Charting
the Course

Millions of people work most of their lives to build the retirement savings they will need to live comfortably after they decide to quit working. In some ways, that’s the easy part. For many, the hard part is managing all the wealth they’ve accumulated.

It doesn’t matter whether they’ve saved several hundred thousand dollars or several million; people want to know their investment accounts are growing and that their money is safe. Everywhere they turn, they hear voices from the financial industry competing for attention with facts, figures, claims and promises.

In the middle of it all, retirement savers are busy with careers and families, and have little time to study all the assertions and understand the differences. And rest assured, there are differences.

You would not use a sand wedge to drive a ball down the fairway and you’re not likely to pull a 7 iron for a 10-foot putt. The financial industry is a little like a golf bag. There is a club for every purpose whether it is insurance, investing, retirement savings or a range of other services. The problem is that some of these clubs are being used for multiple purposes. Trust fund managers also set up retirement accounts, insurance companies offer IRAs and brokerage houses sell annuities. No wonder some retirement investors struggle to find the green.

The U.S. Securities and Exchange Commission had investor safety in mind when it set up regulatory structure around registered investment advisors, which are financial firms dedicated to financial management services and advice.

Under SEC rules, RIAs must hire an SEC-regulated custodian, such as Fidelity, Schwab, or Pershing, to independently ensure transactional compliance and transaction accounting on behalf of clients. To ensure independent, third-party financial reporting, these custodians also provide account and activity statements directly to the RIA’s clients. Furthermore, RIAs place their clients’ funds in the hands of the custodian, which conducts financial transactions as directed by the RIA, which has legally required approval from the client.

Under this structure, retirement savers have the best of both worlds. They have direct access to seasoned financial fiduciaries with legal responsibility to act in the best interest of clients, and they are protected by giant, multi-trillion-dollar institutions dedicated to keeping their money safe.

The RIA regulatory structure is unique in the financial industry, custom-designed for a specific purpose, just as every other club in the financial industry’s golf bag. So, when it’s time to make a decision about wealth management and retirement savings, don’t take chances. Be sure you’re swinging the right club.

There are many things in life that we dismiss, not even realizing how much we value them until they are taken away. For a lot of us, the experience of living through a pandemic has demonstrated just how much some of those little things mean to us in our daily lives.

Millions have been working from home for months as companies have transitioned away from traditional office settings, prompting wide speculation about the future of office space, office buildings and downtowns across America.

Amid the continuing debate over worker productivity, flexible work hours and reduced overhead costs, many of us are realizing the link between offices and the cultures that bring companies to life.

Over the past year, we have missed more than our share of face-to-face meetings and the collegiality that comes with them. We have gone without lunches with clients and co-workers, and there have been no after-work Thunder games downtown. Office Christmas parties became a thing of the past, and forget about the birthday cakes, appreciation days, and donuts by the coffee pot.

Offices are where people work together and celebrate together. How can we know each other, appreciate each other and sacrifice for one another without being able to high-five each other after a win?

Sure, there are going to be some innovations in the use of office space after what we experienced last year. More workers may be sharing offices while they work from home part time, and rigid work schedules may become a thing of the past. If it isn’t already, mobile technology platforms will be the standard for executives and professionals because of the pandemic.

We can all be grateful that technology enabled us to step away from our offices and distance ourselves as COVID-19 was raging across the country last spring, but we can’t trade technology for organizational culture. Without offices, the impromptu conversations in the hallway don’t happen, training opportunities diminish, personal connections wither, communication suffers and company loyalty fades.

The office environment is an essential source of social connection, motivation and creativity. Maybe we overlooked that last year as we rushed to deploy our laptops and cloud-based data banks, but the little things we gave up in 2020 turned out to be big things we need to get back in 2021.

Every now and then, we see media reports about celebrities who pass away, leaving vast holdings untethered by wills or estate plans. Family members, significant others, lawyers and advisers are left with months or years of work, untangling the financial mess.

Tech entrepreneur Tony Hsieh may be the most recent example of a high-flying fortune seemingly cast to the wind following an unexpected death. The founder of the online shoe and clothing retailer Zappos passed away in a house fire last November, leaving little word on how to manage an estimated $840 million in financial assets.

Reports show the only guidance family and friends could find were written on thousands of sticky notes stuck to walls throughout the house, noting financial commitments to employees, co-workers, friends and businesses. The 46-year-old left far-flung assets for his family to locate, and when all the dust settles, a vast majority of his wealth will likely be subject to the 40% estate tax rate.

Hsieh may be the most recent example, but there are plenty of other prominent people who have died, leaving close friends and family with little to no instruction on how to allocate their fortunes. The list includes Bob Marley, Prince, Aretha Franklin and Sonny Bono.

But estate planning is not just for the wealthy. Regardless of an estate’s size, an estate plan can be an invaluable tool that families can use to manage financial assets and other responsibilities after death.

Plans often contain a trust or will that address beneficiaries and how financial assets will be managed and distributed. Plans may also include a durable power of attorney, which designates a representative to make financial decisions, and an advance directive covering certain medical decisions.

If possible, it also is important to let beneficiaries know what lies ahead rather than waiting until you’re gone and letting them read about it in the plan. This approach can better prepare them for their financial futures, and it may also deepen personal relationships.

Estate planning is not always popular. Most people would rather not think about their mortality and name prospective guardians for their children. They must account for personal assets, and the process can take weeks. Attorney fees are not insignificant.

But the benefits outweigh the costs. Families experiencing a loss are already grieving, so why subject them to more work, uncertainty, and potential conflict with other family members? Without an estate plan, the public probate process can take months or even years to resolve.

Remember, plans are living legal documents and should be reviewed periodically to ensure they are current. Laws change and families evolve, so modifications may be necessary.

Estate plans can remain active long after you are gone, and it’s comforting to know assets will be managed and people will be cared for according to your wishes. No one wants to leave their family behind to decipher sticky notes hanging from a wall.

My brother texted me today and asked if he should buy GameStop stock.

I stared at my phone trying to figure out how to compose a text that included a brief summary of efficient markets hypothesis, the effect of global pandemics on the future of retail, the future of gaming when games can be downloaded instantly to a console instead of purchased in store, fundamental analysis on a company whose revenue has dropped by half in the last 5 years, the impact of a potentially coordinated group of retail investors via Reddit possibly engaging in market manipulation to short squeeze a group of institutional investors with significant short interest in the stock, the impact of a different company’s CEO tweeting “Gamestonk!!”, the time value of money on various option trades that exist on the stock, and how all of this fits into my overarching view that active management has been evidentially proven to reduce value.

Instead, I sent him a GIF of Kanye West shrugging his shoulders.

There are a lot of reasons to own GameStop at this point but I’m not sure how many of them can rationally be based on a fundamental analysis of the company’s prospects for growth in the short and near term.

You can own the stock from a technical basis that it is going up based on volume. You can own the stock because you recently got a stimulus check and since casinos are closed you want to do some gambling. You can own the stock out of coordinated spite because you think hedge funds have been ripping off the retail investor and you want to be a part of the movement sticking it back to them.

You can also own the stock because you are a market cap index investor who fundamentally believes that all forms of active management have been shown to reduce returns over the long term. You own the stock because GameStop is a, currently though subject to change, $24 billion dollar company and that represents 0.08% of your domestic portfolio. You have seen the evidence that a handful, literally less than ten, of stocks are responsible for over 90% of your returns and being out of the market for the wrong ten days over a decade materially reduces your return. You have realized you must own all the stocks all the time.

Full Sail Capital is an indirect owner of GameStop through exchange traded funds. We own it in an appropriate proportion of its market capitalization relative to the entire United States stock market.

We will leave it to others with a mandate to try to outperform the market to make the perilous decision about whether to buy or sell GameStop. Frankly, we don’t envy their difficult choice of whether to join the momentum trade that has been so profitable recently or dig in based on the fundamentals and sell or even short the stock. Fortunately for us, the evidence shows that a low-cost, evidence-based approach rooted in the idea that discipline trumps conviction is the best path to wealth creation.

We’ll leave bets to the Redditors and continue to focus on investing money in such a way that grows wealth slowly, but safely, over time.

Resources

https://www.reddit.com/r/wallstreetbets/

Matt Levine GameStop Articles

• https://www.bloomberg.com/opinion/articles/2021-01-25/the-game-never-stops
• https://www.bloomberg.com/opinion/articles/2021-01-26/will-wallstreetbets-face-sec-scrutiny-after-gamestop-rally
• https://www.bloomberg.com/opinion/articles/2021-01-27/reddit-driven-surge-puts-gamestop-and-ryan-cohen-in-a-weird-spot

“A smooth sea never made a skilled sailor.”

My wife shared the old English proverb with me earlier this year after a particularly challenging day at the office. As chief executive of Full Sail Capital, I’ve seen plenty of challenging days at the office this year, so Kim’s words were particularly meaningful.

The smooth sea adage became famous after President Franklin D. Roosevelt used it to close one of his fireside chats during the Great Depression. That was a difficult time in American history, much like the pandemic of 2020, when businesses failed, unemployment soared, and financial markets plummeted.

While the turmoil is not over, we have plenty to be thankful for this year as we watch multiple vaccines against the coronavirus being launched and development of medical treatments for those infected. Financial markets have broken back into record territory, and businesses are looking ahead to better times.

As investors, we can breathe a sigh of relief after a year that has tested the tenacity of many seasoned veterans. Those of us who have maintained discipline and stood our ground can take satisfaction in weathering a financial hurricane, while those who jumped ship may still be trying to make their way back to shore.

Financial downturns happen, and there is nothing we can do to prevent them. What separates successful investors from those who do not survive is the resolve we bring to the market.

Consider the different ways that cows and bison cope with storms that roll across the prairie. When cattle see storms approach, their instinct is to run away from them, prolonging the suffering as they gallop in the same direction as the rain, thunder, and lightning. Bison, on the other hand, run into storms, minimizing the danger by emerging from the back side much sooner than the hapless cows. The phenomenon illustrates a valuable lesson.

Through my 30-year career of managing clients’ wealth, I have seen many uncertain times and negative economic events, and I have learned that it is always better to move into the storm rather than stop moving, ride it out, or run away. The famous quote by Winston Churchill always rings in my head, “If you are going to go through hell, keep going.” In other words, move!

This COVID-19 crisis has been no different. Overnight, our high-flying economy was pulled to the ground, and Full Sail Capital’s entire staff was forced to work from home with their laptops, cloud connections and smartphones. As bad as the market seemed at the time, we did not run or take cover. We knew the storm would eventually pass, so we responded to the circumstances, reminding clients of the importance of discipline and diversification, and provided information they needed to make informed decisions.

While there were impulses to pull out of the market and come back when the pandemic was over, we encouraged clients to be patient because the turnaround was coming, and there would be more opportunities to create wealth in the market than on the sidelines.

When you are an investor, financial storms are inevitable, and some can seem unbearable, no matter how many you have weathered in the past. But it is important to remember that storms end, markets return, and wealth is created for those who stay the long-term course.

Smoother seas are always over the horizon.

The holiday season is always a popular time for giving to worthy causes and to those who are less fortunate than we are.

It seems like the natural thing to do around Christmas and research appears to confirm that with about 30% of annual giving taking place in December. Studies even say that the simple act of giving makes us happier.

The benefits of charitable giving can also carry through to the following year when we see a lower tax bill. But these days, tax advantages from charitable giving are harder to manage than they used to be.

The Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction for individuals and those filing jointly. As a result, donors must give significantly more to receive tax deductions that are greater than the new standard deduction, prompting many to reconsider their philanthropic strategies.

But changes in the law should not stop us from giving to those great causes that depend on our generosity. A long-standing investment vehicle established by the Tax Reform Act of 1969 provides a strategy for donors to keep giving without surrendering their tax benefits. Seldom used in the 1970s and ’80s, Donor-Advised Funds (DAFs) picked up popularity in the 1990s and gained more interest when the Tax Cuts and Jobs Act became law.

Think of a DAF the same way you might think of a foundation. They both take contributions; they both invest the money and they both distribute grants to various charities over time. The difference is that DAFs are owned by individuals or families and they do not need the staff, the overhead, and the regulatory oversight that foundations require.

Once a DAF is established, donors can receive immediate tax deductions from their contributions. When assets are transferred into a DAF, they can grow tax-free, but the contributions are irrevocable, which means they can only be used for grantmaking. However, they are easy to manage and donors can make grants in any given year to virtually all IRS-qualified public charities.

Now, the strategy gaining in popularity due to the new tax environment is bundling charitable gifts every two years. By utilizing a DAF, donors can reap a greater tax benefit when they itemize their tax returns and bundle their DAF contributions every other year. In off years, donors can then take the standard deduction and hold their charitable donations, allowing them to accumulate for the next tax year.

In addition to its tax advantages, a DAF can provide a more deliberate approach to charitable giving. Members of the entire family can be included in grantmaking decisions. Some families name their DAFs, and even write mission statements to help guide them across years of giving. For those focused on leaving a legacy, this can be an incredible way to impart a family’s core values to the next generation.

Before setting up a DAF, consult with a tax adviser and a Registered Investment Advisor to help with the process. Their training, experience, and commitment to act in their clients’ best interests will help ensure a successful outcome.

So, in the midst of the holidays, a DAF may be the key to a more meaningful and tax advantageous charitable giving strategy. So, go ahead and give this Christmas. It will be good for the community, good for your tax bill and it’s likely to make the season a little merrier for you.

Tyler Grubbs is an accredited investment fiduciary, providing financial advising services at Oklahoma City-based Full Sail Capital, working with individuals, families, and companies of all sizes to implement financial planning strategies.

Football season is officially in full swing, Halloween is just around the corner and before we know it, the holiday season will be upon us. Yes, we have finally reached the fourth quarter of 2020, and considering how wacky this year has been, many cannot wait to see 2021.

Before we reach Jan. 1, however, it might be a good idea to sit down with your financial adviser and certified public accountant to explore options for savings this coming tax season.

Tax law provides several avenues for lowering adjusted gross income, which lowers tax liability. With a little consultation, many taxpayers can drop their AGI levels significantly and perhaps even drop it to a lower tax bracket, saving thousands of dollars. Here are a few basic strategies that are worth considering.

Filers can reduce their AGI substantially by contributing maximum amounts to their Individual Retirement Accounts and 401(k) retirement accounts. For example, individuals can contribute up to $19,500 to their 401(k) accounts and for those 50 and over, the maximum is $26,000.

Also, contributions to Health Savings Accounts are tax-deductible. An individual can contribute up to $3,550, and a family can contribute up to $7,100. Individuals who are 55 or older can contribute an extra $1,000.

Meanwhile, individuals on the cusp of moving into a higher tax bracket can avoid paying the higher tax rate through proper investment strategies.

Under IRS guidelines, individuals who make more than $163,300 must pay a 32% tax rate on each additional dollar above that tax bracket threshold. But those additional costs can be avoided through retirement savings. For example, if the individual’s AGI were $182,800, they could contribute the maximum of $19,500 to their 401(k) plan, avoid moving into the 32% tax bracket and achieve a tax savings of $6,240. Married couples who file jointly can see a similar outcome with an AGI of $326,600.

Financial market volatility also can be used to an advantage when investors sustain losses. As painful as they might be, there are ways to turn disappointing investments into tax benefits. In taxable accounts, investors can use losses to offset capital gains through a strategy called tax-loss harvesting. This is an approach that is intricate and complicated, but when handled properly, it can provide a nice benefit to investors. The key is having a proactive advisory team to ensure you are satisfying the requirements of this strategy.

The Internal Revenue Service allows tax-losses to be used to reduce AGI by up to $3,000 in net capital each year. Those who have lost more than that can carry the remaining losses forward for use in future years.

To spur charitable giving amid the pandemic, Congress included a new tax deduction provision in the CARES Act, enacted to provide economic assistance to workers, families, and small businesses.

Normally, tax deductions for charitable contributions only benefit those who file itemized tax returns. This year’s CARES Act is allowing those who take the standard deduction to take an additional deduction for qualified charitable gifts of up to $300 for individuals, or $600 if married. Additionally, an individual who itemizes can deduct 100% of contributions, up from 60%. Corporations can deduct 25% of taxable income, up from 10%.

These are just a few options for achieving tax savings, and there are others depending on financial circumstances. So, it may be a good idea to schedule time with a financial professional this fall, so you can be ready for better days ahead in 2021.

If you like hyperbole, this is the election year for you. Strong feelings abound on both sides of the political spectrum, and heated passions have spilled into many facets of society that are usually benign to politics.

In our office, we talk about politics almost every day with clients concerned about who might be our next president. It does not really matter whether they are liberal or conservative. The fears are the same.

“If Donald Trump wins, I’m pulling out the market,” some say. Others say they’ll make for the sidelines if Joe Biden becomes president. But jumping off an emotional ledge just because of an election is a serious mistake.

Political tides ebb and flow, and presidential administrations come and go, but markets continue to gain value over the long term and reacting to an election cycle is not a winning investment strategy. Successful investors stay focused on long-term goals and resist making short-term decisions based on politics.

We can look back at history and assess how markets have performed under various leadership configurations, such as a Democrat in the White House and a Congress split between the two parties. Historians have documented trends, but those trends are not necessarily predictors of future performance.

For example, look at the current configuration. The Dow Jones Industrial Average has an abysmal record when there has been a Republican in the White House and a Congress split between the two parties, averaging 1.1% in the first two years after the election, according to Fidelity Market Research. That is the worst performance of all possible configurations.

Historians might have advised investors to jump ship when the Republicans lost the U.S. House of Representatives in 2018, leaving President Trump to work with a split Congress. But those who ignored history are glad they did. The Dow gained nearly 6,000 points before the bottom fell out in February. Even with the coronavirus selloff, the index is still ahead of where it was in January 2018.

History can be intriguing to study, but election outcomes and future market performance do not necessarily align, so it’s easy to see why experienced investors don’t react to political outcomes. Instead, investors focus on interest rates, corporate tax rates and earnings.

For example, today’s markets are largely driven by a low 21% corporate tax rate and historically low interest rates.

The outcome of a presidential election would not necessarily change either of those variables. A Democratic president might attempt to raise the corporate tax rate, but it is safe to assume a Republican majority in the Senate would thwart that attempt. Even if Democrats take the Senate majority, a corporate tax hike could face strong opposition from Republicans and even some Democrats.

As for interest rates, the Federal Reserve has demonstrated a strong commitment to keeping rates low for the foreseeable future, and it’s important to remember that the Fed functions independently from the president.

There are many arguments and counterarguments about public policy from Washington, but the fact is our government is well-balanced, and it has functioned effectively for 244 years. As divided as society seems to be right now, the historic fundamentals of our government remain the same.

So, it is important for investors to set politics aside and remember that elections have short-term effects. Meanwhile, they will be investing through many different presidencies and Congresses, and despite all of the hyperbole out there right now, the best investors follow a long-term path to their financial goals and avoid drastic moves based on an emotional response to the political season.

Zac Reynolds is chief investment officer at Oklahoma City-based Full Sail Capital, and he is one of the firm’s founding principals.

A couple of years ago my grandmother had to move out of her home due to advancing medical needs, and our family faced the task of selling it to help cover rising health care costs.

She had been living in the place since 1970, and as we walked through it, we found the house hadn’t really changed much over the past 45 years. It was out of code, there were structural problems, and certain aspects of the house no longer functioned. It was clear that we had our work cut out for us before we could put the property on the market.

We were facing the same issue that thousands of families across the country face every year. The home health industry has burgeoned, allowing more older people to stay in their homes longer, and in some cases, they may never move out.

As people age in their homes, maintenance and upkeep are often overlooked to a point that many of the houses are not in condition to pass home inspections when it’s time to sell. We’ve all seen the billboards and television ads from companies offering to buy houses in quick, easy transactions, regardless of the property’s state of disrepair.

My family certainly didn’t sell to these types of companies, and we rarely suggest our clients sell to them either. People who do can leave thousands of dollars on the table. With a few simple steps and strategies, families can sell their properties for what they’re worth and walk away with the value they need to cover retirement and health care costs that can grow late in life.

The process starts with hiring a private home inspector. For between $125 and $250, a home inspector can identify structural, mechanical, plumbing, electrical, roofing and other problems that could stand in the way of a sale.

Once the fundamental problems are out of the way, it’s time to hire a real estate agent who can typically provide advice on cosmetic improvements. That might include paint, flooring and potential updates in the kitchen, bathrooms or other parts of the house that can increase a property’s value and improve its marketability.

All these repairs and improvements can be costly. But don’t invest so much that the ultimate cost per square foot of your house exceeds the market price range of surrounding homes.

Scott Cravens is chief operating officer and a founding principal at Full Sail Capital in Oklahoma City.

Everyone knows that investors don’t like uncertainty, but experience tells us that markets will eventually climb those walls of worry and emerge more prosperous on the other side.

There has been a lot of talk about the stock market this year for obvious reasons. Much of it is coming from market pundits citing a basketful of economic and social concerns, such as COVID-19, the recession, the election, and government debt. The stock market is too high and interest rates are too low, they say.

Some investors have responded by pulling out of the market, and that is tragic to see because liquidating stock in a downturn could turn a temporary drop in value into a realized loss.

For those who stayed in the market this year, it took courage to watch indexes plummet when COVID-19 began its sweep around the world. But they were rewarded.

Nonetheless, many investors are easily scared out of their stock holdings, waiting until the coast is clear before reentering the market. By then, however, the best rates of return are long gone.

Let’s face it, investing is not easy. There are economic and emotional challenges.

Market drops, corrections, consolidations, retracements, whatever you want to call them, will happen periodically and each one will test an investor’s resolve. Those who have faith in their investment approach and remain disciplined will eventually capitalize. Those who run for the exits will not.

Markets can move up and down on the emotions of investors. Many people struggle to keep their feelings in check, allowing their emotions to take over in response to sudden developments in an otherwise favorable investment environment.

Through it all, it is better to have a poor strategy and the discipline to stick to it, than it is to have a great strategy, but no resolve to stay with it when times get tough.

Of course, investment plans are only useful for so long, so experienced investors conduct regular investment reviews to ensure plans are still up to date. Registered Investment Advisors are ideal to help with this process because of their training, experience, and commitment to act in their clients’ best interest.

By developing an investment plan that fits their goals, investors can be confident the next time the investment world feels like it’s falling apart. They’ll have the plan they need to keep their financial house intact.

George Cohlmia is a financial advisor with Oklahoma City-based Full Sail Capital.