Friday, August 10, 2018

Keeping Clients' Rebates and Knowing Your Advisor

Pathways Advisory Group, Inc.
Jeff Karst, CFP®

A news story earlier this year brought to light that Wells Fargo was keeping mutual fund fee rebates rather than distributing those rebates back to the clients.  Well Fargo managed the investment portfolio for a pension fund.  Some of the mutual funds have a revenue sharing feature that would kick a rebate back to Wells Fargo.  Those rebates were supposed to go back to the pension fund but Wells Fargo kept them.

The story might cause some people to wonder if they’re missing out on their own fee rebates. 

This is yet another story highlighting the importance of knowing about the advisors you hire. Pathways is a fee-only investment advisor and financial planning firm.  We are paid solely by our clients.  We do not receive kick-backs, rebates, etc. from any of the mutual funds that we use or from our primary custodian, Charles Schwab.

We primarily (almost exclusively) use the mutual fund company Dimensional Fund Advisors (DFA).  It is simply a match-up in investment philosophy and beliefs.  We believe they do an excellent job of applying academic research to real-world investing in a cost-effective manner.

What can you do to protect yourself and have a better understanding of your advisors? Asking your current or prospective advisors the following questions might be a good way to start:
  • How do you get paid? Only by your clients, or is there compensation from third-parties? The advisor should be able to answer clearly and with full disclosure.

  • Do you act as a fiduciary? Meaning, are you required by law to put the interests of your clients above your own?

  • Do you have a certification or designation, such as the CFP® certification, that holds you to high ethical and competency standards?

You might also find the Searching For an Advisor page on our website helpful. We wish the best for your financial planning through the rest of 2018 and beyond!

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Monday, May 21, 2018

Tax Form 5498

Have you received a tax form in the mail recently? If you did just receive a 2017 IRS Tax Form 5498, don't panic. Form 5498 is generated by investment custodians every May for Traditional IRAs, Roth IRAs or Educational Savings Accounts with activity during the previous tax year and usually does not lead to an amended tax filing.

Tax Form 5498 is informational. The IRS reconciles this activity with your Tax Return. If you received this form, ask yourself: Did I contribute to a Roth or Traditional IRA last year? Did I roll money into an IRA last year? Did I contribute or initiate activity out of an Educational Savings Account last year? Did I convert IRA money to a Roth IRA last year? If any of this activity applies to you, you received Form 5498.

Contribution information is typically requested on an accountant's questionnaire. IRA rollovers and conversions generate a 1099-R. Either way, your accountant should already be aware of the activity. Then what should I do with my copy? In most cases, simply add it to your freshly started tax folder for 2018. As your accountant reviews next year's tax file, he or she can confirm that the activity was addressed.

The above explanation is summarized and generic. Please consult your tax professional with any specific questions.

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Thursday, May 3, 2018

Is Your Knowledge Expiring?

Pathways Advisory Group, Inc.
      Evon Mendrin, CFP®

How much of what you read today will you still care about a year from now?

I was lucky enough to stumble upon a blog post by Morgan Housel of Collaborative Fund that proposed that very question.  In the post, “Expiring vs. Long-Term Knowledge,” he challenges us to consider: what is the quality of all the stuff we read, and how much does it really benefit us?

With access to the internet, television, and radio, we are flooded with information. Media content is chopped down into bite-sized portions so we can consume more and more. Newsfeeds constantly update us on every bit of information, on any topic we want. How much of that content will you care about years from now?

Citing an observation by MIT’s endowment fund, Housel describes two types of knowledge: expiring knowledge, which has no long-term value, and long-term knowledge, which is valuable over time. He lays out the differences:

“Expiring knowledge catches more attention than it should, for two reasons. One, there’s a lot of it, eager to buzz our short attention spans. Two, we chase it down, anxious to squeeze out insight before it loses relevance.

Long-term knowledge is harder to notice because it’s buried in books rather than blasted in headlines. But its benefit is huge. It’s not just that long-term knowledge rarely expires, letting you accumulate it over time. It’s that compounds over time. Expiring knowledge tells you what happened; long-term knowledge tells you why something happened and is likely to happen again. That “why” can translate and interact with stuff you know about other topics, which is where the compounding comes in.”

There’s an abundance of expiring knowledge! I count four applications on my cell phone alone dedicated to giving me short-term, mostly useless content. What does this information really teach that I can use far into the future? Sadly, not much.

Contrast that to the truly useful information buried in books, research papers, journals, and podcasts. Consider some of the greatest books to have been written – knowledge to have stood the test of time. Consider Benjamin Graham’s The Intelligent Investor (originally written in 1934), Nick Murray’s SimpleWealth, Inevitable Wealth (Published 1999), Dale Carnegie’s How to Win Friends and Influence People(1936), Robert B. Cialdini’s Influence (1984) and Michael Gerber’s The E-Myth (1986).

The advice and knowledge within these books are still as relevant today as they were when first published – and those are on business and finance alone! Not to mention subjects such as history, construction, engineering, automobiles, music, faith, art, and science.

Many of us may not remember the newspaper articles we read in 2011, but – like Housel, we may remember details of great books we read in 2011 and how it affected our thinking.

Even some of the greatest entrepreneurs of our time attribute their success to reading good content. Warren Buffett once remarked, “Read 500 pages like this every day. That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”

As Housel writes, it’s not just that long-term knowledge rarely expires, but that it compounds! It begins to spread into other areas in your life! Skills you learn from one piece of writing can carry over to other hobbies or work. Long-term knowledge gives you the deeper why’s, what’s and how’s. It helps to sort through the expiring stuff, to know what to pay attention to and what to ignore.  In the same way, relying on short-term knowledge for decision making can compound in your life as well.

Investing is a great example – the hottest market headlines are always fighting for attention, and yesterday’s headlines are forgotten. Even data from companies – such as quarterly earnings, performance, expenses, and cash flow – expire in short-term value once the next quarter comes.

These bits of information compete against long-term research and discipline. How easy it is to make quick, emotional decisions from an article we’ve read – forgetting about the long-term plans we’ve established.

So, what are we to do? Housel writes:

“I try to ask when I’m reading: Will I care about this a year from now? Ten years from now? Eighty years from now?

It’s fine if the answer is ‘no,’ even a lot of the time. But if you’re honest with yourself you may begin to steer toward the enduring bits of knowledge.”

As for me, I think I’ll go ahead and blow the dust off the stack of books I’ve been neglecting. News on the latest Donald Trump tweets will have to wait.

-Written by Evon Mendrin from our June 2017 Client Newsletter Article.

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Friday, April 6, 2018

Now and Then Story – Does It Sound Familiar?

Pathways Advisory Group, Inc.
      Dustin J. Smith, CFP®

We are in the peace-of-mind business.  This is one of the reasons we focus more heavily on knowledge and expectations than short-term results.  We would all like returns to be predictable and consistent, but this expectation is unrealistic and unfounded.  The actual results tell a much different story. 

Big Bang Theory Executive producer Dave Goetsch realized this through his own investing experience. He felt true stress and anxiety during the Great Recession, but understanding and accepting the unpredictable nature of markets completely changed the way he viewed recent results.  

Long-term optimism doesn’t have to depend on short-term results.  Hopefully, you can relate to the peace-of-mind he shared in a recent Now and Then story. You can read his story by clicking here or by using the link below. Enjoy and have a great weekend!

Dustin J. Smith, CFP®

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Friday, March 16, 2018

Thinking of Downsizing Your Home?

Pathways Advisory Group, Inc.
Jeff Karst, CFP®

Have you ever thought about downsizing your home but worry about new property taxes?

A little background

Proposition 13 was passed overwhelmingly by California voters in 1978.  It establishes the tax base when you purchase a property and that base value increases 2% per year.  

Assume you purchased your house in 1987 for $125,000. Your current tax base would be about $230,000 (assuming no re-assessments).  If the home next door sells for $699,000 the new buyer’s property taxes are roughly three times higher than what you pay each year.

It's time to downsize

The kids have long moved away and you’re ready to downsize to a smaller, more manageable home.  Assume your home sells for $699,000 (similar to your neighbor’s) and you purchase a smaller home for $450,000.  You have a smaller, more manageable home that should cost less.  The only problem is your tax base was $230,000, so your property taxes will double.

Or maybe not…

There is a once in a lifetime exemption to retain your property tax base if you downsize your home.  Proposition 60 allows you to transfer your base value when you downsize (the new home costs less than your previous home) within the same county.  

You or your spouse must be over age 55 to apply for the exclusion.  The California Board of Equalization has a page dedicated to Frequently Asked Questions about Proposition 60.

You may not be able to transfer all the trees and shrubs from the old home, but you may be able to transfer the nice, low tax base!

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Thursday, March 15, 2018

Tax Time is Here, and Your 1099s Should Be Too!

We have been informed that all Schwab 1099s have been mailed out as of February 28th. Schwab extended their mailing date into February to reduce the number of corrected 1099's, but corrections are still a possibility. The forms should be available online through your Schwab login. Please give our office a call if you have any questions.

Good luck with your taxes, and happy filing!

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Friday, February 16, 2018

Recent Volatility and the Headlines You Don’t See!

After a period of relative calm in the markets, the recent increase in volatility has renewed anxiety for many investors.

From February 1–8, the US market (as measured by the Russell 3000 Index1) fell over 8%, resulting in many investors wondering what the future holds and if they should make changes to their portfolios.  Financial news outlets were quick to jump on the commotion, as you’ll find headlines filled with “chaos,” “turmoil,” and “panic.” However, here are a few of the headlines2
you probably didn’t see over the last two weeks.

“Another normal year in the market, as stock prices decline.”

“Recent decline offers little insight about the future.”

It’s natural to worry the sudden volatility was a sign of worse things to come, but a longer-term perspective shows us these types of declines are quite normal.

Exhibit 1 shows calendar year returns for the US stock market since 1979, as well as the largest intra-year declines that occurred during a given year. During this period, the average intra-year decline was about 14%. About half of the years had declines of more than 10%, and around a third had declines of more than 15%.

However, despite substantial intra-year drops, calendar year returns were positive in 32 years out of the 37 examined. As you can see, the recent decline is normal behavior for a functional auction market and tells us very little about the future.

“Market timing isn’t the answer.”

“Investors wisely staying in the game.”

Market prices aggregate the information and expectations of all the thousands of market participants better than we can individually. Information that’s available and the opinions of investors everywhere are built into current prices. If that’s true, stock mispricing can’t be systematically exploited. Meaning, we can’t time market!

This point, supported by the fact that a substantial proportion of stock returns come from just a handful of days, leaves long-term investors with plenty of incentive to remain invested. 

Exhibit 2 helps illustrate this point. It shows the annualized compound return of the S&P 500 Index going back to 1990 and shows the impact of missing out on just a few days of strong returns. 

The bars represent the hypothetical growth of $1,000 over the period and show what happened if you missed the best single day during the period and what happened if you missed a handful of the best single days. The data shows that mistiming or being on the sidelines for the best single days substantially lowered returns for the entire period.

“Savers rejoice as stocks go on sale.”

There wasn’t a whole lot of rejoicing the past few weeks, but should savers really fear these types of market declines? For those regularly contributing to their investments, the short-term volatility will actually aid their long-term returns. How? The assets they want to buy just went on sale! 

Figure 3 shows the historical growth of US Large and Small cap stocks. Since 1926, there have been tremendous amounts of ups and downs. Some were quite serious (Great Depression, the 1973 crash, Dot-Com Bubble, Great Recession). We were reminded these last two weeks that stocks carry risk. Yet long-term results reward disciplined investors, even through all the short-term volatility. So rejoice, savers, and keep saving!


While market volatility can be nerve-racking, reacting emotionally and changing long-term investment strategies can prove harmful. With each new decline, try to look past the noise and remember the headlines that you don’t see.


For more insight, view this video about expected returns before, during and after market declines. Market highs and market declines offer little insight about future expected returns (for the long-term investor).

1Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.
2These, of course, aren’t actual headlines. Just simple truths you won’t always see in the papers!

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