Archives for April 2025

Investing Blog Roundup: Drawing Upon Your Investment Memories

Regardless of what is currently happening in the market, what you think about it and how you feel about it is going to be influenced by your own personal investment history. For example, for people who personally experienced the 2000-2002 dot-com bubble bursting and the 2008-2009 global financial crisis, any current days/weeks/months in which the stock market falls are automatically going to be compared to those prior events. For people who started investing more recently, there is no similar personal experience to draw upon.

For any investor, though especially for newer investors, it’s important to be a student of investing history. It’s the best way to be as (mentally) prepared as you can be, for the different types of investment experiences you might face.

Your Memories of the Market May Deceive You from Jason Zweig (WSJ)

Why Most Financial Planners Don’t Offer Very Short Engagements

One question I receive regularly is why most financial planners don’t offer an option for an engagement that consists of just a one-hour paid phone call, to answer a handful of questions.

There are a few reasons (which I think most people outside the industry are unaware of) for the rarity of such a business model.

State Regulation of Billing Models

Firstly, state regulation of registered investment advisers (RIAs) often creates incentives for RIAs to prefer billing models other than hourly.

For instance here in Missouri, hourly fees of above $250 are “presumptively excessive and unreasonable.” But an asset-based fee must exceed 2% per year before the regulator takes the same position. So that means that, for example, for a client with a $1 million portfolio, an RIA can charge up to $20,000 per year, without any regulatory hassle with respect to the fee, as long as the fee was calculated based on assets. But special justification would need to be provided in order to charge the same client $300/hour for 20 hours over the course of the year (totaling $6,000).

You can do the math yourself with respect to portfolios of $2 million, $3 million, etc. — and quickly see how this results in a situation that’s kind of crazy in terms of how it influences the way that RIAs choose to charge for their services.

The details vary by state, but the general situation is that the regulators are more comfortable with asset-based fees than other billing models.

It’s no surprise that many RIAs opt for the billing model that results in more compensation and less regulatory hassle.

Client On-Boarding Time

Another factor that makes 1-hour (or similar) engagements rare is that there’s more “behind the scenes” work than people realize. In my own experience, it takes somewhere in the range of 2-4 hours just to:

Meet with the potential-client to discuss a possible engagement and terms thereof,
Get up to speed on the new client’s facts and circumstances,
Set the client up in the recordkeeping software and perform the necessary related compliance activities, and
Set the client up in the actual financial planning software.

In other words, before even attempting to answer any actual financial planning questions, the planner has typically already invested a few hours of their time. And that has to be factored into the pricing in one way or another.

An important point here is that, in a DIY context, none of items #1-3 above would be applicable at all (as there is no compliance required and the person is already of course up to speed on their own circumstances). I think this is relevant for two reasons:

It’s an inherent inefficiency of working with a professional planner: it introduces new work that otherwise would not have to happen.
I think many DIYers think only of the time it would take a professional planner to actually address their desired financial planning topics, and are thus surprised at the pricing (because they weren’t mentally accounting for the time the planner would spend on various other necessary tasks).

Relatedly, many people assume that an hourly financial professional’s weekly compensation is probably somewhere along the lines of 40x their hourly rate, but that’s not remotely the case. A 2023 AICPA survey found that an hourly billable rate of $204 (which was the average for CPAs with 8-10 years experience) equated to an average annual compensation of $105,662 — or $2,032/week (i.e., 10x their hourly billable rate). And I strongly suspect that it’s typically lower than 10x for hourly registered investment advisers, given that RIAs are regulated more heavily than CPAs (i.e., have to spend more time on compliance activities that are not billable).

The RIA “No More Than 5 Clients” Rule

A registered investment adviser must register in the state in which the business is located. It also must register in any state in which the firm has more than 5 clients, within any one-year period (not just calendar years).

Each additional state with which the RIA is registered creates significant ongoing compliance costs, because the firm is now subject to examination by an additional regulatory body. For instance, at any time, any state with which the firm is registered might demand to see assorted client records, the firm’s balance sheet, engagement agreements, the firm’s business continuity plan, the firm’s information security plan, or any number of other things. And each state may have their own unique rules about what they require to be included in any of those documents.

Point being, for a solo practitioner or other very small firm, there’s a compelling reason to keep it to no more than 5 clients in any state (other than the state in which the firm is located) within any one-year period, if it’s at all practical to do so.

In other words, the regulatory environment creates a strong incentive to have fewer clients and more revenue per client.

If an RIA eventually reaches $100 million of assets under management or needs to be registered in 15 or more states, they must register with the SEC — and then they no longer have to be registered in all of those states. For an “advice-only” RIA though (i.e., one that provides advice but does not actually manage the clients’ portfolios) assets under management will always be zero. So they’re going to have to be registered in all the applicable states, until they reach 15. (And I promise you, being registered in 12, 13, or 14 states while building up to 15 is something that nobody wants to do.)

April 21, 2025

Investing Blog Roundup: Will Brokers Have to Stop Calling Themselves Financial Advisors?

Right now, there is no regulation of the term “financial advisor.” Essentially anybody (insurance agents, brokers, etc.) can refer to themselves as a financial advisor. Note that this is very different from the term “investment adviser” which does have a specific regulatory meaning.

Of course, most people who don’t work in the financial services industry have no clue as to that distinction. And that leads to situations in which people engage the services of a financial professional, while having significant misunderstandings about the duties and responsibilities of that professional.

As a result of something that happened earlier this month, we might see some changes to this situation. Specifically, the North American Securities Administrators Association (NASAA) amended their Model Rule: Dishonest or Unethical Business Practices of Broker-Dealers and Agents to prohibit “Using a title, purported credential, or professional designation containing any variant of the terms ‘adviser’ or ‘advisor’ without licensure as either any investment adviser or an investment adviser representative, unless otherwise permitted by law.”

This doesn’t mean that any laws have changed yet though. Investment advisers are regulated by the SEC (in the case of larger firms) or at the state level (in the case of smaller firms). NASAA is the association of those state-level regulators. NASAA does not have any regulatory authority of its own. Rather, it produces model rules such as the one above, which state-level regulators can then adopt, adopt with changes, or decline to adopt. Usually, most states adopt the model rule or something very close to the model rule. But, we’ll see.

Should Brokers Be Able To Call Themselves Advisors? NASAA Says No from Tracey Longo

What To Do During a Stock Market Downturn

First a brief announcement: The 2025 edition of Social Security Made Simple is now available. Relative to the previous (2022) edition, there are of course the inflation adjustments to various dollar amounts. There’s now also a brief discussion of child-in-care spousal benefits and mother/father benefits. And the book now reflects the recent changes made by the Social Security Fairness Act of 2023 (i.e., elimination of WEP/GPO).

Thank you to everybody who supports this blog by buying the books, gifting them to loved ones, posting reviews on Amazon, and so on.

And now on to today’s topic: what to do during a stock market downturn.

As of the close of trading on Friday (4/4), the US stock market (as represented by Vanguard Total Stock Market ETF) was down 8.14% in the last 5 days and down 14.1% year-to-date.

The Stock Market Doesn’t Care About Your Politics

Because this recent decline was kicked off by the new Trump tariffs and responding actions by other countries, many people are responding in ways that are informed by their political views. (You can see it happening in real time at the Bogleheads forum, for instance. And if it’s happening there — a place that’s known for being nonpolitical and populated with buy-and-hold investors — you can bet lots of other people are making similar changes.)

But the stock market didn’t suddenly become predictable, just because you either really like or really don’t like the tariffs. That is, fundamentally, not how this whole stock market thing works.

The stock market responds to available information. And it does so pretty darned quickly. Do you know something that the market collectively does not know? Do you somehow know whether Trump will keep these tariffs as-is, raise them, or lower them (and by how much and when)? And do you know how other world leaders will respond? Frankly I doubt even Trump’s chief of staff knows the answer to those questions. And if you don’t know those answers, you shouldn’t be making stock market predictions based on the tariffs.

Check Your Risk Tolerance

Now, when things are scary, is the time to evaluate your risk tolerance.

If you’re losing sleep or feeling ill over what is, so far, a decline of less than 15%, the blunt truth is that your asset allocation was way too risky for you.

Just in my own investment history, we’ve seen two declines of roughly 50% (2000-2002 and 2007-2009). You have to be prepared for that sort of experience, with respect to any money that you have allocated to the stock market.

And if you’re thinking, “this time is different!” yes, you’re right. This time is always different. That’s the key thing to understand.

In early 2020, we saw an extremely quick decline, coupled with a pandemic. That was certainly a new and scary experience.

In 2008-2009, we saw a quick and large decline, coupled with major financial institutions collapsing and a non-trivial possibility of the whole thing becoming system-wide if too many large institutions failed. That was a new and scary experience.

In 2000-2002, we saw a large decline that just kept on going and was coupled with things like major accounting fraud scandals. Could we trust that the market wasn’t just a scam, rigged against the little guy? It was a new and scary experience.

That’s how these things go. A significant market decline doesn’t happen out of thin air. Such declines are generally accompanied by some scary real-world event.

If you’re going to invest in the stock market, you have to be prepared to see large declines from time to time, coupled with something scary going on.

Rebalance (or Not)

In addition to evaluating your risk tolerance, now is a good time to rebalance — if your plan calls for such.

Over an extended period of time, the general effect of rebalancing is that it reduces returns and reduces risk, relative to a portfolio that is never rebalanced. That’s because, more often than not, it’s the stock part of the portfolio that has risen above the intended percentage, and so rebalancing most of the time means selling stocks and buying bonds.

Right now, it would be the opposite. The point of rebalancing today would be to increase expected returns.

Rebalancing isn’t necessarily mandatory. Depending on your circumstances, it could be reasonable to have an investment policy statement that calls for rebalancing out of stocks when the stock allocation gets too high but does not call for rebalancing into stocks when the stock allocation is below the targeted level.

Tax-Loss Harvest

If you have investments in a taxable account, now may be an opportunity to tax-loss harvest.

As always, be careful of the wash sale rules. (And as always, I do not have the answer as to whether two funds count as substantially identical or not, because there’s no IRS guidance on the matter.)

Reevaluate Your Plans

Market declines are also a good time to reevaluate your plans. Does this change mean we need to cut spending? Does it mean we should be pushing back our planned retirement date?

Roth Conversions

Finally, Roth conversions, if using money from a taxable account (rather than from the tax-deferred account itself) to pay the tax, become a slightly better deal during a market downturn, because you’re converting a greater number of shares per dollar of taxes paid. But that wording probably makes it sound like a bigger deal than it is. It’s not that you’re paying a lower tax rate on the conversion. You’re just getting slightly more “oomph” out of the “use taxable dollars to pay the tax on the conversion” concept.

April 7, 2025