind of where the, you know, the tough part kind of hits is, it’s not like there’s a bunch of great investments out there kicking out all sorts of yield and return right now, as I said, we’re in a low return environment. So, you got to Get a little bit more creative with it. But nevertheless, sitting on a ton of cash, you’re in a situation. I mean, think about this, I said the term real return, guaranteed negative real return, if you want to sit in cash, guaranteed, I can’t say guaranteed, right? But guaranteed negative real return, I can’t even say that. It’s like, you know, this is guaranteed negative real return. But that’s, that’s really the reality of what we’re facing, if inflation is, is ever present and rising, so I just don’t want to be in that situation personally. So then how do we source investments and there are some, I mean, there, there’s some even in the short, shorter duration, kind of cash reserve stuff, there’s some stuff that maybe you’ll still have a get this right, maybe you’ll still have a negative real return, but you’ll just have less of a negative return, then if you’re in cash, right, buddy, that’s better. Right? It’s still better. So, you know, I think those are things that, you know, making sure that stuff’s getting pulled out on the table, even as uncomfortable as it is, that is very critical from a planning perspective, because it’s just people aren’t aware right now, they’re not even thinking about it. And it’s a big deal.

Ross Marynell  31:05

I want to jump in here quick, because I think on that note, one of a lot of our clients can remember the 1970s, they were working in the 1970s, they were buying homes and cars, and they can remember getting a home loan at 1314 or 15%, which seems unbelievable in today’s rates. But they also had CD rates that were 13 1415 16%. And so, I think you’re right, the challenge now is that as we see inflation start to creep up into that maybe four to 6% range, if our savings rates aren’t matching that, and we’re still seeing savings rates at major banks below 1%. where, you know, if you see a half a percent return, you might get excited if that’s coming through a bank, that separation is creeping up even more so than when we’ve had really high inflationary periods.

Steve Osterink, Jr  31:56

Yeah, and, yeah, I think you’re touching on interest rates a bit like both on the on the earning side, like with investments, but also then on, you know, the lending side as well. And, you know, I think what, and this is where the Federal Reserve, I mean, as inflation takes up there, there, there’s going to be rate increases, there has to be like, because you can’t have this massive differential of like, you know, say it’s 667 8% inflation and like, 0% federal funds rate, like, that’s, that’s going to put people in a spot, that’s just, you know, it’s, it’s hard. But I think this is where we have to prepare for it like as rates do adjust. But even now, like, as we explore other types of investment vehicles, even if it’s short duration stuff for our cash, like, how do we absolutely maximize the yield that is available in the marketplace, it’s becoming more important as inflation increases, because we have to protect that gap between inflation and the interest rates? I’m just talking about reserve funds right now. But yeah, it’s like, make sure that gap isn’t too significant, because that gap is what’s going to lead to our loss of purchasing power, which could really hurt our financial plan.

Michael Baker  33:09

Yeah, no, I mean, and I think one of the, the main drivers of that is you touched on this, Steve, and it’s that it’s the, the uncertainty about market volatility, where, you know, I use a medical description, you know, market downturns, you know, that they can be painful, but they’re more acute, right, they tend to be self correcting over time, we don’t necessarily get a guarantee of how quickly the market will recover. Of course, last year was a huge anomaly, I believe, and, you know, as far as downtime and recovery, but like, inflation is, like more of a chronic thing, it’s like ever present, you know, and, and it’s like, if, if we were kind of hovering around this, you know, 2% you know, you know, core inflation number that the Fed says they want to have 2% and now the floor on that gets raised up, and now we’re hovering around four or 5% that’s a significant, that’s a significant impact. And, you know, using the rule of 72 I was messing around with just been trying to think of ways to explain this to people, like, you know, the rule 72 you take your interest rate or rate of return you divided into 72 gives you how many years it takes that investment to double Well, I use the interest rate of I believe 4% and so if you had a baby this year, the cost of college if it went up at 4%, doubles by the time they’re 18 you know what I mean? Just things like this is like stuff that just slowly creeps on you and it’s not ever present in your day to day life, but you know, over 234 years, you’re like wait a minute, why is it costing me X to do this, it didn’t used to do you know, to cost that So, great, great talking point and for everyone that that’s one of the things that we’re you know, we’re constantly watching what’s happening and trying to do Just and give people guidance on how to deal with these things. Because inflation is not a problem that we just we solve it and then it’s over with, it’s something that’s always going to be present, especially when we’re having an expansionary monetary policy where they’re continuing to get, you know, spin from the deficit spending, and expanding the money supply. Next thing I want to chat about was just generally, like with the market, you know, we’re in this mode now, where we’re kind of coming out of, you know, we’re coming out of COVID, they’re still spending, but now everyone’s starting to look a little bit more closely, like, Okay, back to the economy, again, you know, there may be some additional spending coming out of Washington, DC, but a lot of the legislators have become much more skeptical about just putting money out and wanting to see things happening, we’ve got the a lot of people calling for, you know, the few remaining states that are doing the enhanced unemployment to pull that back, and we’re going to kind of go into, like, starting to see if this market can stand on its own. And so what are your What are your thoughts right now, as far as not trying to get you to make a prediction about what’s going to happen? But you know, just what are some things we should be thinking about? And folks should be kind of monitoring, you know, in the months ahead, you know, I would give you a tight if I had to give you a time frame, I’d say next six to 18 months.

Steve Osterink, Jr  36:29

Yeah, I this, this market, this bear market situation that we hit with COVID was, I mean, it was it was a strange one, because it was such an isolated kind of situation that, you know, caused all this. And I think it impacted certain market sectors and certain businesses, I mean, to really bring it down to earth, much more so than other businesses. And then you had this monetary, mainly fiscal response, because monetary policy, which is the Federal Reserve, you know, messing with interest rates and stuff, interest rates, were already floored, although once COVID hit they did floor. Maybe they had raised a little they had

Michael Baker  37:16

raised them just enough, so they could actually cut them again, bring it again. Yeah,

Steve Osterink, Jr  37:20

so they did that. But then most of most of the stimulus that we’ve been talking about, it’s all fiscal, it’s all, you know, governmental kind of spending to try and prop up the economy. Right. But you know, and it was weird. I mean, because COVID it was just, it was so visible to the average person. And scary that, I think a lot of times people don’t they naturally when we see something, we feel like it’s real. When we don’t see something we can kind of like it’s easier to push it to the side. So, like the, I think back to Oh, eight, when there was such a, the financial institution crisis. Very few people physically saw that they felt it and it was scary. I mean, I’m not saying that. But I mean, you didn’t see like, you didn’t really see it. But there were scary problems, like I mean, for people close to it. It’s like, this crazy stuff that was like we were in a bad structural spot, and for financial institutions, but very few people saw now look at this situation. And it’s, it was just so visible, it was like, oh, my goodness, people aren’t at restaurants, people aren’t going out. People aren’t spending. And so I think a lot of people from an economic I’m not talking about from a health perspective, but from an economic perspective, it was kind of overblown, in a lot of regards, because it was so scary, because the average person everybody saw it. Now, again, it was scary. I’m not saying that. But it’s just from the from the response, the fiscal response was so aggressive. And I listen, I mean, I’m, I’m not the one making those decisions, and I don’t have all the facts, that’s fine. There’s smarter people that can make those decisions in terms of how to deploy fiscal stimulus. But just I just know that psychologically, I mean, when you see it, you get a lot of like, so much pressure to do things. And all that to say, like this response. It was so aggressive and so widespread, that here’s my point. Businesses, there’s a lot of businesses that have been making more money than they have ever made. Ever, period, the number of businesses that I talked to that have had the best possible years that they’ve ever experienced over the last 12 to 18 months. I have never heard that in my entire life. It’s crazy, you know, but then you’ve got restaurants and gyms and stuff that yes They have gotten crushed. And it’s sad. But if you look at our GDP, and even consumer consumption, personal consumption, restaurants and gyms are like, teeny, I mean, part of that it’s there. I’m not diminishing it. It’s, it’s, I feel for these people. It’s terrible. I hate it, every aspect of, but I just the profitability of some of these businesses is just out of control. I mean, and that’s why we’ve seen the market run, and there’s been so much money thrown at this thing. And when we saw it coming out of our way, there was so much money thrown at it back then, we thought it was so much money. In hindsight, it wasn’t compared to now. But you know, it, that wave of money that has happened, and that stimulus, combined with the fact that there were a lot of businesses that had a very temporary blip, that ended up being so crazy profitable. It leads me to believe that there’s a lot of support for the equity markets. I mean, coming out of this, I really, I really feel that way. I think certain businesses are going to struggle, and that’s terrible. But I think on the Brodeur’s on the on the broader market, I mean, there’s companies making money hand over fist. That’s why we’re seeing markets do well combined with the fact that interest rates are terribly low for fixed income, no competition for equities, no competition, oh, and then you throw in inflation. So your real return for fixed income is for most fixed income is negative, like we just said, The even more non competition for equity. So it’s just the challenge is equity markets are high, doesn’t mean that they can’t go higher. But I just think we’re going to be in a lower return environment for equities. I think we’re going to be in a very tough environment for bonds and because of all these factors, but I don’t have a very bearish stance at all on equities just for all those reasons.

Michael Baker  41:45

No, I mean you made you made some excellent points and that’s one of the things is it’s always tough because it when something can be humanized and like you said we can actually see it happening it becomes much more real versus something that seems to be happening out there in the ether and you know our news media sources are telling us about it but we don’t see it but yet when you know your favorite restaurants are closed down your gym is closed, you know you can’t go shopping in person and do these things it becomes much different and I think there was a there was a very real you know, fear factor for a lot of people but at the same time, I think about companies like peloton for example, like peloton. People knew about peloton but peloton, you know, I mean, they went through a period where you good luck getting a bike like they couldn’t make them. They were backordered you know, you they went from like a two week delivery to couple months delivery. And you know, they expanded things. And so, it’s going to be interesting to watch, you know how some of the things that may have arisen during COVID continue, you know, I mean, our gyms are these big gyms that they build out. I mean, we’ll gym culture, you know, become, you know, continued to be a thing where there’ll be more people like working out at home or doing other stuff. I mean, those are just, those are things that happens, but look at companies like doordash and grubhub, where, you know, I was thinking about this the other day, you know, one of the challenges a lot of restaurants are having right now is getting their staff back. But I’m think how many you know how many people like that were maybe doing a service at a restaurant, and they had to, you know, fight for shifts or whatever, decided to go be a driver for grubhub or doordash. And, you know, it’s like, as many deliveries is you can make in your time that you want to work, you know, you can do that. So, it’s you know, there’s obviously whenever you have a big economic event like that there’s going to be a shaking of the tree and some things will some things will fall and will kind of fall by the wayside. And then we’ll see other things, you know, sprout up so I, I think Ross would probably agree as well. I mean, we are more definitely more leaning towards equities, I think than we’ve been in a long time, just because historically, I mean, that’s one of your best hedges against inflation is investing in companies that are also fighting that fight, you know, they they’re trying to be profitable and do things whereas, you know, fixed income or savings rates that are things that are very, very interest rate sensitive in a low interest rate environment, and you’re going to have higher than normal inflation. That is a tough hill to climb. You know, so I would agree with agree with that. Now, let’s talk about everybody’s favorite thing. taxes, taxes, taxes, taxes. Nothing seems to have come across yet in the form of actual legislation, at least anything that I’ve seen, but we know some of the proposals are deaf and obviously as you know, you guys No, and hopefully people that are watching this know one of the things, we’ve created all this money and the federal government, a core tenant of modern monetary theory, we won’t go down that that rabbit trail today. But, you know, part of modern monetary theory, which seems to becoming more like an orthodoxy of our some of our politicians, like deficits don’t matter. Well, one of the ways that you extract or pull some of that money supply back is through taxes. And so you’ve heard, we’ve heard things about long term capital gains, long term capital gains, rates changing, stepped up basis at death, changing, raising the top, you know, income tax rates, multiple different proposals happening, there was an expansion of, I think, the FICA taxes, and, you know, raising the cap the ceiling, on that multiple things happening. How important you feel taxes are going to be for investors in the future as far as managing not just their income sources and how they’re taxed, but really paying attention to their effective tax rates and trying to optimize for, you know, paying what we owe, but not paying what we don’t, right.

Steve Osterink, Jr  46:14

Yeah, I, it’s, this is such a fun topic. For me, because I love I actually like to talk about it. I’m not a CPA, I don’t have like a tax preparation, or, you know, kind of audit or whatever background at all, but it’s the topic attacks, and it’s so integrated with wealth management, I mean, to the point, to the point of like this in the Certified Financial Planning designation, and many others, I mean, it is a key component of, you know, those types of designation programs for financial advisors. But then, on the flip side, very few financial advisors talk about it.

Michael Baker  47:00

Let me stop you, though, because you said you said something great, and now I don’t want to let the moment pass because you use the term wealth management. And I believe wholeheartedly. Our industry does a horrible job, because they make wealth management, like synonymous with like managing portfolios, and no, like, no Wealth Management touches so many different things. It’s your tax, you know, it’s your taxes, it’s your, your income, it’s your, your, your financial capital, your human capital, multiple different approaches to me think of like wealth management, right? And so I just wanted to, like back you up on that, because you’re right, you know, with not just portfolio management, like, that’s part of it, but that that’s not all of it.

Steve Osterink, Jr  47:44

Yeah. And that’s, and to some degree, that’s, you know, where, where I’m going, I mean, like the industry, and from the consumer perspective, investment management is what all financial planners do, and it’s all kind of one in the same and the discipline of financial planning, or comprehensive wealth management, whatever you want to call it is still not really, it’s, it’s not real clear to average consumers quite yet. I mean, it’s becoming its own thing. I mean, financial planning should be its own discipline, apart from investment management, most clients, I would argue, need both. But most advisors are not equipped to deliver both. And so I think it’s a, it’s just an odd, it’s, it’s, we’re kind of it’s an odd thing with just trying to educate consumers on it. But so tax kind of falls into this realm of like, a lot of a lot of financial advisors, and even the term industry is like, you know, and I know, you know, this, Michael, but for the listeners, viewers, the idea of the term financial advisor is now from a regulatory perspective, being somewhat the kind of thrown out is like only applicable to certain types of advisors can call themselves a financial advisor. So this is good, I mean, to some degree, but I think it’s just important to know like, when you’re working with some kind of a, I don’t even know what to call it an investment professional, a financial professional, you could be dealing with somebody selling mutual funds for a commission, a comprehensive wealth advisor, a an investment manager, that’s only doing investment management, there’s all sorts of different types. And so I think that’s very important, first of all, to make sure that we’re not talking about just this whole community of these nebulous financial advisors. Now, there’s very specific types of, of financial professionals in the industry, and that’s critically important. So when we talk about tax very, I, you know, I don’t like to make these absolute statements but it’s, it’s a subset of financial professionals that are articulate and aware of how tax planning should be integrated into the broader Wealth Management conversation. And there are a number of ways that it can in a very powerful fashion and actually relate it back to the last conversation of inflation, right? It’s like when inflation is a crazy huge it guess what the idea of inflation adjusted returns or real returns, it’s not that big of a deal. When inflation is big, all of a sudden real returns understanding how inflation eats away at your returns, that’s all a sudden a big deal. Same thing on the tax side. It’s like if taxes are kind of normal and low or decreasing, like we’ve experienced with the prior administration, is tax integration into your wealth management plan, a big deal, not so much. Now, if taxes go on the rise all of a sudden, whoa, that’s a big deal. Maybe we should be a little bit more intentional around where we’re throwing our tax dollars. Right. So I think this is also going to be a pretty interesting trend in the in the business and for consumers and for financial advisors. Is it as taxes increase the need for intentional Tax Management tax strategy becomes a big deal. And it’s very important to know, I’m not just talking about doing your taxes, and I’m not just talking about saying, hey, you can take a deduction here or there, like that stuff’s all good. Talk to your CPA on that for sure. But I’m talking about like, there’s certain intentional tax management strategies that can be deployed inside of a portfolio inside of a financial plan. That is that actually CPAs don’t even know about right, because it’s in It’s weird. I’ve talked about this, it’s like, if some of this tax strategy stuff falls into a no man’s land, it’s like you got all these financial professionals that are like, No, I don’t want to talk about tax, I don’t you know, I don’t do that, then you got a CPAs that are like, that’s a financial planning stuff. I don’t do that like, but it’s, it’s so it’s like, very, you know, I don’t see a lot of people talking about some of these very powerful strategies that can be deployed inside of wealth management to save and manage the tax liability.

Michael Baker  51:44

I think that tax is its own world. And one of the things that I share with and, you know, I’ll put, I’ll put my name on this, I’ve said this to many people, what I have found is that a lot of tax professionals are tax preparers. They’re not necessarily tax planners, they’re there, they’re there, they provide a great service, but you bring your stuff in will crunch the numbers, and there, there’s a few elementary ABC things that we’ll look at. And then outside the scope of that you’re needing to find another layer of advice or expertise. And there’s nothing wrong with that. But a lot of people think, Oh, I have a tax person, but that tax person is a tax preparer. Case in point actually got an email this morning. That was someone asking for a tax person, a tax professional reference, because their tax preparer missed some things last year, that ultimately resulted in them paying a larger tax bill than they needed to pay. And so this is these are one of the reasons why Ross and I, I mean, we have made a concerted effort to now do tax reviews, with all of our clients that we can, because we want to know like how you’re being taxed? What if you have specific life events coming up, that may impact your tax planning? You know, how can we be adjusting and monitoring for that, so we don’t have surprises. But also, if we see opportunities, we can take advantage of those. And one of the things that we’ve been trying to reiterate to a lot of people is, you know, that our tax policy is intentionally difficult in DC, you know, I mean, they can, they can do some things to the reconciliation process. But, you know, to really have like a permanent change in the tax code, it requires 60 votes in the Senate, and it doesn’t look like anything’s going to get 60 votes. That’s not just got almost unanimous support these days. However, these temporary tax packages, they do have expiration dates. And so right now, we’re operating under the tax cuts and jobs act that was passed during the Trump administration. So even if the Biden administration is not able to do anything, we are going to revert back to the previous tax code, which there’s a 12% tax bracket that goes away, there’s a 22% tax bracket that goes away, the 24%, tax, these all change. And so if you’re falling into those marginal brackets, you’re going to be impacted just by the nature of things changing. So there’s opportunities now for planning, but some of these things that that have been proposed are significant, like you know, of long term capital gains get taxed differently. You know, I think about business owners who want to sell their business and their business now has evaluation over the threshold that they’re allowing that so now, you may have been in a long term capital gains situation with your business, but now that that business is going to be your proceeds are going to be taxed significantly. I think about our people that you know, they’ve done very well and they’ve saved and they’ve got large IRA balances or large 401k balances plus other taxable assets, where they’re going into distribution and they’re doing RMDs How will You know, a difference in long term capital gains rates impact them? And so there’s, to me, again, taxes are game we’re always playing. And we don’t get, we don’t get to like, hit the easy button and say, you know what we want the tax game, it’s all done unless, you know, you just magically are able to convert everything to Roth IRAs, and you’re going to have tax free income for the rest of your life. You know, those represent, imagine a very small percentage of folks. But those are the things that we’re looking at. And I know, one of the things that you guys and advisory alpha have been doing, we’ve been paying more attention to, you know, tax exposures inside of our portfolios and making sure we’re doing things like tax loss harvesting. So maybe you could share just a little bit about that from a portfolio management perspective.

Steve Osterink, Jr  55:44

Yeah, no, I think Yeah, just to give a some more tangible examples of what we’re talking about with how I think these worlds can come together on the tax side, and the wealth management side is you through a tax loss harvesting, you know, we can talk about that first. But it’s this idea of selling positions that are at a loss and realizing the capital losses, and then redeploying that capital into other investments, even if it’s very similar investments. So what you’re doing is you’re just harvesting out those losses, so that you can leverage those losses on your taxes against offset either other realized capital gains, or to some degree, some earned income as well. So, you know, it’s just now you don’t have to do that. But it’s like, kind of like, why wouldn’t you? I mean, we saw even last year, through the volatility of the COVID world, you know, it’s like, if a bunch of investments sank, why not sell them off and redeploy it, I mean, if there are other representative assets, we could still get the proper exposure for our clients, which we do a lot of research on, why wouldn’t we harvest out those gains so that we can use them, you can bank them, you can use them against future, or use those losses against future realized capital gains. So it’s just, it’s just something that you need the right systems and technology to be able to do that. We’re in the process of actually rolling out some dedicated investment strategies around that to automate those processes in a really, really powerful way. And I these are the things that are just going to make sense, you know, as time progresses, as I mean, especially if you’re talking about right cap gains going from, from wherever they are today up to income, you know, lower tax levels, I mean, you’re talking about some massive, massive differences. And there’s actually this term now, people have used it for a little while, I suppose. But it’s a term of tax alpha, which is like the kind of the added value that a manager is providing through tax, an intentional tax strategy. So the tax alpha will keep going up and up, I mean, as tax rates go up and up, because there’s more money to be saved, which is kind of scary. But another, you know, another strategy is, you know, this strategy of asset location holding certain types of assets in either qualified like IRA money versus taxable money. I mean, certain investments generate more, say income, income tax returns, like yield and interest versus capital gains return, like growth, appreciation. So there’s some inherent like tax deferral benefit from certain assets, like stocks, for example, that could be held in taxable accounts to kind of diminish out some of the some of the tax impact. So again, just being intentional around this idea of asset location where we’re holding certain, you know, certain assets. And then a final one I’ll just throw out is I like this term as well, tax diversification, which is just balancing out the types of kind of the pots of money that that you have, I mean, and there’s different strategies to balance that out and plan around where what your income needs to look like in the future, what your what your individual tax rate will be in the future. I mean, there’s some, some tax diversification kind of strategies to kind of reallocate, like, How much money do we have in these different tax buckets so that we can kind of plan that out in the future to make sure we’re not setting ourselves up in the future for some really tough tax situations. Right. So yeah, and none of that. It’s just it’s some there’s, there’s some art and science, I’ll say to some of that. I mean, because, like with, with tax diversification, I mean, it’s, it’s, to some degree, it’s forecasting out your own tax rate, but also forecasting out what we think future tax rates are, your tax brackets are going to be just in the general world, in the general country. So like, we can speculate to some degree around that and make some educated decisions, but it’s just having those conversations I think is pretty cool. Really, I mean, with advisors that are equipped to do that. I think again, and again, back to my opening comment on this. It’s, as rates increase as taxes increased. All these things I mean, these can have a meaning For a meaningful impact on the people, you know, there’s fee compression in our industry, right? I mean more eyes are on what the fees are the financial advisor is charging. But man look at when we’re talking about how much money that can be saved on an appropriate tax strategy. I mean, some of this stuff, some of those savings can absolutely Dorf in advisors fee if they’re doing their job properly. So, you know, I think these are very real strategies that I think are going to become more in focus.

Michael Baker  1:00:28

I agree. And one, one thing that I am personally watching is, is the language being used on the stepped up basis at death, because that’s a little bit something that I’m sure it’s been discussed before, but that one’s a little bit of a newer topic, you know, kind of it kind of goes in there with the, you know, the estate tax thresholds. And, and with all of the buzzwords and the political posturing, you know, one of the big things that is being discussed right now in our country, and I don’t dispute that exists, but as wealth inequality, and you know, there’s a lot of people taking the position that, oh, this stepped up basis at death. This is how the wealthy people, you know, pass on assets. And I would first say that no wealthy people pass on assets by planning correctly. That’s typically how they do that. But it’s interesting, because if they do seem to get that through, and it is something that where the threshold isn’t right sized, where it captures, what I mean by that is it captures a lot more people than it probably should, you know, one of the consequences of not having Tax Management all through your assets. And you know, as you kind of do your normal for a normal person’s life cycle, it could have disastrous impacts for your heirs. Now, we work with a lot of people in retirement and Rawson Ross would probably back me up on this, but we I don’t know that we have ever had, in our entire meetings history with people more than maybe 10 people wanting to prioritize, like what their kids are going to get. Most of our retirement clients are like, Look, we want to make sure we’re okay, we love our kids, we raised them, we put them through school. Now it’s our time, you know, we want to travel, we want to do things we want, we want to do, we want to help our grandkids, you know, And hey, if there’s anything left, we want it to go to them. But we’re not planning to adjust our life, so that they, you know, can do everything that we want to do. And we think that’s great. However, at the same time, one of the things that’s happening is if you don’t properly manage that, and they change that, you know, your kids could inherit a nominal sum of money. But because there was no tax management, they may owe significant capital gains taxes, just by proxy of inheriting the money, or the assets. Think about houses, typically an illiquid asset, it’s not something you can just readily move, you know, you have to maybe prepare it and put it on the market, but a half a million dollar house that your parents bought for, or you know, had $100,000. And you know that $400,000 is stepped up right now under the current law, and becomes your basis at death. But just by inheriting the house, if you own now own capital gains tax on that $400,000 where are you going to pay that or you sell the house, and then you got to you got to pay it. So it’s, that is something that’s very interesting that we’re watching because that is a stealth away to get into a lot of people’s pockets. And I don’t think people really understand that, you know, for the most part, because we get questions all the time when someone loses a loved one when they inherit some money. You know, they’re people like, well, I’m going to owe all these estate taxes like no, we’re not, you know, like, Oh, yes, I am. And I’m like, No, no, no, like, Yes, I am going to like, Listen, alright, so did you inherit, you know, $25 million? And they’re like, no, and I’m like, well, then you were okay. You know what I mean? It’s so that is something that’s going to change. And so in our last few minutes here, I want to pivot I want and I want to get more personalized, cuz we got something really neat here on this call. We’ve got three dads here. talking, talking heads, you know, Steve’s a dad, he’s got kids. Ross has children, I have children. And so Steve, I’d love to hear from you. Just you know, Steve, the dad, the business owner, like what are your What are your thinking about, you know, how are you trying to invest? You know, and thinking about investing now, not just from like, hey, running the business gotta do all these macro level decisions for portfolio management, but also like for your family, and like what the type of environment you feel like your kids are going to grow up in. You know, what things are you watching from that perspective? Yeah,

Steve Osterink, Jr  1:04:53

I don’t, I don’t know if it’s so much that I’m watching certain things but just being in Yeah, being a business owner. And then yeah. Danna being a parent. I, it does kind of get your wheels turning a little bit. I mean, one thing that I have done even though we have young kids is just even thinking about planning around kids. I mean, how do you plan? What’s the best way to plan for, for college? but also how, what’s the best way even now, at my, my current age of planning around legacy asset transfer down to kids? How do you encourage them from a planning perspective to start accumulating wealth because we have this thing called time value of money, obviously, you know, younger, they are more they can accumulate, but the tax changes the estate planning changes the duration of time that they have to invest and just building good habits, you know, how do we how do we do that and train that and make those decisions at a at a super young age, because hard, I am a planner here on the I feel relatively young yet, you know, in life, but you know, it’s never too early to start planning, even if you’re, even if your kids are young. And there’s intentional things that can be done around that. I mean, there’s things you can do. I mean, if as there’s a lot of business owners around the country, and you can get you can get your kids involved in your business and, teach them teach them how to work and pay them oil, and you know, there’s different things you can, you can do along those lines. But it’s dad’s just trying to build good habits, but as the landscape changes with tax and these different things, it’s a you know, it’s, it’s important to be to be thoughtful on that. But, you know, on the on the less about the kids side of things, which is more on the personal planning and business planning side of things. You know, even just like our thinking on reserve funds, both personally and as a company, we’ve pivoted a lot, honestly, I mean, we use, we don’t sit on cash, more than we need to I mean, we have operating capital for our business, of course, but we have broader reserve funds that are invested in different types of things, not equities, but shorter duration, tools that generate yield, like my comment earlier, where I just hope to lose less purchasing power with these investments than just sitting in cash. And, you know, those are all very, very important planning strategies for any business, and we didn’t touch on this is well, kind of lob this out there. But it’s, there’s alternative, you know, fixed income strategies available to, you know, with different types of structured products and kind of index linked investments and know not just annuity vehicles, you know, if that’s what people are thinking, I mean, there’s a lot of different tools where there’s some alternatives to fixed income. And those are, those are tools that we deploy as well, you know, if you need risk management outside of just buying a 30 year treasury bond or something like that. So, yeah, there’s a lot kind of packed in there, for sure. But there, yeah, those are all things that we’re that I’m personally taking advantage of, we need to you know, we need to be smart with that.

Michael Baker  1:07:58

Absolutely. So we got a couple minutes here left, and if anybody’s in the in the chat and wants to throw in a question, feel free to but we’ll wrap we’ll begin to wrap up. I mean, I think that, you know, from everything I’ve heard, you know, to kind of recap, some of your thinking is a we got to be mindful of real rates of return, you know, we can’t just look at nominal rates, we have to also consider, you know, what impact is inflation and the, you know, the rate of inflation having on, you know, my, my real rate of return for my investments and taxes, we got to think about taxes, because and, and I would sum that up with just saying, like, what, what is our how are we growing, our purchasing power? Is our purchasing power shrinking? Or is it is it growing, you know, over time when we factor in, you know, taxes and inflation, and then, as far as you know, market uncertainty and risk, I mean, we never can really divorce ourselves, if we’re going to be investors, we’re going to be dealing with those factors, but we can control the things we can control and you know, have a plan be thinking about long, you know, longer term needs versus short term needs. And, you know, Tax Management is, is something that apparently Steve really loves to talk about. So, maybe we’ll get him back, and we’ll do a deeper dive into Tax Management. And we’ll, we’ll nerd out in a big way. But, you know, the tax game never really ends, especially when you have I think, you know, there’s competing ideologies in our country, right about what’s the proper way to you know, generate tax revenue and how that should be done. And, and so just by nature of, you know, power oscillating from one side to the other, we were going to continually be dealing with taxes, but at the same time, you know, we have a progressive tax system and so if you make more money, I mean, how does that impact you? How can you be thinking about it and then ultimately, you know, what, what type of environment will your heirs maybe inheriting money in you got to think about that, even though for our retiring people out here. You and I know you we want you to live great and have a wonderful time while you’re retired. But we can’t think about that. Anything I miss Steve Ross. What I miss anything.

Steve Osterink, Jr  1:10:11

I think we’re good. Nice recap. It was great to be here. Great chatting with y’all.

Michael Baker  1:10:15

Awesome. This was, this was a lot of fun. And I’ll make sure I try to get this edited up soon so we can share it out for everybody. But Steve, always a pleasure, man. And hopefully, Michigan will open up soon and embrace the southern folks with open arms. We can come up and visit you guys are getting there, brother. Thanks so much. Appreciate it. All right, you guys be good. Thanks a lot.


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