SYNOPSIS

Many retirees have some money in the market as an inflation hedge and as a growth strategy with discretionary retirement monies. ETFs (exchange traded funds) can provide both, and perhaps at a reduced cost compared to their mutual fund counterparts. You may want to include active money management from a Registered Investment Adviser (RIA). Watch the interview with financial planner Sean Humeston.

FULL TRANSCRIPT

Steve Savant

00:02

I’m Steve Savant, syndicated financial columnist and money color commentator. On today’s show, active money management with ETFs, part four of our series on building a firm financial foundation for retirement with financial advisor Sean Humeston. Welcome to the show Sean.

Sean Humeston

00:16

Thank you.

Steve Savant

00:16

Sean, I know that you have a partner that you outsource all your securities to, because this is all they do.

Sean Humeston

00:24

That’s right.

Steve Savant

00:24

I mean this is all, I mean these guys, they did not do financial planning at large for so to speak, they’re really security guys. They do mutual funds, ETFs maybe REITS. They’re into stocks and bond trades, but predominantly what they do for you is for your clients, for ETFs. Now, it’s always a Yin and Yang argument here. Why am I looking at ETFs over mutual funds? It’s not that there’s a wrong or right here, but there’s a preference here. Talk about it.

Sean Humeston

00:51

Yeah, so let’s first just, what I see as far as a vision on the differences between those financial advisors are those money managers. We always look at the active guys versus the passive guys. So your passive guys are going to be your, let’s set up some mutual funds and started just turn it off and forget about it. The market goes up, great! You make money if the market goes down, oh well you lose. Whereas an active money manager is more or less really looking at it on a constant basis and making adjustments to those securities as it needs to be based on what’s relevant economy. So I think it’s a really big difference there.

Steve Savant

01:25

Let me stop you there though. Okay. If I have a guy managing my account for mutual funds and he and he’s not actively involved. Should I be paying him a point to manage my account?

Sean Humeston

01:36

That’s a great question.

Steve Savant

01:37

I mean, I think I should be paying for active management. Not for somebody saying set it and forget it. You know what I mean? This isn’t Ron Co securities, right? So I’ve kind of, I guess that’s the first thing. I don’t mind paying for active management if it’s truly active. Now, in this case, the gentleman that you and these guys you outsource to are predominantly ETF people. Now, why is that?

Sean Humeston

02:01

Well, we think that obviously with mutual funds, you’re going to get expense loads and things that are a little bit on the higher side than you would with an ETF exchange traded fund, and nationally you have a lot more movement and you can trade quicker than you would drop the day.

Steve Savant

02:18

So when I’m looking at ETFs, I’m looking at the expenses that I have looked at this. I’m looking at Morningstar and measuring up between the differences between the same mutual fund and the same goal. Maybe it’s a large cap, small cap, or going to the indices that ETFs are into. When I’m looking at index, it’s pretty cheap. I mean it’s pretty cheap to get into if you don’t know what you’re doing and you wanted to enter as the poor man’s portfolio SMP 500 is about the best way to go

Sean Humeston

02:42

Right.

Steve Savant

02:42

And when I’m looking at those numbers and ETFs, talk about cheap, those are cheap. So this is your time, about 500 companies that you know about. Most people watch the news, they see the five on the SMP, as a basic results. At the end of the day, they can even see the vix report. We’ve been having an index that talks about the fixed report, which actually quantifies the SMP is it a danger zone? Is it a kind of Okay? It’s kind of a futuristic look at the SMP 500, so when I’m looking at ETFs, a client’s going to look at that and say, I like the cheapest shoe like that, like the inexpensive. I like active management, like guys that are overseeing this. I don’t mind paying a point if you’re actually doing it.

Sean Humeston

03:20

Right.

Steve Savant

03:21

Now when I’m looking at this for ETFs, when do I start thinking as a client? I’m just trying to be the client now. When I’m a young man, I want to be all over this mino ETFs, maybe some mutual funds depending upon I want to be in equities. I got a long time to go, the market’s always seem to go up, all it’s like. I still want to take a risk tolerance test, I don’t trust you know, the person I’m sitting across from. One of that person’s 40 years old, but he just does not have a propensity for risk. I can’t put them in the work and I mean even though I want to, I keep trying to tell them you will be okay in the long haul, but a lot of people are looking at taking a risk tolerance test. I think you need to be taking this on an annual basis. Things change in your life. And in 2008 I saw people that never did a risk tolerance test and after 2008 market meltdown, people were all over it.

Sean Humeston

04:04

Right

Steve Savant

04:04

So when I’m looking at ETFs, they still have the same risks. Mutual funds, they’re still in the market. Still have things to worry about, but when do I start thinking about, hey, I’m pretty good about doing ETFs all the way up and through into someplace up to maybe even up into my upper fifties, early sixties. But then I got to start thinking about moving away. I noticed you like to take money off the table with, hey, we were profitable. Talk a little bit about how you or when does that transition from? I’m all over ETFs and active management and then I started saying, you know, I need to start preserving some of this.

Sean Humeston

04:33

Yeah. So that strategy is obviously different for everybody, but in general when you have the ability for growth and you’re able to take that growth and just take it off the table and move it over and put it into a more of a guaranteed position that’s only going to increase the better opportunities for retirement, right? The more income and the more assets that you can have in retirement.

Steve Savant

04:58

I was looking at the Yin and the Yang on Morningstar. They were talking about the low portfolio turnover, provides a higher tax efficiency and I was talking about their automatic dividend reinvestment or you know, on the same and I don’t want anybody to saying, hey, just give me the profit every year. They’re just reinvesting it and letting it roll. Are these good funds for retirement qualified plans? I mean, this is the kind of thing you should look at. This is a quantity of EFTs.

Sean Humeston

05:22

Oh yeah. Again, because of that lower expense, I really think that when you look back, you know, 50, 60 years, you know, the mutual fund that the term mutual fund was really where it was at, right? Well diversified, you don’t have all your eggs in one basket. Well now , you know, here we are 2017, the argument is that ETFs are really what is taking over from a cost effective way and just more flexibility.

Steve Savant

05:46

I have to say my 35 years of being in this business, I have seen the cost of mutual funds continue to go down. There’s still not down enough for most clients, but ETFs kind of were born out of that thinking, Hey, let’s try to build it around it and to see, let’s try to build it around an idea that’s low cost for the client. And I think ETFs could, you know, I don’t want to get too far ahead of my, I share thinking here, but if they could be the play for equities for the foreseeable future. I don’t know if I can own the end on the horizon that’s going to have probably supplant it. So when I’m looking at this, I like the ETF and I like to have active management. Now, when you outsource this, how do you identify a person, hey, this guy’s got plenty of time. He’s got a good risk tolerance threshold here. I’m sending them over because you outsource this. How do you identify people like that?

Sean Humeston

06:33

Well, I think the first thing we look at is whether or not they do have that risk tolerance and if they’re already in the market before, right? As, as of current, so when we first meet with them, the established that strategy and then talk with them some more about what they’re really trying to accomplish. What are the end games here? Are they looking for inflation protection, are they looking for growth or are they looking for future income? And so some of that, of course will be right up the ETF world. And then of course, if it’s income may not be the play.

Steve Savant

07:01

Okay? So in your view, when you’re qualifying clients to outsource to these people that are in your consortium, you’re looking for reason. They have to pass the risk tolerance test and by the way, if you’re just watching the show and say, Steve I’ve never even done a test. if you’re in a 401K plan, you need to do a test.

Sean Humeston

07:19

Yeah

Steve Savant

07:19

If you have money non-qualified, but you need to do a test and I say things change in your life. You get older, things happen to your life. You need to take once a year, it’s a good test. It’s going to take a 10, 15 minutes. Most of these aren’t, I wouldn’t call it science, but it’s good Psychodynamics kind of gets you in the game. You know, it’s a profiling your profile on yourself. You’re actually setting a financial profile for yourself, so you can kind of get an idea. I’ve noticed on ETFs, especially August of 2015, we had a really a market bath back then and during August everybody finally saw a little bit of the bone or ability of ETFs. Hey, we’re publicly trading this every single moment on the hour. It’s not a mutual fund, at the end of the day, we settle up under the net asset value. Oh my gosh, we’re actually, were buying and selling throughout the day and that was a first time we saw, oh, look at the vulnerability we’d ever seen ETFs have to look at that, so just keep in mind it’s liquid and it’s being traded every day and it has the same propensity to go up, but it also has the same propensity to go down.

Sean Humeston

08:22

Just to be clear, your mutual funds and ETFs, there’s no better safety or are higher risks that are all equally the same. It just depends on how you invest the funds.

Steve Savant

08:31

Yeah, that’s a very good statement to make, especially on a consumer show like this because we’re trying to save the expense lives or might be cheaper with the ETFs. You might even do better in the indices than most people can’t pick their own stocks and beat those indices, but the biggest issue is they’re all exposed to risk and so it just got to understand, take the risk tolerance test, find out if you feel good about it. Now, when you’re sending people over there, you’re still meeting with these people even though you’re not really performing the oversight on the funds themselves. You’re still performing the oversight on the overall retirement program.

Sean Humeston

09:04

Correct.

Steve Savant

09:05

So talk a little bit about your quarterbacking in that regard.

Sean Humeston

09:07

Yeah, so naturally not being securities licensed, you know, there’s only so much I can and cannot say, right?

Steve Savant

09:15

Sure.

Sean Humeston

09:15

But the biggest concern naturally is that, we understand that most people need to be in the stock market with some of those monies. And so really carving out what portion that is by doing those tests and getting a better understanding of what’s important, then we can actually flip that over and give that to our team.

Steve Savant

09:32

Well, the thing I like about this, your team over on the security side, this is all they do in it. Morning and night Listen, we’re out here, we’re recording in Phoenix, which right now is on Pacific time. These guys are up at the crack of dawn and east coast time because the market opens at what, 5:30 or 6:30 our time right now. So think about it, that’s the kind of dedication we’re looking for. Don’t forget to watch our next segment on planning for assisted living and elder care, part five of our series on building a firm financial foundation for retirement. And keep in mind before moving forward with any of the ideas on our show, always check with your tax consultant, legal counsel, financial advisor. You’ve been watching Steve Savant’s money. The name of the game.

 

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