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Investing Blog Roundup: The Impact of Impact Investing

A recent paper from Jonathan Berk and Jules H. van Binsbergen took a look at “The Impact of Impact Investing” (a.k.a. ESG investing or socially responsible investing).

Their conclusion:

“We conclude that at current levels impact investing is unlikely to have a large impact on the long-term cost of capital of targeted firms. A substantial increase in the amount of socially conscious capital is required for the strategy to affect corporate policy. [Mike’s note: elsewhere in the paper, they estimate that in order to cause a 1% change in the cost of capital, impact investors would need to control more than 80% of all investable wealth.] Given the current levels of socially conscious capital, a more effective strategy to put that capital to use is to follow a policy of engagement. By purchasing the stock in targeted companies rather than selling the stock, socially conscious investors could potentially have greater impact by exercising their rights of control through the proxy process or by gaining a majority stake and replacing upper management.”

This is the case I have been making for years. But from a purely financial point of view, it’s clear that investing in broadly diversified low-cost mutual funds (rather than buying a handful of individual stocks) is the best decision. And unfortunately when we invest via mutual funds, we give up our voting rights in the underlying shares. The fund company gets to vote those shares instead (or not vote them).

Nearly 20 years ago (December 2002) Jack Bogle argued to the SEC that mutual fund shareholders should have a right to know how fund managers vote the fund’s shares. Unfortunately, the availability of such information is still quite limited.

Other Recommended Reading

Thanks for reading!

Social Security Made Simple: 2022 Edition

Just a brief announcement for today: the 2022 edition of Social Security Made Simple is now available (print version here and Kindle version here).

Relative to the prior (2019) edition, various figures have of course been updated.

And with this year’s large COLA, one of the questions I received repeatedly was whether a person has to have filed for their retirement benefit already in order to receive the COLA. So I’ve added an explanation that you get the annual cost-of-living adjustment beginning at age 62, regardless of whether you have filed for benefits.

There’s also a new example in the chapter on spousal benefits that illustrates another topic that has been a source of question for years: how is a person’s total monthly benefit calculated if they a) start their own retirement benefit early and then b) later start to receive a spousal benefit? (In short, the dollar-value reduction to your retirement benefit that was applied due to filing early continues to apply after your benefit as a spouse kicks in.)

For anybody who has not read the book, the outline is as follows:

Part One: Social Security Basics
1. Qualifying for Retirement Benefits
2. How Retirement Benefits Are Calculated
3. Spousal Benefits
4. Widow(er) Benefits
Part Two: Rules for Less Common Situations
5. Social Security for Divorced Spouses
6. Child Benefits
7. Social Security with a Pension
8. The Earnings Test
Part Three: Social Security Planning (When to Claim Benefits)
9. The Claiming Decision for Single People
10. When to Claim for Married Couples
11. The Restricted Application Strategy
12. Age Differences Between Spouses
13. Accounting for Investment Returns
Part Four: Other Related Planning Topics
14. Social Security and Asset Allocation
15. Checking Your Earnings Record
16. How Is Social Security Taxed?
17. Do-Over Options
Conclusion: Six Social Security Rules of Thumb
Appendix A: Widow(er) Benefit Math Details
Appendix B: Restricted Applications with Widow(er) Benefits
Appendix C: The File and Suspend Strategy

You can find the print version here and Kindle version here.

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security cover Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."

Investing Blog Roundup: How Do Household Finances Change After Children Leave?

I hope that you enjoyed your holiday season. I’m looking forward to 2022, and I hope you are as well.

Recommended Reading

As always, thanks for reading!

Professional Financial Advice: How Much Should You Pay?

In the realm of financial planning, advisors are often encouraged to use “value-based” pricing — and to determine the value of their services by comparing the results the client would get with those services to the results the client would get without those services. For example, an annual advisory fee equal to 1% of your assets under management is reasonable if the financial planning and portfolio management services provided for that fee can collectively improve your results by more than that amount. (And Vanguard’s “Advisor Alpha” research or David Blanchett and Paul Kaplan’s “Gamma” research is often used to make this case.)

But that only makes sense if this financial professional is the only financial professional with whom you could work.

If you’re at the Toyota dealership, considering purchasing a RAV4, the decision you’re making isn’t “Toyota RAV4 as compared to walking everywhere.” You’re evaluating the RAV4 against other vehicles.

It does make sense to first ask the question: do I want to buy a vehicle? Depending on your mobility, where you live, and so on, you may be able to save a lot of money by walking, biking, and using public transportation. Similarly, not paying for financial advice can be perfectly prudent for lots of people in various stages of their lives.

But for a particular vehicle to be the right one to purchase, it has to not only improve your life relative to no vehicle, it has to improve your life relative to the other vehicles you could purchase.

The same goes for financial advice. Even if a financial professional could, for example, improve your results by $20,000 per year relative to not working with a financial professional (and that’s a tall order to fill), that doesn’t mean that any price less than $20,000 per year is a good deal. You might be able to find an equally qualified professional who can provide the same service for less.

There Are Substitutes

Since starting this blog in 2008, I have had the pleasure of meeting and corresponding with lots of super smart financial professionals. But I have never met a single one whom I thought to be the only person who could handle a particular financial planning situation.

And to be clear, that’s 100% true for me as well. I believe I do a good job advising clients about retirement tax planning, Social Security, and a few other topics. But Jim Blankenship, for example, knows at least as much about those topics as I do. And so do plenty of other professionals who don’t happen to write a blog or books.

Many parts of financial planning are complicated. But they’re not that complicated. There’s nothing for which you need a one-in-a-million genius-level IQ. No matter which area(s) of financial planning you want help with, there are more than a few people qualified to help.

What Services Do You Want?

When considering working with a financial professional, the first step should be to ask yourself what services you want.

A critical question here is whether you want advice (i.e., financial planning), portfolio management (i.e., somebody who will actually place the buy/sell orders for you, to keep your portfolio at its intended allocation), or both.

If all you want is portfolio management, you can get it very cheaply through Vanguard or other robo-advisors. (Or you can get a very basic version by simply using an all-in-one fund.)

If all you want is advice, you would likely appreciate working with an “advice-only” professional (i.e., one who does not even provide portfolio management, and who will therefore not be trying to sell you such services).

If you want both advice and portfolio management, that’s where the financial planning firms that charge based on assets under management might be a good fit. But even then, not necessarily. There are flat-fee firms as well (e.g., Bason Asset Management, which charges a flat $5,100 per year as of this writing). And depending on the size of your portfolio, a flat fee could be a lot less than an asset-based fee.

Typical Costs

For advisors charging hourly, a 2020 Kitces Research survey found that the median cost for hourly financial planning was $250. A 2020 survey from Envestnet/MoneyGuide found the hourly average was $257. (I’ll be interested to see the extent to which these fees change in the next iteration of the surveys, given the inflation over the course of 2021.)

For firms charging a flat retainer fee, the Kitces Research survey found that the median annual amount was $4,000.

As far as asset-based fees for financial planning combined with portfolio management, the Kitces Research survey found that “median fees were 1.0% of [assets under management] up to $1 million. The median fee then dropped to roughly 0.9% at $2 million and 0.8% at $5 million.” The Envestnet/MoneyGuide survey found a mean asset-based fee of 1.04%.

More Than Just Costs

The point here isn’t to automatically choose the advisor who can provide the rock-bottom cost. You want to be aware of costs — and check to see if there’s an equally-good option that costs much less. But in many cases the advisor who turns out to be the best fit for your needs will not be the very least expensive option.

It’s important to determine whether this particular advisor has the particular expertise you’re seeking. Do they often work with people in circumstances similar to yours? For instance, Jon Luskin works with DIY investors. Meg Bartelt focuses on working with women in tech. Cody Garrett works with families with “FIRE” goals. Sotirios Keros works especially with healthcare professionals.

And there are other questions about the firm that could be important. For instance, some people may prefer to work with a solo advisor, while others may prefer to work with a larger team, such as the hourly-only firm Timothy Financial. A team can likely provide deep expertise on a broader range of topics than an individual can. In addition, a team can provide better accessibility. (If a solo advisor is on vacation, the firm is on vacation. If one person in a team firm is on vacation, the team is still operating.)

And there are subjective considerations as well: does this person/team feel like a good fit? Do you trust them? Do they communicate in a way that makes sense to you, or does it feel like they’re speaking another language?

Investing Blog Roundup: Happy New Year

I hope that 2021 has treated you well.

As for me, it was on the whole a good year, working with individual clients again for the first time in many years, enjoying a number of climbing adventures with friends, and sincerely appreciating the ability to safely spend more time with friends and family, relative to 2020.

As always, thank you for reading, and I wish you the best for 2022!

Other Recommended Reading

Tax Returns Necessary After Somebody’s Death

A reader writes in, asking:

“A family member appears to be in his final days. I have not seen his will, but I have been told that I am named as executor. I have never been an executor before, so I am doing some research on what my responsibilities will be. Could you perhaps discuss what tax filings will be necessary?”

Firstly, one thing you should know if you choose to accept the role of executor is that you are allowed to hire assistance (e.g., an attorney to guide you through the process and/or a tax professional to prepare the necessary returns).

And as far as basic tax information, IRS Publication 559: Survivors, Executors, and Administrators will be very helpful.

Background Information (Basic Definitions)

What exactly is an estate? An estate is a legal entity that comes into being when a person dies. The purpose of the estate is to gather the decedent’s assets, pay the decedent’s debts and expenses, and distribute the remaining assets. The estate exists until all of the assets have been distributed to heirs or other beneficiaries.

The executor is the person named in the will to administer the estate. (If no will exists, if no executor is named in the will, or if the named party refuses to serve as executor, the court will appoint an administrator to perform the same functions.)

Form 1040 (Final Individual Tax Return)

The executor must file the final income tax return for the decedent for the year of death as well as any returns from prior years that have not yet been filed. (For example, if you die in February of a given year without yet having filed your return for the prior year, your executor will have to file your return for that prior year as well as the return for the year of death.)

The final tax return is due on the same date it would have been due if the death had not occurred (i.e., typically April 15 of the following year).

For the final return and any returns for prior years not yet filed, the executor may choose to file a joint return with the decedent’s surviving spouse, if applicable.

Form 1041 (Income Tax Return for the Estate)

The executor also must file an income tax return (Form 1041) for the estate for each year that the estate remains open. Broadly speaking, the estate has to pay tax each year on any income it earns that is not distributed to beneficiaries. Form 1041 is where all such income and distributions are reported and where the resulting income tax is calculated.

For calendar year estates, Form 1041 for each year is due April 15 of the following year.

Form 706 (Estate Tax Return)

Form 706 is the estate tax return. That is, it’s the return relating to the federal estate tax (filed once), whereas Form 1041 discussed above is the income tax return for the estate (filed every year until the estate is closed).

Form 706 is also used to report and calculate the tax on generation-skipping transfers.

Form 706 generally only has to be filed if one of two things is true:

  1. The gross estate, plus taxable gifts made during the person’s lifetime (i.e., gifts beyond the annual gift tax exclusion amount) exceed the applicable threshold ($12,060,000 for 2022), or
  2. The executor elects to transfer the deceased spousal unused exclusion amount to the surviving spouse.

If Form 706 must be filed, the executor must file by 9 months from the date of death, with a 6-month extension possible.

State Returns

In addition to the above, there will generally be forms to file at the state level as well (e.g., income tax return for the decedent, income tax return for the estate, and potentially an estate tax return if the state has an estate tax).

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