WCI #335: Solo 401(k) Questions

This is the White Coat Investor Podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011.

This is White Coat Investor podcast 335 solo 401 questions did you know that the White Coat Investor not only has a podcast and a blog, but several books that will help you on your way to financial independence? These books cover topics such as asset protection and minimizing your taxes to keep more of your hard earned money. They discuss plans for insurance, housing spending, student loan elimination, investing and estate planning. You can learn how to become a millionaire within five to 10 years of leaving residency and how to invest in a sensible, low cost and effective manner with or without the assistance of a financial advisor. There's even a book geared directly toward medical and dental students so you can start optimizing your finances or early in your professional journey. Find the book that is right for you at the WCI store, at shop.whitecoatinvestor.com or on Amazon. You can do this and the White Coat Investor can help. Alright, let's start the podcast with our favorite thing to do here. Corrections all right, I got an email about our last podcast. Not our last one, probably you heard, but last one that was heard before. We recorded this one on September 8th but apparently I made a mistake. I know it's hard to believe, but it does happen from time to time. I mentioned on a previous podcast that you can contribute to your IRAs, your traditional and Roth IRAs after April 15th. If you file an extension to file your taxes in October, you could do it as late as October. That is not actually true. While you can do that for a SEP IRA for solo 401k, you cannot do that for an IRA. The deadline for an IRA is the tax filing deadline for that year. Usually April 15th. Sometimes if there's a weekend a few days later. Sorry about getting that one wrong. I got a couple of messages about that. I also apparently said the extension deadline was in September. It's September for businesses, it's October for individuals, October 15th September 15th. If you have a partnership or whatever, that return has to be filed by March 15th. You can extend it six months to September 15th. If you're filing as an individual, you have to file by April 15, which can be extended six months to October 15. Also, somebody corrected me on something that changed in between the time I recorded the episode and when it ran the Roth contributions. These new mandatory catch up contributions that have to be Roth for new earners that was supposed to take place starting in 2024 is not going to take place until 2026. So if you've been worried about that at all, you got a couple of years of reprieve for that. I also had something pointed out to me that I didn't know and I'm still not 100% sure it's true. But this correction, this message I got said that mandatory catch up Roth contributions only impact W2 earners contributing to an employer 401 plan. So if you're using a solo 401, you can still make catch up contributions even after 2026 to a traditional Roth 401K. And the commenter said, I believe the logic decided upon by the Congress is that self employed individuals are still calculating their net business income for the prior tax year after the current tax year has started. So it would be unfair and difficult to impose an income cut off for mandatory catch up contributions to a Roth account only for self employed individuals. I don't have confirmation that that's the way the new rule is, but be aware of that possibility at least. You know, we got two years to confirm this still, since it doesn't go into effect until 2026. All right, our scholarship, the WCI Scholarship, had a banner year. We had 990 applicants for the scholarship this year, which is pretty wild. So, you know, the problem is we kind of were recruiting judges thinking we'd have six or seven or 800 applicants instead of 1,000. So we try, we tried to get a few judges at the last minute. We got a few more to help. But for those of you who volunteered to judge, thinking you'd only be reading 10ish essays or so, and ended up reading closer to 15 to 20, thank you so much for going above and beyond what you're expecting. It really does help make the process fair to have these dozens and dozens of judges looking at the application. Scholarship essays. Scholarship application essays. So thank you so much for doing that. And for the rest of you, thanks for what you're doing. Job's not easy. That's why they pay you so much to do it. And I appreciate what you do each day. All right, let's get into some of your questions. Since the content on this show is driven by you. I do have a few more announcements I'll make later in the podcast. But hey, let's talk about what you guys want to talk about. And our first question comes from Ben, who's apparently becoming a partner.

Hi Jim, My name is Ben. I'm an anesthesiologist in Arizona. On October 1st of this year, I'll become a partner in my small practice and I'll be paid K1 income instead of W2. I plan to create an LLC for the money to go into and ultimately file as an S corp to save on Medicare taxes by paying myself a minimal salary and taking the rest as a distribution. I'll become a partner on October 1st. Should I try and set up and file as an S corp this year or just wait until next year to avoid problems? Thanks for all you do.

Great question, Ben. First issue is, don't pay yourself a minimal salary. Pay yourself a fair salary, right? If you cannot hire an anesthesiologist to do your job, even an employee, an associate, whatever, to do your job for what you're paying yourself as a salary, it's probably not a fair salary. You cannot go out there and pay yourself salary of $30,000 as an anesthesiologist, save a bunch of Social Security and Medicare tax and expect that to fly with the irs. It's not going to work. How much do you have to pay yourself? Well, you can look at salary surveys for anesthesiologists, you can look at MGMA data, but as a general rule, kind of a rule of thumb, you want at least half of that income coming in from your clinical work to be salary. And some would argue it needs to be even higher than that. Certainly for an anesthesiologist, it needs to be more than the Social Security wage limit. I think that's around $144,000 this year. Don't quote me on that, but it's usually something around that number. So if you're thinking of paying yourself a salary under $150,000, I think you're making a mistake. But the way this works, if you're going to make six or seven hundred thousand dollars as an anesthesiologist, you pay yourself a salary of, I don't know, three or four hundred thousand dollars. And then you pay yourself a distribution of two or three hundred thousand dollars. And basically you save the Medicare taxes on that two or three hundred thousand dollars. So that might save you seven thousand or eight thousand dollars, ten thousand dollars maybe in Medicare taxes. It's well worth doing, but don't get too aggressive with that sort of a thing. S corps do not get audited very often, but you need to follow the rules. You need to pay yourself a reasonable salary, not a minimal salary. But yeah, I think if I were you, I'D wait till the first of the year. I mean, it's only three months. It's not that much in Medicare tax. And then you can have your corporate tax start date be January 1st. Keeps everything really clean moving forward. So I think that's what I would do is to form that llc. Obviously you got to do an S election to make that into an LLC S corp as far as the IRS is concerned, but I think I'd go with the January 1 start date on that for all the companies we've started that are S corps, it's really only a white coat investor. That's what we've done. We've tried to just line it up with the calendar year. Our next question isn't really a question, it's more of a story comes in via email. Let me read it to you. I thought your listeners could learn from a near miss I had with my Solo 401. I don't mind if this is read on the email, told via an interview or published as a guest post. How about we just read it on the podcast? A few years ago I opened a solo 401 when I started to receive enough 1099 income from side hustles. I was so excited to have my own Solo 401k. I even transferred money from an old employer, Regular 401, into it. This transfer put my account over $250,000, so I had to submit the 5500 form annually to the IRS each year. I submitted the required 5500 form and I received the AVS account valuation statement on the Solo 401. However, we moved in 2021 and that statement was sent to our old address in 2022. I waited a while for it to come, then called and found out it went to the old address. We ended up submitting our 5500 form 39 days late. There was an option on the 5500 form asking if we wanted to pay a $500 late fee. Thinking we did not owe the fee because our AVS was sent to the wrong address, we did not pay it. A few months later we received notice from the IRS that we owed a $9,750 late fee, $250 per day. This fee was increased from $25 per day as part of the Secure Act 2.0. We submitted copies of the AVS with the wrong address on them, as well as other documents from the investment company with the right address to show that we had every reason to think the AVS form would be coming. When it was ready after several months and some worry anger over what seemed like a large fee for an information only form, the late fee was eventually dismissed. I would advise everyone with a Solo 401 to get the 5500 form in by the July 31 deadline, if possible, to move any investments out of their Solo 401 to keep the account under the reporting amount of $250,000. It's not a hard form to file, right? Put a note on your calendar sometime in July to make sure you file the 5500 form. It's not that hard to do. And if you're not getting the data you need to file it, get in touch with your Solo 401 provider to make sure you have it. But here's the deal. This is a big fee. It's kind of an unfair fee. It ranks right up there in my view with the ridiculous penalty on failing to take a required minimum distribution, which used to be 50% of the RMD you didn't take. It's now down to 25%, which is still this huge penalty for an easy mistake to make, especially as you become more elderly considering this soon only going to apply to people who are 75 plus years old. Anyway, here's the deal. I've run into a lot of white coat investors who screwed this up and then begged for mercy from the IRS and got it. So if you've gotten some notice that you owe 10 grand or 20 grand or a $30,000 penalty for not filing your 5500 for your solo 401k that has more than $250,000 in it, go through the process and try to appeal it and most people are getting this wave as near as I can tell. Certainly if you've only made the mistake once, you had a good reason to do it. People are getting this waived. So take advantage of that. We also have a blog post talking about filing your 5500EZ late and I would check that out as well if you're in that sort of a situation. But this is something you just need to know if you have a Solo 401. If you have a Solo 401, there is an informational return that you have to send to the IRS every year. It's due on July 31st, called a5500EZ and you just know that you got to file it. That's the main thing to know. All right, I'm going to Orlando next February. I hope you're coming with me. It's February 5th through 8th is WCICON 24. The weather's probably going to be awesome. It usually is in February in Florida. You know, it's not hurricane season. It's wintry everywhere else. And in Florida it's super nice. You know, not too warm, not too humid. Nice. You ought to come down and join us. But the early bird registration for this conference ends on October 12, so by the time you're hearing this, you've only got a week left or so, and you can register for that@wcievents.com the early bird registration is $300 off for in person registrants, so it's pretty good discount. You should definitely sign up before then, assuming it's not full already. I guess it could be sold out by the time you hear this, but we haven't sold out the last couple of years, so I'm assuming there's still going to be room for you. But not many of us have people we can discuss our financial challenges with. People who can relate to having student loans hanging over your head, paying what seems like too much to the tax man, or feeling burned out of doing something that you've wanted to do since eighth grade. So we've crafted the conference so you can invest dedicated time to focus on how to move closer to your ideal life financially, professionally and personally. I've found that spending time with those who truly understand is one of the most important parts of our conference. Content is going to be top tier. Paula Pant from the Afford Anything podcast and Taryn McCarthy, a DMD who's a happiness and transformational mindset coach for high achieving professionals, are going to be joining me as keynotes. We're also going to have 30 plus other amazing breakout speakers. But don't worry, we're going to knock off the academics by 4pm each day to make sure you actually take the time to relax and enjoy activities. Yes, it is the Physician Financial Literacy Conference, but it is also the Physician Wellness and Financial Literacy Conference. And if you haven't been getting wellness content during the conference, you're certainly going to get wellness activities starting at 4pm each day. And this is a great conference. People love it. I think our first one 99% of attendees recommended you come to the conference. I mean, it's truly an awesome conference. It's docs from all kinds of specialties. It's going to be fun, you're going to enjoy it, you're going to learn a lot. If you're like many people, it will change your life. Come to this conference. It's the White Coat. Investor Conference. Physician Wellness and Financial Literacy Conference. You don't have to be a doctor. You can get both physician and dentists continuing education credit for it. You can sign up wcievents.com okay, let's take a question from Tom. He wants to talk about Geographic arbitrage. S Corps Solo 401s. Let's have a listen.

Hi, Jim. Thanks for all that you do. I had my financial awakening recently thanks to you. I work in California and need to relocate for geographic arbitrage. Thanks to your continued advice, I just created a Vanguard Solo 401k for my S Corp. However, when I relocate, I have to terminate my S Corp because having an S Corp In California costs $800 a year. Questions? What do I do with my solo 401k after I terminate my business? My Vanguard rep said nothing needs to be done or I can roll over into an ira, but I'm not going to do that. Second question. Am I able to roll over my funds into a second solo 401k, which I'll probably create as soon as I relocate? See, when I relocate, I can create a new tin number as a sole proprietor and transfer funds into my second solo 401. Or is there an easier way? Thank you.

All right. Well, Tom, congratulations on your financial awakening. It's exciting to think about all the benefits you're going to have from geographic arbitrage. I mean, leaving California typically lowers your tax rate dramatically. It typically lowers your cost of living dramatically and often gives you a raise. So your actual after tax income could be 50%, could be doubled depending on where you're going to. So that's exciting for you. You know, those of you who live in Manhattan and the Bay Area and Southern California and Washington, D.C. kind of areas, this is an option you got to ask yourself, well, what do I want out of my life?

Right?

It's not always all about the money, but this is huge. To leave these areas as a doctor, particularly as a physician, and go somewhere else. I mean, it's amazing how much that will help your finances. So if you're not wedded to being in San Diego or LA or Walmart, Washington, D.C. or some other areas in the Northeast, consider this, because it really can make a big difference. Tom, as far as your questions, this is not as complicated as you're making out to be. Go to the new state, start your new business, and get your new ein for it. And the ein's free and takes 30 seconds to get from the IRS online. And then call up Vanguard and say, do I need a new one. Can we transition this one to the new business? And they'll walk you through the steps and you just transfer all the assets into this new 401. You know, I have been through several iterations of this. You know, we started a solo 401k at Vanguard, and basically, I think it's the same 401k technically that we've used, even now that we have employees at the White Coat Investor. But basically they had to redo it. And so my assets that I put into this solo 401k, what was a solo 401k, are all still in the same place. And, you know, and so all those things now held at Fidelity, it, you know, it's all basically the same money. It's never had to go anywhere else. The problem was rolling it over to an ira, which is what a lot of people recommend mistakenly for high earners, is that it keeps you from doing a backdoor Roth ira, because now your conversions are getting prorated each year. So you generally don't want to do that. You want to roll it into your new Solo 401K. Or if you're going to a job that doesn't have a. That has its own 401 or 403, you can roll it in there. You know, just simplify your life. You don't want to have a bunch of these. Keep in mind, if you do have multiple solo 401ks, for whatever reason, you have to add them all together for that $250,000 limit. And if they all added together are worth More than $250,000, you do have to do a 5500EZ for them. But in general, just roll this into the new Solo 401. It's probably going to look an awful lot like the old one, but the folks at the Vanguard Small Business Retirement Account department can help you do that. So I just call them up. Once you set up a new LLC or S Corp or sole proprietorship or whatever you're going to do at the new job, if all of this is totally over your head, by the way, we have a lot of resources for you. You can go to the Start Here page on the website. We also have an email series you can sign up for, which sends you a bunch of emails over a number of months. They're all short, but they're about the basics of finance to get you up to speed so you can be financially literate, so you can be financially woke up like Tom. You can sign up for that@whitecoatinvestor.com basics. It's totally free. You might also notice if you listen to the Milestones to Millionaire podcast. Those are the ones that drop on Monday, whereas these ones drop on Thursdays. I'm trying to include some basic beginner level financial info with each episode of that. Those don't show up in the show notes. We don't do show notes on the blog for the Milestones podcast for the most part. Are we doing those now? Megan? We're still not doing those. So you got to listen to the podcast to get that information. But since you're listening to this podcast, you probably like podcasts, so I'd make sure you catch those even if you don't like the interviews with the people who have hit the milestones. Fast forward and get to the basic information at the end of each episode. All right, next question is from Jen. She wants to talk about roth and solo 401s and converting an old IRA. All kinds of fun questions.

Hi Dr. Dali. I'm so glad I found your podcast. I am not the target demographic at all. In fact, I'm a former teacher and now I'm a stay at home mom. But I found so much value in the podcast. So thank you. I would like to open up a backdoor Roth because my husband now makes too much. We're married filing jointly. My husband makes too much for us to have Roths anymore. To contribute to them, I should say so. I know from you that not being employed right now, to roll over my old IRAs from previous employers, I would need to open up the an individual 401k. I can get an EIN. I have kind of a little side hustle, so I can do that. But my question is, when I eventually move my old IRAs over and then open up the new one, I know I can have a spousal ira. Spousal Roth ira. But I just wanted to know if there was anything I needed to do so that the IRS knows that it's a spousal Roth once I finally open it and convert it. Because I don't have much earned income technically. But we're married filing jointly, so I'll be using our shared income to fund my backdoor Roth. I hope this makes sense and I appreciate your help and again, thank you for all you do. This is a very valuable resources. Take care.

Thanks. All right, great question, Jen. Here's the deal. First of all, personal finance, as you probably realized at this point, is 95% the same for everybody, right? Yeah. There's another 4% that's maybe specific to high earners and there's maybe 1% that's doctor specific. So if you like the podcast, listen to podcasts. I don't care if you make $20,000 a year selling balloons. There's probably still a lot of useful stuff on this podcast for you, so you're welcome to be here. Don't feel like this is for doctors only or even for high earners only. Now, we absolutely aim our information at high income professionals and basically all we talk about here are first world problems. But there's still lots of useful stuff for everybody. I think you're worrying about something you don't need to be worrying about. You understand the situation well. If you want to do backdoor Roth IRAs, you can't have money in an IRA. You've got a side hustle, a business you can get an EIN for and you can open a solo 401 for, and you can put your IRA money in there, no problem. Just make sure when you open it that they actually accept IRA rollovers. Vanguard used to not do that. They do now, but there's other places that will take those rollovers. Just make sure you're. If you're going to go through the trouble of opening a Solo 401K, make sure it's going to work for the main purpose you're opening it for. But as far as the spousal ira, that's not like there's no such thing really. It's just your ira. It's an IRA with your name on it. Both the traditional you'll have to have money in for a few days or whatever, as well as the Roth IRA. They're just your IRAs, your Roth IRAs. And you can contribute to them using money that your spouse is making. So no big deal. You don't have to do anything special. You don't have to tell the IRS or you don't have to tell Vanguard. This is a spousal ira. Open the ira, move money from your checking account into it, the next day, move it to a Roth ira. That's it. Just like anybody else. Just as though you were earning the money. This is no big deal. You don't need to worry about this. All right, Our quote of the day today comes from Mark Twain, which is kind of disappointing because it's not funny. Most quotes by Mark Twain are funny, but this one's not. It's still good advice, though. He said, the secret of getting ahead is getting started. The secret to getting started is breaking your complex, overwhelming tasks into small, manageable tasks and then starting on the first one. I think that's really good advice. And a lot of us, especially as we become financially awakened, are just overwhelmed. It's overwhelming to realize, ah, crap, I got the wrong insurance. I don't have the right insurance. I don't have a plan for my student loans. I don't really even know what my investments are. Am I even investing? You're totally overwhelmed. Fine. Right. This is a lifelong process. You don't have to do it all the first week. Start breaking those tasks into small, manageable tasks, ticking them off one by one. People overestimate how much they can accomplish in a day, but generally underestimate how much they can accomplish in a year. And if it takes you a year to really get your finances under control, great. That's okay for most of us. That's faster than most people do it in. But get started. Okay, next question is about another solo 401k question from a career locums nurse anesthetist.

Hello, Dr. Dahl. I am a longtime listener. First time caller. Thank you so much for what you do. You have really helped me. I am a nurse anesthetist. I am a career locum. So I've been in practice for 13 years. I've been a locums for 12. I've worked all over the country, and I'm planning to retire in five years. I also write novels. I've been writing novels for about the same length of time, or I've been publishing novels about the same length of time as I've been doing anesthesia. And the books and the anesthesia business both had their own solo 401ks. And this has been true for a while with Vanguard. And recently, because of you, I set up a cash balance plan, figured out how to do that through empyrean. And then that kind of leads inevitably to realizing that you want a mega backdoor Roth, and then you realize that you can't do it with Vanguard. And so now I'm trying to set up a 401k that I can do a backdoor Roth through. And so I contacted the solo. My solo 401k people because of you. Again, thank you. And they, when they heard I had two solo 401ks, they're like, no, no, no, that's an audit flag. We recommend that you consolidate them. And the problem with that is that I am planning. I'm going to retire at 51. And I was hoping to be able to get to. I retired to write books. That's what I'll be doing the books. Business will never retire. I was hoping to get to my anesthesia 401k at 55 and giving up that option is kind of scary. I talked to my cpa. He did not think I was that likely to be audited. What do you think? Should I give it up?

All right, that's a great question. And apparently a minute and a half was not long enough for you because you also sent us an email noting that a few additional pieces of information that you think you're going to have enough money in your brokerage account to get to age 59 and a half without the retirement accounts. And of course that you could tap your principal from your Roth accounts and that the books are wildcard. Some years they make lots and lots of money, other years almost nothing. But you are worried about losing this option of tapping at least one of those 401 s by age 55. Well, I think you're getting pretty good advice from the 401k provider. I don't think having two solo 401s is generally a good idea. Right? It's not like you get two contributions. You still are limited to $66,000, a little bit more if you're 50 plus, so you're not getting any real benefit there. So I think I'd probably just use the same ein for both businesses and use one solo 401. The IRS could argue that just because you stopped doing anesthesia but you're still working as a self employed person that you can't really tap that at 55 anyway. And I don't think having a separate 401 automatically makes it so you can. So I think I would consolidate the 401s. If nothing else, it'll make your life easier. And besides, as you mentioned, there are other sources of income, right? You've got a brokerage account and that's generally what you want to spend first anyway before retirement accounts. And so you can go through that. Then you can hit your Roth IRA principal. And remember there's all these exceptions to getting into your retirement accounts before age 59 and a half anyway, right? You can get in there and pay health insurance. You can get in there. And if you get disabled, you can get in there if you die, well, not you, but your heirs. And there's a few more from Secure Act 2.0. Like if you're the victim of domestic abuse, you can get in there and first home for you or your kids. And that means a home when you haven't had one for a couple of years, you know, so there's all these options to get into your IRA without having to pay that 10% penalty. And even if you had to pay the 10% penalty on a little bit, it's not the end of the world, right? And so I'd probably keep this simple. I would probably consolidate your solo 401s, especially since you're making things complicated by doing a mega backdoor Roth IRA option in the 401 by having a cash balance plan. You know, all that stuff makes the situation even more complicated. So you need to simplify where you can. And I think going from 2 solo 401ks to 1 is a great way to simplify it. You know, just like your accountant told you, he doesn't have any other clients with two solo 401ks. There's a reason for that. And I don't think you ought to have two either. I would definitely cut back to one. On the podcast with me now is Stefan Schiphol of Scholar Financial Advising. He's one of our recommended financial advisors, one of our premium recommended financial advisors. There's a short list of those if you go to the recommended page under whitecoatinvestor.com recommended. And he's here to kind of be introduced to you as an audience, but also to help us to answer your questions. And I think we've got a couple of great questions that we'll be going over together from the audience here that I think his input will be very valuable on. But before we get into that, can you tell the audience why you decided to become a financial advisor in the first place?

Yeah, happy to do that. Thank you for having me on today. It started a while ago. I've always been a finance guy kind of through and through, even back into middle school, high school, interested in the markets and naturally led into a finance degree and that led into graduate school. So went to get my PhD in Finance and had a focus from a dissertation research area on executive compensation and conflicts of interest. So I was dealing a lot in that area, that realm. And I had the unfortunate experience of being pitched whole life insurance as a grad student, which made no sense to me, but really started to make me question how much this person had to disclose about how much they were going to get paid on me being pitched this policy. And that caused me to switch around my research interest a little bit to still focusing on compensation and conflicts of interest, but on investment advisors and really looking at investment advisor disclosures and conflicts of interest that arise because of different fee structures. Ended up writing A couple papers on it. Worked with the state of Massachusetts on new regulation related to fee structure disclosures and had the unfortunate experience there of having to explain to 300 investment advisors in Boston how I thought it was a great idea that their clients knew more clearly how they were being charged for investment advice. And that kind of rubbed me the wrong way that something that seemed so obvious to me was taken as a negative that should be hidden somewhere from a fee structure. So wanted to start my own firm and focused a lot on trying to start a firm that minimized conflicts of interest as much as possible. I knew I didn't want to take aum. There would be absolutely no commissions. And what we add today is the culmination of that. A growing firm. We have five advisors, all past professors or current professors in finance, also holding PhDs. So it's very like minded on the academic side of whether things are being pitched to you and what really is the truth of what's going on in those investments and acting as true advisors. Since there's no skin in the game there of how we're managing assets or anything like that, we don't manage them. You still maintain control of your accounts. I don't want your passwords, I don't want to have anything like that. We show up as advisors instead of wealth managers.

Yeah, it's a pretty unique approach. And it's interesting when I look at who your ideal client is, you say it's a do it yourself investor who doesn't want to pay asset under management fees but wants advice and he's getting it from professors. 5 PhDs are the people giving the advice at the firm. That's pretty unique. So tell us all this talk about fee structures. What is your fee structure?

Yeah. So happy to go into that. And as I said, it was a long way to get there because it's so unique. Right. In the sense that a lot of firms, and I put the paper on it, 99% of advisors are going to charge an AUM fee and they'll charge you the 1%. Maybe they give you a little break, get you down to 70, 80bps. So the way we charge we have two paths depending on what the client's looking for. The first is where the bulk of our clients work is on an hourly structure. So we charge $350 an hour. And when a client comes in, one of my worries of an hourly fee structure is I didn't want to be associated with these runaway costs where somebody starts talking to me and then they find out that they get a call and say, well, you know that 401k is taking us another 10 hours or anything like that. Right. It's so the clients know upfront what the project cost would be. So client calls, we walk through kind of what they're going through, what issues they're running into, what they need advice on, and we build out custom plans for them. So there's no kind of boilerplate plans that we deal with for everybody. And general recommendations. A lot of the advice we're giving are answers and questions that are non googleable. Right. When they come into that, everybody's unique and there's a lot of different unique facets of people's finances. So we build out a proposal and it is exactly as you said, it's for do it yourself investors. Right. So they're managing their accounts and we're providing the shopping list for each of the accounts of what they need to buy, the recommendations and they get a flat fee up front of this is how much time it's going to take us and the fee associated with it. That would be the first and the bulk of the clients there. What we found is that there was a need for more. We had a lot of clients come back and say that's great, we're doing our semi annual meetings or annual meetings. But there's a lot of complexity going on here whether they have their own business. Right now we're dealing with accountants multiple times a year and attorneys multiple times a year because it's really a team effort.

Right.

When you're dealing with somebody's finance, especially after a certain level, and we normally see that around the 10 to 15 million dollars in assets level. Right. And above is when things start getting a little weird out there. Right. And taxable accounts become a significant part of the portfolio, which causes tax consequences. Obviously real estate starts to become a bigger factor, both direct investments or indirect investments. Many of those clients are entrepreneurs. So we're dealing with things like succession planning, legacy goals, issues related to picking 401k providers for their employees, lots of issues that come in. So we have a family office set up for those clients where there's no more us sending you a bill for a project and back and forth every single month. We're your family office, we act as your personal cfo. And any finance issue whatsoever that shows up is just a forward button to us. Right. And we handle all that on the back end. So that's our retainer model that sets up. We do have minimums for that one because we frankly don't believe everyone needs that in many cases. So a minimum of $10 million in assets or a million dollars in income is generally where that starts to be a concern. And those are tiered at 3, 6 and $10,000 a month for ongoing fees.

Okay. All right. Well, let's get into some of the audience's questions. Our first one comes in by email. This doc says I am five years out of training, paid off my primary home and a rental property. I've been maximizing my 403B, 457 for a year and 529 for a year. No debt due to getting my medical education in India. I have a few questions. I'm trying to copy your asset allocation. Having a hard time due to some options in our 403. We don't have small cap value funds in our 403 or 457. We do have a Vanguard Small cap Index Fund and a Vanguard Equity Index fund. I'd like to know your thoughts on small cap value index versus small cap index funds. I'd also appreciate your opinion on mid cap value and large cap value funds. Is it okay to invest in mid cap value instead of small cap value? Well, there's a lot of underlying questions there about asset allocation. Where would you start with somebody like this that's got asset allocation questions?

Yeah, so I guess you said a lot to unpack. So maybe we start from the top there. That it's a common issue is that all asset allocations look really great until you actually have to implement them in a 401k or 403. And then you find out that not all of the Vanguard funds exist anywhere else. And some of them are horrible. I mean there's some really bad 401's out there when it comes to investment options. So I think it's good that I guess from the onset it's fantastic that they're going through this already. Right. That they already have the 403B457 filled up. My next step, or probably pre step would be a backdoor Roth and then taxable accounts are next and that's really where you have a lot more flexibility on the choices. Now getting into the small cap versus mid cap discussion. Anything else, this is something that comes up regularly and it's a granular. It's a distinction without a difference really is what it comes down to. Because if you run correlations on these funds, a small cap value fund is going to be correlated to a small cap index fund of 98%. So if you have the option For a small cap index fund and you're trying to get that exposure, you're going to be just fine doing that. And even mid cap value versus small cap value is going to be around 97% as well. The important part is actually having the exposure. I wouldn't worry too much about do you have the exact fund that gets you that exact issue or that exact exposure. It does start to open up a bigger question which is growth versus value and where those are at. Because the value funds are highly correlated, the growth versus value side are not as correlated. They're very different in how they're structured. And one of the things that first is going to likely see is once they start going into taxable accounts and everything, that asset allocation is important. But asset location is going to start becoming even more important because we have to start thinking about if you don't have great options in the 403 or 401ks or anything, maybe we can make up for that withholding those assets outside in the taxable account and Roth accounts and doing so from a tax efficient manner. That's the issue that I see a lot of people run into is they see this asset allocation and they try to replicate that asset allocation in every single account. And that is a huge mistake because all of these accounts are going to be taxed differently, they grow differently. There's RMD differences, there are legacy differences, There's a lot of issues there. And when you look at the literature, you're talking 20, 25 basis points a year in value just in making sure the right stuff is in the right account. Not only the asset allocation side and from the value perspective is one that commonly comes in is everyone wants to buy the s and P500 or buy the market, which I completely agree with all for that idea. The issue is it's more efficient though if you split that total market into value and growth because together they are the market. But the big distinction is when you look at something like growth stocks or value stocks, it's really they're not stagnant, they move every year they get rebalanced as value or growth. I had a good example of this over the past year is Facebook. Facebook's been was a growth stock and then it became a value stock because it lost 80% of its value and then it became a growth stock again because it gained afterwards. These aren't concrete definitions of who is a value stock and who is a growth stock. Now there's some that stay pretty similar, but a lot of people miss the definition that Happens is that if you took every stock in the s and P500 and you ranked them on market to book ratio is what's happening. And they cut it. And they said these stocks over here have a lot of growth in the past year. So their market to book ratios are really high. So they're growing. They're typically not paying a lot of dividends, which is the key part from a tax efficiency standpoint. So there's a lot of growth happening over here. On the value side, you end up with this weird mix of these boring kind of companies that aren't growing at a high pace. These are your Procter and Gambles, your bank of America. I mean, Procter and Gamble is not reinventing toothpaste and toilet paper anytime soon. So you have these which pay a really high dividend. And you also have this combination of stocks or companies that have dropped in value. And that's really where you get the upside potential on the value funds. It's not the Procter and Gambles and JP Morgans and Berkshire, those will give you a consistent return. It's the stocks that have fallen so much that they're no longer considered growth, they're considered value that have added risk and had added potential reward when it comes to the tax efficiency side. That's why we really need to start thinking about, instead of thinking about the market or total exposure to equities, it's exposure to value and exposure to growth. Because if we take those value stocks that are throwing off 3% in dividends, the last thing a client in their earnings years need is more income being thrown off from their portfolio. It's going to be taxed at the highest rates. So those are the stocks we want to keep in the Roth or we want to keep in the 403B. If we have the option of the 401Ks and we can take the growth component of those and keep that in the taxable so they can just continue to rise and you're not having all that income thrown off of those accounts. But you get step up in basis for estate planning. Capital gains is going to be much lower. So there's a lot of different options that start to open up for this first unweathered thing about this whole value growth distinction. Because it is something that people miss, right? And they fall too much in the weeds of allocation to small cap and mid cap and large cap, which is absolutely important. But once that's set right, it's a tax game, right? And it's trying to allocate this stuff in the right location.

Yeah. And it varies for everybody, that allocation, because their ratios of the various accounts are different. You know, some people are mostly taxable, some people have a tiny little taxable account. But here's the deal, right? Choose your asset allocation. And don't choose an asset allocation just because it's my asset allocation, right? Choose one that you can stick with in the long term, but there's lots of reasonable asset allocations over there. And then try to implement it as best you can, looking at all of your accounts, implementing it across all of your accounts, right? I mean, take what's good in your 403 and use that. But the more complex your asset allocation, the harder it's going to be to implement that in your 403 or 457. If you got two or three funds in your asset allocation, two or three asset classes, that's probably not very hard to implement, right? There's probably an international fund, there's probably a bond fund, there's probably a US stock fund there. And you can implement it just fine. If you got 10 asset classes, almost surely you can't put them all in your 403 because it just won't be available. It's gotta be in your Roth ira, it's gotta be in a taxable account, it's gotta be somewhere else. And sometimes you just kind of get stuck. You're like, well, I can't, I can't have exactly what I want. And you get as close as you can and deal with it. And recognize that investment options change as the years go by and the ratios of the amounts in these various accounts change as the years go by. So do the best you can and implement your plan as much as you can and then follow it. I think that's kind of the key when it comes to portfolio construction.

Absolutely.

All right, so the next one and this speak pipe. I mean, this question is teed up for a financial advisor on the show for sure. But let's listen to this and then we're going to talk about, you know, who needs some financial advisor? What are maybe some thoughts or some uses for a financial advisor that maybe one hasn't had? Let's take a listen.

Hi, Dr. Dali, this is Matthew, an internist from California. You often talk about, either literally or figuratively, someone firing their financial advisor. However, commonly in a marriage, only one of the two individuals is significantly interested in managing their investment portfolio and finances personally, and has taken the extraordinary step of becoming financially savvy enough to manage their own high net worth portfolio. My concern with foregoing the services of a fee only financial advisor is that if I was to die early or unexpectedly, my wife would not be interested or currently competent to take on the responsibility of managing a seven or eight figure net worth portfolio. She has no interest now or in the future of spending months to years developing that investment management competency. While she could, upon my death, go find a fee only financial advisor, it seems like this would not be top of her list of things to have to deal with and there could be significant costs involved in potentially moving the investment portfolio. Wouldn't you agree that since having one spouse more interested in investment management than the other is probably more the rule than the exception, shouldn't most couples be using a fee only financial advisor from the beginning as somewhat of an insurance policy, so to speak, to make things easier on their surviving non financially savvy spouse?

All right, well, I think the first thing to say about this is kind of reiterate my position on advisors. My estimate is that about 80% of docs need and want, quite frankly, a good financial advisor that gives them good advice at a fair price. I throw that number out to Dr. Bill Bernstein and he tells me that's way too low. He thinks the number is 99% of docs ought to be used in a financial advisor. But, but this brings up, you know, when should someone get a financial advisor who needs one? Does everyone need one? What should you do if you like being a do it yourselfer, but your spouse really has no interest in it? What are your thoughts on who actually needs an advisor?

Yeah, this is an interesting question because when I first started the firm, I was not expecting this question. This wasn't the thing that you're expecting as starting a financial advisory firm. You're ready for the 401k questions and the asset allocation. And I've got to say this is probably one of the most common questions I get, if not the most common question that I get from potential clients. And I think the distinction really comes down to do you need a wealth manager or do you need an advisor? Right. And unfortunately those fall under the same definitions a lot. Right. And I would obviously be under the opinion that you don't necessarily. Most people don't need a wealth manager. Right. But they need the advice. Right. Because especially in today's age, right. The ability to place trades and access accounts, it's not like you have to call a broker and have trades placed over the phone. And days to clear. You could easily hop online and place account trades in Fidelity or Vanguard or any of these things very easily. I'd say most people do need some sort of advice. The question is the level of advice that they need. And that's usually where people, I think, split on whether or not they need it. Because they go into a traditional advisory firm and they say, I need advice. And they say, well, that's great. We're just going to take 1% of your eight figure portfolio for that advice. And that's not really what they're looking for. They're looking for exactly. What this caller mentioned is that they know and which is very common. I agree that it is the rule, pose the exception that generally in a relationship, there's one person that's what I consider like the family cfo, right? And they're watching the investments. They understand the pitfalls of hiring an advisor. If they had to pick an advisor, they would pick a good one. They would know what background research they'd have to do. But in the back of the mind, the problem is exactly this. If something happens to them and they die, who does the spouse call? And the worst part is it's very easy to call bad advisors. And that's also the issue that is almost like a fear problem as well, right? If something happens and you've accumulated this wealth and you have a great financial plan, it doesn't take long for someone to really screw that up with the wrong advice going forward. So a lot of the times we'll have clients come in for exactly this reason, say, listen, I think we're doing okay, right? We, we just like that to build that relationship. And we spend a lot of time from a relationship perspective with our clients, right? We're not really into somebody coming in, build you a plan, kind of throw it at you as you're walking out the door, and we'll see in 10 years, 20 years, if ever, right? We, we want to build that rapport in that relationship because things come up, right? It's, it's like finding a doctor, right? In the sense of the time to find a doctor is not when you need one, right? You should have a relationship built, right? You should have that understanding and they should understand what your needs are. Because finance and health go hand in hand. They're very personal. And the last thing that most people want their degree is your spouse having to go in the midst of a horrible event in their life. Now they have to go interview financial advisors on something that they have absolutely no interest in doing. And that is not a good scenario to be in. So I would agree. I think the number is High for the need for a financial advisor, for someone to provide that advice and more importantly, to build the relationship so that's there. And when events come up, right, you have someone to call and someone to bounce ideas off of and not to. I mean, that's a big thing with us is we don't dictate what needs to be done. We're here to provide what we think.

You should do, right?

And then provide floors and ceilings around it of saying, this is what we think you should save or this is what we think you should do. But if you didn't do that and you decided to do this, this is what the impact is going to be. Lay out all the risks and potential returns there, and then this is the floor. You can't go below this number. That's not going to end up being good. And ultimately then the client is in control of where that falls. But this is a big one and it's a tough one to have, I would say. No matter who somebody works with, in meetings with an advisor, both of you should be in attendance. You should both be in there. They don't have to be the one uploading documents and dealing with the accounts and all of that kind of stuff. But I think there's a big benefit of at least the other spouse, who's not the CFO to spend that hour or two of a year of at least knowing who the advisor is, knowing that they have met them before, they have to call them, and at least they have the idea of general strategy. What's going on? Where are assets held? Right. What does it look like? Because I see that a lot, too. Somebody will come in and say, I didn't even know we had that account, right? And they're looking at their spouse saying, did you know? Right? And it's like, well, yeah, that one of you knows, right. But the other has no idea you had a safety deposit box or that you have this account over here, what the strategy is and who this account saved for, right? So even just the. The awareness, right, of having somebody else involved, so that way all that can be brought together is a big benefit. But, yeah, this is a credit to him to thinking about this, because it is something that generally doesn't show up for a while right, before people start wondering, like, well, what would happen if something were to happen?

To me, Yeah, I think the bare minimum, the bare minimum, even for a hardcore do it yourself, or if your spouse is not really that interested, the bare minimum is to select the financial advisor they should go to. Should the worst happen to you. I think that's the bare minimum. And put a letter together to your spouse and that financial advisor that includes these are the assets we have, here's what we've been doing, and here's where you can find everything. I think that's the bare minimum.

Completely agree.

Ideally, both spouses would be participating be at least a little bit more interested than maybe is being described in this case. But that isn't always the case. A lot of times it is very much one spouse that's been doing this and it's often the man. And men often marry a younger woman and don't have as long of a life expectancy anyway. And so for almost every couple there's going to come a time when the less experienced person is responsible for the finances. And so I think it's great to have a backup plan in some way, shape or form that might involve someone you've been doing checkups with every year or two. It might involve just a name to call. It might involve having a formal financial advisor. But I think you're right. Every couple, every family is going to have to choose what level of advice they need and are willing to pay for.

Absolutely.

All right. Well, we've been talking with Stefan Ship with Scholar Financial Advising. You can get more information about that firm@scholarfinancialadvising.com thanks so much for being on the WCI podcast and for sponsoring us.

Yeah, thanks for having me.

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