Make It Last – Ep 75 – A Portfolio is Not a Plan & NJ’s Proposed Fiduciary Rule

October 6, 2018

This week on Make It Last, Victor gives details on why a portfolio is not a plan, a newly proposed NJ fiduciary rule, as well as a glimpse as to why NJ has been ranked as the worst tax structure in the nation.

Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and Certified Elder Law Attorney (CELA®) and Certified Financial Planner™ professional (CFP). Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.

For more information, visit Medina Law Group or Palante Wealth Advisors.

To read the entire transcript click below


Victor Medina:  Everybody welcome back to Make It Last. I’m your host, Victor Medina. I’m so glad that you can join us this Saturday morning on, what is it, a Columbus Day weekend. We have had a run of special guests in the last two shows, but today you’ve got me by myself, by yourself.

Hopefully, you’re strapped in for that because I’ve got a bunch of stuff to talk to you about today. I’m really excited to share the information with you.

Today, we are going to talk to you about why a portfolio is not a plan. There’s a whole rash of a new situations where investments are becoming free. We’re going to talk of why simply having a portfolio is not the same thing as having a plan.

I’m going to talk to you about a new rule in New Jersey, introducing the concept of fiduciary status, why that’s a requirement and maybe what you can expect if, in fact, this law passes.

Finally, New Jersey has won an award, essentially, as having the nation’s worst tax structure. I’m not sure you’re going to go and celebrate that with your neighbors. I’m going to talk to you about why that is. Why do we rank 50th in the entire country?

We’ll go through all that. Before I do, over the last week, I was actually in Orlando, Florida, at Disney World, not on vacation with my family, but doing something just as equally fun, which is that I have been hosting for the last 10 years a tech conference for attorneys.

One of the things that distinguishes my practice, especially in the legal field, is that we run an all‑Mac or an all‑Apple law firm. We’ve got Apple products everywhere in the computers that we use, and the tablets that we use. Back about 10 years ago, it’s a pretty rare thing to have somebody set up a firm like that.

What I did was I created a conference that I invited people to come to, to better learn how their technology works and make sure that they were optimizing it. The reason why I’m sharing this with you is, while it was a great conference, in fact, I had the opportunity to have my mom join me, which is something that I always like.

She’s been a fixture of the conference for the last seven years or so, basically, because I had this person who’s supposed to come and help me run the conference, She quit two weeks before the conference was supposed to happen. I didn’t have a replacement.

I ended up asking my mom, who lived about an hour away or so, would she mind coming and sitting at the desk and checking people in? Of course, she said, “Yes.” She was happy. I said, “Look it, I’ll pay for your room. I’ll get you a ticket at Disney World, if you’d like. I just need help with this conference because I can’t do it on my own. There’s 50, 75 people that are coming.”

She shows up, and she does a brilliant job. Next year, I bring somebody from my office, who’s been the same person who’s been from my office ever since.

Some of you who are clients of ours know Julianna and know that she’s another important piece of the suite of services that we have in the team that we’ve developed. She’s also helps me on this tech conference. She’s been coming ever since then, but my mom doesn’t stop coming. She’s always there.

It’s a lot of fun because the attendees at this conference keep coming back year, after year, after year. They’ve grown to love my mom, and they like to see her. In addition, my mom was responsible because the coffee at Disney World has not always been the best, like brown water.

My mom sat down and said to the workers who were there, “I can’t drink this. Can you go and get me some real coffee?” and made friends with a Greek guy and a Hispanic guy. They all competed to make the best pot of coffee for my mom, strong, good coffee. The other attendees got wind of the fact that my mom had good coffee.

Year after year, they set aside mom’s coffee. They bring it out special. It’s not part of what we order in the catering. They’ve continued to do it. It was really nice to experience the conference once again. I continue to be impressed because the attendees that show up here are people who are working hard towards staying on the cutting edge of what technology has to offer.

I always find that to be impressive because this life‑long learning concept, this idea that we are going to continue to stretch and grow even in situations where we feel, maybe, things are going to be passing us by, knowledge base, technology base, something like that. I think that’s such a great quality.

It’s one of the things that I really admire. In the client base that I’ve developed over these years is it seems like two things are going on. First of all, the clients that sign on with us, want to be on the forefront of planning techniques, whether that’s on the legal side or the financial retirement side. What they’re looking for is best in class and somebody that’s going to continue to grow.

They know that that’s my mindset, that we’re always going to be searching out for what is the best thing that we can be doing, testing it, making sure that it is, in fact, a great thing to be doing. By the same token, they’re willing to delegate that work out. Find somebody else to be a mentor for them, to teach them and be responsible for getting that done.

That relates to the conference because people there are finding the conference teachers, the speakers that come out there, as people who can mentor them. They want to stretch and grow, but they also realize that they’re going to need help to do that and that there are people out there that know more than they do and can share that information with them.

As we go through this journey on this radio show and we think about our podcast, if you listen to this as a podcast. As we go through this, part of my role, the way that I like to position what we’re going to be covering it, I want the listeners, I want you to be somebody who wants to stretch and grow your knowledge.

While we try to make it as entertaining, it’s not an entertainment show. We don’t have funny guests on. There’s not sketches. It’s not a production value with lots of music, and bells, and whistles trying to grab your attention using those types of tricks.

With the information that we’re sharing every week is really information that I hope starts to add to your body of knowledge that helps you continue to stretch, and grow, and learn more along the way. That’s has been the way I’ve set up everything around my life, the way that I do my legal practice, my financial services practice, this tech conference that I do.

Even more and more, what I’m trying to teach my children is that this life‑long learning, this curiosity, this desire to try to stretch and grow is one of the things where we draw life from. A few episodes ago, maybe even so much as a month ago, we talked about how to survive in retirement, solo seniors. One of these things is finding a purpose greater than ourselves.

Finding things that we can be doing that continue to stretch. When we stop moving forward, it’s the first step in moving backwards. We want to make sure that we are continuing stretch and grow ourselves, so we’ve got reasons to stick around and that we’re enjoying the process of doing that.

In any event, I was on another great lesson to experience the conference. The conference went great.

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Victor:  I’m really, really happy with the results on that. We’ll be doing it again in a couple of years or so. I’m happy that will be the year 11. I can’t even believe that we’re going to be there.

Anyway, when we come back, I’m going to cover those three things that we talked about today. I’m going to talk about why a portfolio is not a plan, and then two new rules about New Jersey and how they’re going to impact you, new proposed fiduciary rule. Also, why New Jersey is the 50th out of 50 tax structures in the nation. Stick with us. We’ll be right back on Make It Last.

Victor:  Welcome back to Make It Last. I spent the first segment talking a little bit about this tech conference that I had. I did want to spend some time on this concept that a portfolio is not a plan. It’s interesting to me. There’s a lot of news being spread about how the cost of investing is coming down, and down, and down.

There are mutual funds that are free. Asset allocation is free. Trading can be free. No one understands why that is, by the way. If you’re interested, the reasons why they’re able to offer you free stock trading is not because of the democratization of the Internet. It isn’t because technology costs have brought everything down. That’s true.

In fact, it doesn’t cost very much at all to send electrons back and forth. These are still profit‑driven companies. For instance, in August, JP Morgan essentially dropped trading costs altogether, trading stocks. They’re a loss leader that some transactional costs, if they’re zero, there’s going to be some loss there.

Now, the reason why they’re doing that is, of course, they’re offering you a couple of things to make money. If you want to trade on options, that costs money. If you want to use margins, there’s lending costs that’s on that.

Also, they’re doing securities lending. Essentially, they’re taking your shares that you own and then using it in a complicated lending scheme to make money on the fact that they’re lending out these shares that you’re owning in there. It’s credit card or whatever else, but anyway that’s free.

Asset allocation is free. You can go in within Betterment or any of these other services, you can go and get an allocation of five ETFs. You can rebalance them a couple of times a year. There you go. You’ve got asset allocation.

Mutual funds are free. Fidelity Free is Fidelity’s answer to this idea that there’s a mutual fund that is going to be absolutely free to own, no expense ratio. Everyone’s trying to race to the bottom, and it’s there. While the war to the bottom is over, your war is just beginning.

The difference between a portfolio that costs a percent, or three quarters of a percent, or something like that, and zero, is negligible in the grand scheme of things, if you don’t have any idea about how to act, implement, or react to varying conditions.

If, behaviorally, you can’t control yourself in the presence of news, data, opinion, regulatory changes, volatility, to know what’s important and what isn’t. Then it doesn’t matter how many basis points you’re paying for a portfolio, if you’re not able to capitalize on those ideas, in terms of an investment plan, a philosophy, a strategy.

If you question whether or not this is going to apply to you, just think about how you are reacting to the news that’s out there, that this is the largest economic expansion in history. It’s also one of the slowest.

When I say that to you, “Look, this is the largest economic expansion in history, and it’s also the slowest.” If your reaction is anything but, “So what?” you are at risk for having your behavioral tendencies affect your investment strategy, which will wipe out any of the costs that are associated with investing.

For instance, if you say, “Well, and that means that there’s a contraction coming. And so maybe I ought to be thinking about going to cash, or hedging myself against…” whatever, you want to call it, a recession. Or if you say, “And that means that it’s going to continue.” If you make a predictive statement about what that information means, it means that you’re at risk.

The best investment strategy is one that strives to go outside of this concept of behavioral influences on it. If you have a smart strategy, you stick to the strategy. The data seems to suggest that people are on their absolute worst behavior at the absolute worst moments.

It’s why markets function to begin with. People have to lose and the masses have to lose massively at major turning points, and they do. The returns of even the best‑performing funds prove it every year.

There’s a reason why there are any number of mutual funds that are out of existence, 10, 15 years later. There’s any reason why the majority of them under perform their benchmarks. Part of that is because, in the world of investing, it’s a zero sum game. There are winners and there are losers.

For every person that is going to purchase something, there is somebody that has to sell something. One of them is going to be wrong about what their bet is on that.

When I hear people obsessing about the cost of a particular investing strategy, while I think that you should absolutely look to control cost, going from a reasonable cost to zero, is not necessarily going to get you a lot, if we fail to act professionally, if you fail to act professionally.

The cost of the portfolio becomes irrelevant, an absolute triviality, in the shadow of human behaviors and its colossal inability to stick to a plan. When people start obsessing about the cost of an investment strategy, sometimes I bite my tongue. Sometimes I look at them and try to tell people, “Look, you’re out of alignment with what you could get, and reasonably get.”

We don’t try to get to zero, because the true cost, the cost of an aimless course of investment, nondescript objectives, is going to bury them anyway. To give you an idea, nondescript objectives, people say they want to outperform the market, or outperform a benchmark. Outperforming is not a financial goal.

If you want to have an income you don’t outlive, that lasts as long as you are, that’s a financial goal. If your portfolio outperforms your neighbor’s portfolio, such that the neighbor runs out of money at 76, and you run out of money at 82, it doesn’t matter much if, at 85, you’re both sitting there on a park bench without two nickels to rub together, between you.

I hope that resonates with you. Actually being able to put together and articulate a financial objective as part of a plan, and then follow through on the steps of the plan, is going to be far more important than the particular cost of a portfolio. Or whether or not you have one that you feel comfortable with, that you’ve gotten from somewhere else.

It’s got to be linked to a plan along the way. A plan is going to include a portfolio that is calibrated to deliver what the plan calls for as an acceptable outcome over time. It includes calculations, assumptions, using statistical facts, educated guesswork, evidence‑based strategies.

It creates scenarios and populates them with probabilities. It involves decision‑making with experienced advisers who can incorporate things like taxes, and cash flows, and debts, and philanthropy, and insurance and healthcare. The plan is not a particular product. You don’t get a plan that’s 200 pages.

It’s an ongoing service. It is dynamic in its nature. It has to be, because circumstances are going to impact that in a non‑static way. You’re not going to have the assumptions that you have put on the plan stay absolutely the same throughout your, in this case, retirement. That’s where we focus, is in retirement.

It’s not going to stay fixed all the way through. You’re going to need ongoing help on that. I’m not saying that it necessarily has to be an adviser. We’re saying that we think that advisers should be there, but just in the academic sense of what a plan is. The plan is this idea that it is an ongoing set of services, no matter who’s providing them.

The plan is going to demand rational and deliberate behavior on the part of you, the investor, or the adviser. You don’t fixate, necessarily, on the fact that your cost of trade is zero, versus $10 a trade. Focusing on performance or the cost of a portfolio relative to something other than a plan is like decorating a house where you’ve got no foundation on there.

If you make poor decisions, it’s not going to do you any good. Everything in investment business is pretty much free now. Nothing really has value ‑‑ mutual funds, ETFs, asset allocation, rebalancing, account opening. All that stuff, that’s free. It doesn’t have value, but a financial plan that is well executed and tenaciously adhered to, that’s got a lot of value.

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That’s where you should be looking to spend your money and making sure that you’re getting value for those services. Little bit of a rant. I’ve got another rant coming for you. [laughs] When we come back from the break, I’m going to talk to you about New Jersey’s new fiduciary rule, and why it is the state with the absolute worst tax structure in the nation.

Stick with us. We’ll be right back on Make It Last.

Victor:  Welcome back to Make It Last. We’ve been talking today about why a portfolio is not a plan. We handled it in the last segment. I promise you that I was going to cover some new news that had come up about how New Jersey is planning on instituting its own fiduciary rule for broker‑dealers operating in the state.

This is according to a press release from the governor’s office. Governor Murphy, basically, said that the plan that they’re going to put in place, “Would impose a fiduciary duty on all New Jersey investment professionals requiring them to place their clients’ interests above their own when recommending investments.”

This rule is actually being developed by the New Jersey Bureau of Securities, which actually has the authority to impose a uniform fiduciary standard through legislation and regulation. Legislative approval is not necessary. This can be simply a regulation that is adopted within the Bureau of Securities under their authority of the law that was already passed.

From an administrative standpoint, just understand that you don’t need this to be a new law. It’s a regulation. It’s a rule because the law that established the Bureau of Securities give them enough latitude to just do it through regulation.

It was the same mechanism that the fiduciary rule at the federal level was imposed because it was already ERISA on retirement accounts, already given broad latitude to do that.

The bureau’s expected to actually published what it calls a pre‑proposal in the New Jersey register on October 15th. Shortly after the airing of this show, a couple weeks from now, it’s going to allow 60 days for public comment. It’s actually going to hold two informal conferences to solicit public comment on November 2nd and November 19th.

Then after the 60 days, assuming that all is well, and it’ll make any major changes, it will adopt it. As soon as that rule comes out, I’ll be sharing with you some information about it so that you understand the way it’s going to work. I actually don’t know specifically what it’s going to say.

In the press release, they’re quoted as saying that the roles, the duties, and the obligation of investment advisors and broker‑dealers are confusing to investors under current federal regulations. You know what, I couldn’t agree more. People already believe that broker‑dealers are people that look out for their best interest.

By the way, most of them don’t even know what broker‑dealers are. They believe that the largest organizations, like Merrill Lynch, Morgan Stanley, Edward Jones, UBS…All of these people, they believe that the broker‑dealers, in of themselves, are the same as just a regular investment adviser.

They don’t understand that the relationship between the agent that they’re talking to or their representative is actually one where the standards that they have to apply is not a best interest standard. Listen, if you’ve been a long‑time listener of the show, you’ve heard me railing about that since its very inception.

We talked about it at the federal level. Now we’re talking about it at the state level.

Even in the release, they noted that most investors assume that all financial professionals are required to provide unbiased advice, when in fact under current ERISA federal standards only investment advisers, like I am as an IRA or an investment adviser representative, have the fiduciary duty to put their client’s best interests first, not broker‑dealers.

There’s this SEC rule called the Best Interests Rule. It has yet to be finalized. It’s going to propose something that would be a higher standard of conduct than the current rules for broker‑dealers. It’s still going to fall short of protecting investors as much as a uniform fiduciary standard what there is a bit of dilution in the SEC rule.

Again, we’ll be in a situation as we were in the fiduciary rule that said, “Don’t rely on that necessarily because there are all these caveats around it.” It’s not giving you the protection that it should. I’ll tell you that New Jersey is not the only state working on a state fiduciary rule but actually would be one of the first to implement one.

There are several states that have advanced legislation to create a fiduciary standard, including Maryland, Connecticut, and New York. Even Nevada has passed a law, but the regulations for implementing those are still in the process of being written. It looks like New Jersey actually might be one of the ones to get to market fastest with this kind of rule.

Some states are getting into the act because the federal government has effectively stepped back from the DOL rule, the Department of Labor Fiduciary rule letting the SEC take the lead. Of course, that has a lot to do with the political climate.

Once the political affiliations changed over, the Democrats that were leading the charge in protecting investors, have been replaced by Republicans that are looking to secure the interests of the higher money corporations and put that on the shelf. When it was defeated in the Fifth Circuit, the White House effectively took the position that it wasn’t going to push it any further.

Take aside any actually political thoughts you have about whether the administration on its own, or other stuff is something that you like or you don’t like. If you’re on the side of protecting consumers, you ought to be angry with what’s going on here because the federal government has effectively stepped back from protecting you, as a consumer, with the abandonment of the fiduciary rule.

It’s going to be interesting to see how this works out. The effect of it is going to be that when the rules are going to come out, you’re going to see that these companies that have got national presence, the Merrill Lynch, and Morgan Stanleys, and things like that, they had some of these workarounds ready to go with the fiduciary rule at the federal level.

They’re probably going to start to reimplement some of those workarounds, depending on what the rules say.

You should be prepared that if you’re not working with an RIA and somebody that’s independent, a fiduciary like the way our office is, then you’re going to get communications from your financial professionals saying that the structure in the way that you have been working is going to change somehow.

I don’t know how that’s going to be, but it’s going to change somehow because they’ve got to comply with the rules here in the state or they get kicked out. That’s not the only New Jersey [laughs] rule that has come out in New Jersey news.

I’ll cover one quick thing before we end for today which is that there’s a new study by the Tax Foundation, basically, looking at the tax climate.

What they conclude is that New Jersey’s tax structure is the worst in the US. It’s got nation‑leading property taxes, second highest corporate tax and some of the worst structured individual income taxes. It is 50 out of 50.

In constituting their report, the person who’s the lead author, basically, said that New Jersey has essentially picked the winners and losers in its tax structure by offering carve outs and tax exemptions for the types of businesses that it wants to attract or retain. That drags down its overall ranking.

Ideally, a tax code should be as neutral as possible. It shouldn’t be picking winners and losers because the goal of the tax code is to raise revenue and not necessarily influence behavior. New Jersey, because of the high rates, end up offering a wide range of incentives for certain kinds of investment and business activity.

For instance, two examples are the Grow New Jersey and the economic redevelopment growth tax credits which are scheduled to sunset in July of 2019 under the former governor, Governor Christie. The New Jersey Economic Development Authority, NJEDA, was awarded eight billion in tax credits.

The idea is that we’re essentially incentivizing that. They also highlighted the most recent set of tax exchanges. We had an increase of a gas tax of 23 cents plus another 4 cents recently. That was an exchange for phasing out the state tax and reducing the sales tax down by a couple of percentages.

While we ended up creating these incentives where we got rid of the estate tax and we lowered the income tax. Then we actually ended up in creating a new individual income tax bracket with the rate of 10.75 percent, which is the third highest in the country. We added a corporate income tax surcharge on companies with income of more than a million dollars, bringing their tax rates to 11.5 percent.

The Tax Foundation, basically, rank both individual and corporate income tax for individual income tax. We were 50 out of 50.

Essentially, for corporate tax we were down to 47 out of 50. It’s not just about the higher taxes because there are other taxes, like Kentucky, that are raising more taxes, that they’re raising for $400 million more in revenue. Really, the idea is that tax in New Jersey is not equitable.

It’s not simple. Kentucky simplified and consolidated rates eliminating some deductions and exemptions on both. Basically, that’s how they were able to do it so they had a higher ranking.

The politicians issued a statement after this news was released. It said that they’re going to continue their efforts to cement the Garden State’s reputation as a bad [laughs] place to do business.

That’s a warning on there. They’re going to continue the charge against the Democrats is that they’re going to continue to increase instability and look at everyone’s using this essentially as a leverage to try to influence where they want to go with the certain tax planning.

The point is this. I think that you would benefit from smart tax strategy. The rule isn’t necessary or the goals necessarily just to move out of state. Maybe, you want to think about doing something with your professional services. Try to figure out how to optimize and limit your tax structure.

There’s certain benefits for retirees. You want to be able to make sure that you’re taking advantage of that without tripping over or stepping on any land mines.

All right, so that’s the show for today. Portfolio is not a plan. New fiduciary who will be possibly coming down in New Jersey, what that’s going to look like and what is the worst place to have taxes in. If you’re in the state but hopefully you’ve got smart planning around that.

If you liked today’s show, please do us a favor and share it with a friend of yours. You can absolutely point them to Spotify, iTunes, anywhere you can find your podcast. We broadcast every show after the live broadcast on the radio at 8:00 AM.

You can download that absolutely for free and not only get that week show but all the prior shows as well. Go on to iTunes, leave us a positive review if you wouldn’t mind. It would really help out with the ranking so that people can find this great information as well.

When we come back, we’ve got a bunch of new guests coming up for the month of October.

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Victor:  Plus I’m going to follow up on all of the news that we shared today. I hope you stick with us when we do that. We’ll be back next Saturday on Make It Last where we help you keep your legal docs in a row and your financial nest egg secure. Bye‑bye for now.


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