What Is a Stock, What is a Bond, What is a Fund?

Jon Jamieson, Director of Trading at Spotlight Asset Group, explains what is a stock, what is a bond, and what is a fund in this episode of the Spotlight On Your Wealth Podcast.

Episode: What Is a Stock, What is a Bond, What is a Fund?
Guest: Jon Jamieson, Director of Trading, Spotlight Asset Group

Spotlight on Your Wealth Podcast

Aaron Kirsch:   Hi, this is Aaron Kirsch, Managing Director at Spotlight Asset Group.

Imagine yourself as a ship owner in the 1600’s in Europe, eager to sail to the East to take advantage of all the riches that trade had to offer.  You are faced with a lot of risk from pirates, weather, and poor navigation.  You are also faced with huge expenses outfitting your ship and crew for the long voyage.  What if… what if you could get investors to put up money and share the risk in exchange for a piece of the profit if the voyage is successful?

You give your investors stock in your shipping company.  As investors start receiving huge dividends others want in on the action and want to buy shares in shipping companies like the British East India Company.

Back then there were no regulations or stock exchanges to trade so many scam artists emerged to take advantage of investors which caused the English government to outlaw issuing s stocks.

In 1790 The Philadelphia Stock Exchange became the first in the United States but the New York Stock Exchange, whose origins began two years later, soon became the dominant stock exchange in the US and the most important stock exchange in the world for almost two centuries.

On this podcast we are going to talk about the basic mechanics of different investments- what is a stock, what is a bond, what is a fund, and how do you invest in them.

Our guest today is Jon Jamieson, director of trading at Spotlight Asset Group. Even if you’re familiar with Spotlight, you may not know Jon. He works behind the scenes to make sure that all the trading at Spotlight goes smoothly. Jon, before we get started, please tell us a little bit about yourself.

Jon Jamieson:  Absolutely, so I’ve been in the industry for about 16 years. I started my career down on the floor of the Chicago Board of trade. I was down there during my undergrad and graduate days. I was working as a clerk on the agricultural trading floor where, instead of a stock like we’re going to talk about today, we were trading futures. After that I went on to work on a trading and execution desk specializing in futures options. I then moved over to Spotlight at its inception a little over a year and a half now so my role here is allocating and trading for all our client accounts and making sure that they are allocated correctly per their IPS agreement. So I’m happy to dive right in and discuss the life of a stock with you.

Aaron Kirsch: That’s great Jon, thanks. So I described how the first stocks were created, but let’s pick a more modern example.

Jon Jamieson:  Sure.  So let’s say Jack and Jill on a widget company and they probably started this widget company with either their own money or money from families and friends or private investment but as the company grows, they’re going to want to expand more. They’re going to want to add do lines of widgets, they’re going to want to build new factories, so they’re going to go out to the public to try and get that investment. The two ways they can do that is by issuing bonds, or what we can talk about first is issuing stock. So they’ll issue stock through an Initial Public Offering or an IPO. They’ll issue stock to investors in the public that will give investors the opportunity to invest in their widget company and be entitled to future earnings of the company as it grows.

Aaron Kirsch: How does the stock become public? What’s going on there?

Jon Jamieson:  They go through a process of registering with an exchange like the aforementioned New York Stock Exchange and they create an IPO or Initial Public Offering in which analysts will determine what the value of one share of stock in the widget company should be and they will open it up to trading and investors can buy and sell at whatever price they deem fit.

Aaron Kirsch:   There’s usually a lot of excitement around IPOs. Some of these are tech companies that people have heard about forever and so the prices kind of get out of hand, right? There’s excitement. People want in on the IPO. Once the IPO starts trading people want to buy in.  It shoots the price up dramatically. How’s all that work?

Jon Jamieson:  Right.  Especially now there’s a lot of social media and you know there always has been a lot of media surrounding a lot of IPOs which leads to a lot of price action or a lot of price movement, meaning the price is not standing still very often in the initial trading. It’s kind of moving all over the place.  It eventually will even out and become a normally traded stock but the media can definitely drive a lot of, some warranted some unwarranted movement in a stock price early on.

Aaron Kirsch:   Some of all this price movement is driven by uncertainty because we really don’t know how much the stock should be worth. These companies have been private up until now, so no one really knows what they’re making.

Jon Jamieson:  Right and it’s all based on potential. Do investors like the widget industry; do they like how Jack and Jill’s approach is to the widgets industry? Sure but there’s not a ton of information readily available yet compared to a well-established company so it’s harder to determine what a fair price for the stock should be.

Aaron Kirsch:   And usually when it’s a really hot IPO, everyone wants in and it’s really hard to get and then sometimes there’s companies that go public and they’re not very exciting. So my dad used to say, if you want it, you can’t get it and if you can get it, you don’t want it. All right, Jack and Jill Widget Company- they have their IPO and they’re now traded on a stock exchange. So now that they’re traded on a stock exchange, how does the stock price move up and down?

Jon Jamieson:  So basically what it is, is an auction market. The stock is always up for auction. There will always be people wanting to buy and there will always be people wanting to sell so there’s always going to be a bid by those people looking to buy and there will always be an offer by those looking to sell and where those two meet is where the stock will always be trading.

Aaron Kirsch:   Right it’s an auction market, so if there’s a lot of excitement about a company because their profits are really good, their potential is really good, there’s going to be more people wanting to buy into that company than there are people willing to sell it. That’s going to push the price up.  And then if the company doesn’t have good earnings or might go bankrupt, then there’s going to be a lot of people wanting to sell that stock and not a lot of buyers and that’s going to push the price down.

Jon Jamieson:  Correct.

Aaron Kirsch:   And all this is done on a stock exchange so what exactly Jon is the Stock Exchange doing?

 Jon Jamieson:  Sure, so the stock exchange, while back in 1790 as you were saying that it was a physical building where there were people matching up buying and selling on the trading floor. It is now, for all intents and purposes, a large network of computers that is run by say the New York Stock Exchange and that facilitates the buying and selling, matching up buyers and sellers of stock, and allowing them to trade freely.

Aaron Kirsch:   If you’re a shareholder of Jack and Jill’s Widget Company, what are some of your rights?

Jon Jamieson:  Primarily the number one thing that you’re entitled to is the company’s earnings. Now how you gain access to those earnings can vary. Some companies are dividend paying companies, so every quarter they have earnings and they pay a certain percentage of those earnings to their investors. Normally a set amount based on the number of stock that each investor has. There are also non-dividend paying companies. They take their earnings and reinvest it in the company. Now you might say, well, I’m not getting a dividend, it’s not as good for me, but theoretically the earnings going back into the company should be increasing the stock price, the value of the company, and making your investment go up as well.

Aaron Kirsch: Back to Jack and Jill’s Widget Company, they make some money and they can decide we’re going to take some of that money and pay it out to our shareholders, let them share in the profits. Or they can say, we’re going to take that money and we’re going to build a new factory or invest in a new product line to grow our company even more.

Jon Jamieson:  Exactly. The first thing is a dividend and the second one is reinvestment, which would lead to a higher stock price and better value in the investment for their investors.

Aaron Kirsch:   If all things go well?

Jon Jamieson:  Correct, if all things go well.

Aaron Kirsch: Jon, investors get proxies in the mail and they don’t know what to do with them. What exactly is a proxy?

Jon Jamieson:  A proxy refers to basically a vote for every one share of stock that an investor owns. Companies have decisions that need to be put to a vote from all of its investors and so what a proxy does is it guarantees every investor a vote in say, whether or not to issue a dividend, whether or not to have somebody on the board directors. Basically a proxy allows every investor to have a say in how the company is run.

Aaron Kirsch: It’s not like electing the President of the United States where there’s one vote for every person. Uou get to vote based on your shares. So if you have a hundred shares of Jack and Jill’s Widget Company and there are a million shares outstanding, you’re 100 shares isn’t going to influence things very dramatically.

Jon Jamieson:  Correct. The larger the holding, the more shares you own, the more say you have in the effect of the vote. In principle it’s good to participate. If you’re an investor in the company you should say that you have some sort of say in how the company is run and what decisions they make.

Aaron Kirsch:   We talked a little bit about the New York Stock Exchange and stocks that are listed on that stock exchange are usually vetted by the New York Stock Exchange. There are certain criteria that these companies have to fulfil. They have to have special reporting, they have to have a legitimate business, but there are other exchanges out there.

Jon Jamieson:  There are. There are other companies out there that don’t meet the criteria of the New York Stock Exchange. They are sometimes known as penny stocks, which are traded not on the New York Stock Exchange, but something that’s called Over-the-Counter. There is less regulation, there is less liquidity, it’s a little bit riskier and kind of like the IPO. This is based almost solely on hype and is media driven so people will invest in penny stocks hoping that the hype will drive the stock price higher exponentially and then they’ll be able to get out quickly.

Aaron Kirsch: But because the requirements are a lot less, they tend to be pretty risky.

Jon Jamieson:  That’s correct.  They are a lot more volatile and sometimes if you get into them, because they are traded Over-the-Counter, it can be harder to get out of your investment as well at a price that you want to.

Aaron Kirsch: Okay now we’re going to talk about the other way Jack and Jill Widget Company can raise money besides issuing stock. You had mentioned they can also issue bonds. What’s a bond?

Jon Jamieson:  A bond is basically an investment in a company’s debt. An investor can buy a bond from Jack and Jill’s Widgets and for that investment, Jack and Jill will pay them interest. They will pay them a fixed amount over the life of the bond as opposed to a stock where the amount you’re going to make back is volatile and not set in stone. With a bond you’re going to make a fixed interest payment back over the life of the bond. It’s going to be the same amount every time.

Aaron Kirsch:   A stock, you actually own the company and you participate in the fortunes of that company. A bond is an I Owe You to the company. You’ve lent them money that they’re going to pay you back at some point in the future.

Jon Jamieson:  Right and the interest payment that you receive from the company on the bond is predicated upon the chances of the company being successful in the future. So a company that is very well established, should have a bright future ahead of it, its interest payment is not going to be as high as one that is slightly more risky and not as sure to pay back the final bond payment at the end of it.

Aaron Kirsch:   And those risky company bonds are known as?

Jon Jamieson:  Junk or high yield bonds.

Aaron Kirsch:   Right. Junk bonds because they’re from companies that aren’t as solid, but the euphemistic term is high yield because those companies are going to have to pay a higher interest rate to investors in order to entice investors to take that risk, right?

Jon Jamieson:  Correct because it’s less likely that the company will still be around at the end of the bond’s duration.

Aaron Kirsch:   Great. Now let’s move on to other kinds of investments. We talked about stocks, we talked about bonds, let’s talk about funds.

Jon Jamieson:  Okay great. There are two major types of funds that most investors might be familiar with or hear a lot. Those are mutual funds and exchange traded funds or ETFs. If you invested with Spotlight odds are you probably own at least a couple ETFs. So basically what they are, if we could go back to our Jack and Jill example, say you like the Jack and Jill’s widgets, but you like the widget industry in general a little bit more and you don’t want to be tied to just one widget company’s stock performance. So you could buy a widget ETF or exchange traded fund and what this fund does is it gains you exposure to all the widget companies on their performance. So if the widget industry as a whole does really well, that price will do really well, but it is not as susceptible to a large drop or a large gain by just one individual stock.

Aaron Kirsch:   There are industry specific ETFs like the widget industry. What other kinds of ETFs are available?

Jon Jamieson:  In addition to certain industries, there are also certain countries or parts of the world. You could do emerging market ETFs. There are international ETFs. There are ETFs that track only large cap or medium cap or small cap companies here in the US or abroad, and then there are also things like energy ETFs or a real estate. Basically the ETF industry is growing by leaps and bounds. There’s really an ETF for any type of sector or investment that you’re looking for.

Aaron Kirsch:   And these ETFs, or exchange traded funds as we mentioned, tend to be low cost which is why a lot of people like them. They tend to be a lot lower cost than mutual funds which were their predecessors. Let’s talk a little bit about mutual funds. Why are mutual funds more expensive than exchange traded funds?

Jon Jamieson:  To put it simply, an ETF is a basket of every company in a certain industry and the allocation to the company stays constant, whereas a mutual fund is a basket of different companies in an industry but it’s constantly changing per the analysis of the mutual fund manager. The mutual fund manager is always adjusting the allocation of the fund to try and capitalize on where he feels different companies are headed in the future and will change the allocation of the fund accordingly. What comes with that however is he will charge a higher fee to invest in the fund itself.

Aaron Kirsch:   Typically exchange traded funds don’t have a manager, it’s just a buy and hold strategy. We’re going to just pick a basket of stocks and hold them. Whereas the mutual funds, they have an investment management team that is tracking different stocks, is looking at and analysing these companies, is trying to pick winners and losers and it’s constantly making changes, so you have to pay for that management. You have to pay for that research team to try and make those changes within the portfolio.

Jon Jamieson:  Exactly. Mutual funds have a finer touch on how they are managed but you do pay for it.

Aaron Kirsch:   And just like exchange traded funds where there seems to be an exchange traded fund for just about anything you want, whether it be industry specific, country specific, company’s size specific- there’s the same thing for mutual funds.

Jon Jamieson:  ETFs are probably more popular of late, but both spaces are incredibly large and can provide exposure to any type of investment you’re looking for.

Aaron Kirsch:   Those don’t have to just be stocks. There are mutual funds and exchange traded funds that do invest in stocks. There are funds that invest in bonds. There are funds that invest in real estate, alternative investments…. There are so many mutual funds. I think there’s more mutual funds than there are stocks available to invest in and the exchange traded fund universe is growing dramatically too.

Jon Jamieson:  Correct. It can be daunting but there’s great tools out there to help us vet these funds and find the ones that are worthy of investment.

Aaron Kirsch:   Which is one of the things we do at Spotlight, which is the investment management, helping find the right investments for our clients. Jon, thank you for sharing your knowledge with us today on the podcast.

Jon Jamieson:  My pleasure Aaron. Anytime.

Aaron Kirsch:   If you have questions about what we discussed today or any other questions about investments, please contact your wealth manager at Spotlight Asset Group. For Jon Jamieson and the rest of the team at Spotlight Asset Group, this is Aaron Kirsch. Thanks for listening.

 

Our podcasts are intended to provide general information about our business, not to provide investment advice or solicit or offer to sell our investment advisory services. You should not make any financial, legal, or tax decisions without consulting with a properly credentialed and experienced professional. Any specific situations we reference in our podcasts are for illustrative purposes only and should not be construed as a testimonial, and any mention of past performance is not a guarantee of future success. 

 

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Jon Jamieson, Director of Trading at Spotlight Asset Group, explains what is a stock, what is a bond, and what is a fund in this episode of the Spotlight On Your Wealth Podcast.

Episode: What Is a Stock, What is a Bond, What is a Fund?
Guest: Jon Jamieson, Director of Trading, Spotlight Asset Group

Spotlight on Your Wealth Podcast

Aaron Kirsch:   Hi, this is Aaron Kirsch, Managing Director at Spotlight Asset Group.

 

Imagine yourself as a ship owner in the 1600’s in Europe, eager to sail to the East to take advantage of all the riches that trade had to offer.  You are faced with a lot of risk from pirates, weather, and poor navigation.  You are also faced with huge expenses outfitting your ship and crew for the long voyage.  What if… what if you could get investors to put up money and share the risk in exchange for a piece of the profit if the voyage is successful?

 

You give your investors stock in your shipping company.  As investors start receiving huge dividends others want in on the action and want to buy shares in shipping companies like the British East India Company.

 

Back then there were no regulations or stock exchanges to trade so many scam artists emerged to take advantage of investors which caused the English government to outlaw issuing s stocks.

 

In 1790 The Philadelphia Stock Exchange became the first in the United States but the New York Stock Exchange, whose origins began two years later, soon became the dominant stock exchange in the US and the most important stock exchange in the world for almost two centuries.

 

On this podcast we are going to talk about the basic mechanics of different investments- what is a stock, what is a bond, what is a fund, and how do you invest in them.

 

Our guest today is Jon Jamieson, director of trading at Spotlight Asset Group. Even if you’re familiar with Spotlight, you may not know Jon. He works behind the scenes to make sure that all the trading at Spotlight goes smoothly. Jon, before we get started, please tell us a little bit about yourself.

 

Jon Jamieson:  Absolutely, so I’ve been in the industry for about 16 years. I started my career down on the floor of the Chicago Board of trade. I was down there during my undergrad and graduate days. I was working as a clerk on the agricultural trading floor where, instead of a stock like we’re going to talk about today, we were trading futures. After that I went on to work on a trading and execution desk specializing in futures options. I then moved over to Spotlight at its inception a little over a year and a half now so my role here is allocating and trading for all our client accounts and making sure that they are allocated correctly per their IPS agreement. So I’m happy to dive right in and discuss the life of a stock with you.

 

Aaron Kirsch: That’s great Jon, thanks. So I described how the first stocks were created, but let’s pick a more modern example.

 

Jon Jamieson:  Sure.  So let’s say Jack and Jill on a widget company and they probably started this widget company with either their own money or money from families and friends or private investment but as the company grows, they’re going to want to expand more. They’re going to want to add do lines of widgets, they’re going to want to build new factories, so they’re going to go out to the public to try and get that investment. The two ways they can do that is by issuing bonds, or what we can talk about first is issuing stock. So they’ll issue stock through an Initial Public Offering or an IPO. They’ll issue stock to investors in the public that will give investors the opportunity to invest in their widget company and be entitled to future earnings of the company as it grows.

 

Aaron Kirsch: How does the stock become public? What’s going on there?

 

Jon Jamieson:  They go through a process of registering with an exchange like the aforementioned New York Stock Exchange and they create an IPO or Initial Public Offering in which analysts will determine what the value of one share of stock in the widget company should be and they will open it up to trading and investors can buy and sell at whatever price they deem fit.

 

Aaron Kirsch:   There’s usually a lot of excitement around IPOs. Some of these are tech companies that people have heard about forever and so the prices kind of get out of hand, right? There’s excitement. People want in on the IPO. Once the IPO starts trading people want to buy in.  It shoots the price up dramatically. How’s all that work?

 

Jon Jamieson:  Right.  Especially now there’s a lot of social media and you know there always has been a lot of media surrounding a lot of IPOs which leads to a lot of price action or a lot of price movement, meaning the price is not standing still very often in the initial trading. It’s kind of moving all over the place.  It eventually will even out and become a normally traded stock but the media can definitely drive a lot of, some warranted some unwarranted movement in a stock price early on.

 

Aaron Kirsch:   Some of all this price movement is driven by uncertainty because we really don’t know how much the stock should be worth. These companies have been private up until now, so no one really knows what they’re making.

 

Jon Jamieson:  Right and it’s all based on potential. Do investors like the widget industry; do they like how Jack and Jill’s approach is to the widgets industry? Sure but there’s not a ton of information readily available yet compared to a well-established company so it’s harder to determine what a fair price for the stock should be.

 

Aaron Kirsch:   And usually when it’s a really hot IPO, everyone wants in and it’s really hard to get and then sometimes there’s companies that go public and they’re not very exciting. So my dad used to say, if you want it, you can’t get it and if you can get it, you don’t want it. All right, Jack and Jill Widget Company- they have their IPO and they’re now traded on a stock exchange. So now that they’re traded on a stock exchange, how does the stock price move up and down?

 

Jon Jamieson:  So basically what it is, is an auction market. The stock is always up for auction. There will always be people wanting to buy and there will always be people wanting to sell so there’s always going to be a bid by those people looking to buy and there will always be an offer by those looking to sell and where those two meet is where the stock will always be trading.

 

Aaron Kirsch:   Right it’s an auction market, so if there’s a lot of excitement about a company because their profits are really good, their potential is really good, there’s going to be more people wanting to buy into that company than there are people willing to sell it. That’s going to push the price up.  And then if the company doesn’t have good earnings or might go bankrupt, then there’s going to be a lot of people wanting to sell that stock and not a lot of buyers and that’s going to push the price down.

 

Jon Jamieson:  Correct.

 

Aaron Kirsch:   And all this is done on a stock exchange so what exactly Jon is the Stock Exchange doing?

 

Jon Jamieson:  Sure, so the stock exchange, while back in 1790 as you were saying that it was a physical building where there were people matching up buying and selling on the trading floor. It is now, for all intents and purposes, a large network of computers that is run by say the New York Stock Exchange and that facilitates the buying and selling, matching up buyers and sellers of stock, and allowing them to trade freely.

 

Aaron Kirsch:   If you’re a shareholder of Jack and Jill’s Widget Company, what are some of your rights?

 

Jon Jamieson:  Primarily the number one thing that you’re entitled to is the company’s earnings. Now how you gain access to those earnings can vary. Some companies are dividend paying companies, so every quarter they have earnings and they pay a certain percentage of those earnings to their investors. Normally a set amount based on the number of stock that each investor has. There are also non-dividend paying companies. They take their earnings and reinvest it in the company. Now you might say, well, I’m not getting a dividend, it’s not as good for me, but theoretically the earnings going back into the company should be increasing the stock price, the value of the company, and making your investment go up as well.

 

Aaron Kirsch: Back to Jack and Jill’s Widget Company, they make some money and they can decide we’re going to take some of that money and pay it out to our shareholders, let them share in the profits. Or they can say, we’re going to take that money and we’re going to build a new factory or invest in a new product line to grow our company even more.

 

Jon Jamieson:  Exactly. The first thing is a dividend and the second one is reinvestment, which would lead to a higher stock price and better value in the investment for their investors.

 

Aaron Kirsch:   If all things go well?

 

Jon Jamieson:  Correct, if all things go well.

 

Aaron Kirsch: Jon, investors get proxies in the mail and they don’t know what to do with them. What exactly is a proxy?

 

Jon Jamieson:  A proxy refers to basically a vote for every one share of stock that an investor owns. Companies have decisions that need to be put to a vote from all of its investors and so what a proxy does is it guarantees every investor a vote in say, whether or not to issue a dividend, whether or not to have somebody on the board directors. Basically a proxy allows every investor to have a say in how the company is run.

 

Aaron Kirsch: It’s not like electing the President of the United States where there’s one vote for every person. Uou get to vote based on your shares. So if you have a hundred shares of Jack and Jill’s Widget Company and there are a million shares outstanding, you’re 100 shares isn’t going to influence things very dramatically.

 

Jon Jamieson:  Correct. The larger the holding, the more shares you own, the more say you have in the effect of the vote. In principle it’s good to participate. If you’re an investor in the company you should say that you have some sort of say in how the company is run and what decisions they make.

 

Aaron Kirsch:   We talked a little bit about the New York Stock Exchange and stocks that are listed on that stock exchange are usually vetted by the New York Stock Exchange. There are certain criteria that these companies have to fulfil. They have to have special reporting, they have to have a legitimate business, but there are other exchanges out there.

 

Jon Jamieson:  There are. There are other companies out there that don’t meet the criteria of the New York Stock Exchange. They are sometimes known as penny stocks, which are traded not on the New York Stock Exchange, but something that’s called Over-the-Counter. There is less regulation, there is less liquidity, it’s a little bit riskier and kind of like the IPO. This is based almost solely on hype and is media driven so people will invest in penny stocks hoping that the hype will drive the stock price higher exponentially and then they’ll be able to get out quickly.

 

Aaron Kirsch: But because the requirements are a lot less, they tend to be pretty risky.

 

Jon Jamieson:  That’s correct.  They are a lot more volatile and sometimes if you get into them, because they are traded Over-the-Counter, it can be harder to get out of your investment as well at a price that you want to.

 

Aaron Kirsch: Okay now we’re going to talk about the other way Jack and Jill Widget Company can raise money besides issuing stock. You had mentioned they can also issue bonds. What’s a bond?

Jon Jamieson:  A bond is basically an investment in a company’s debt. An investor can buy a bond from Jack and Jill’s Widgets and for that investment, Jack and Jill will pay them interest. They will pay them a fixed amount over the life of the bond as opposed to a stock where the amount you’re going to make back is volatile and not set in stone. With a bond you’re going to make a fixed interest payment back over the life of the bond. It’s going to be the same amount every time.

 

Aaron Kirsch:   A stock, you actually own the company and you participate in the fortunes of that company. A bond is an I Owe You to the company. You’ve lent them money that they’re going to pay you back at some point in the future.

 

Jon Jamieson:  Right and the interest payment that you receive from the company on the bond is predicated upon the chances of the company being successful in the future. So a company that is very well established, should have a bright future ahead of it, its interest payment is not going to be as high as one that is slightly more risky and not as sure to pay back the final bond payment at the end of it.

 

Aaron Kirsch:   And those risky company bonds are known as?

 

Jon Jamieson:  Junk or high yield bonds.

 

Aaron Kirsch:   Right. Junk bonds because they’re from companies that aren’t as solid, but the euphemistic term is high yield because those companies are going to have to pay a higher interest rate to investors in order to entice investors to take that risk, right?

 

Jon Jamieson:  Correct because it’s less likely that the company will still be around at the end of the bond’s duration.

 

Aaron Kirsch:   Great. Now let’s move on to other kinds of investments. We talked about stocks, we talked about bonds, let’s talk about funds.

 

Jon Jamieson:  Okay great. There are two major types of funds that most investors might be familiar with or hear a lot. Those are mutual funds and exchange traded funds or ETFs. If you invested with Spotlight odds are you probably own at least a couple ETFs. So basically what they are, if we could go back to our Jack and Jill example, say you like the Jack and Jill’s widgets, but you like the widget industry in general a little bit more and you don’t want to be tied to just one widget company’s stock performance. So you could buy a widget ETF or exchange traded fund and what this fund does is it gains you exposure to all the widget companies on their performance. So if the widget industry as a whole does really well, that price will do really well, but it is not as susceptible to a large drop or a large gain by just one individual stock.

 

Aaron Kirsch:   There are industry specific ETFs like the widget industry. What other kinds of ETFs are available?

Jon Jamieson:  In addition to certain industries, there are also certain countries or parts of the world. You could do emerging market ETFs. There are international ETFs. There are ETFs that track only large cap or medium cap or small cap companies here in the US or abroad, and then there are also things like energy ETFs or a real estate. Basically the ETF industry is growing by leaps and bounds. There’s really an ETF for any type of sector or investment that you’re looking for.

 

Aaron Kirsch:   And these ETFs, or exchange traded funds as we mentioned, tend to be low cost which is why a lot of people like them. They tend to be a lot lower cost than mutual funds which were their predecessors. Let’s talk a little bit about mutual funds. Why are mutual funds more expensive than exchange traded funds?

 

Jon Jamieson:  To put it simply, an ETF is a basket of every company in a certain industry and the allocation to the company stays constant, whereas a mutual fund is a basket of different companies in an industry but it’s constantly changing per the analysis of the mutual fund manager. The mutual fund manager is always adjusting the allocation of the fund to try and capitalize on where he feels different companies are headed in the future and will change the allocation of the fund accordingly. What comes with that however is he will charge a higher fee to invest in the fund itself.

 

Aaron Kirsch:   Typically exchange traded funds don’t have a manager, it’s just a buy and hold strategy. We’re going to just pick a basket of stocks and hold them. Whereas the mutual funds, they have an investment management team that is tracking different stocks, is looking at and analysing these companies, is trying to pick winners and losers and it’s constantly making changes, so you have to pay for that management. You have to pay for that research team to try and make those changes within the portfolio.

 

Jon Jamieson:  Exactly. Mutual funds have a finer touch on how they are managed but you do pay for it.

 

Aaron Kirsch:   And just like exchange traded funds where there seems to be an exchange traded fund for just about anything you want, whether it be industry specific, country specific, company’s size specific- there’s the same thing for mutual funds.

 

Jon Jamieson:  ETFs are probably more popular of late, but both spaces are incredibly large and can provide exposure to any type of investment you’re looking for.

 

Aaron Kirsch:   Those don’t have to just be stocks. There are mutual funds and exchange traded funds that do invest in stocks. There are funds that invest in bonds. There are funds that invest in real estate, alternative investments…. There are so many mutual funds. I think there’s more mutual funds than there are stocks available to invest in and the exchange traded fund universe is growing dramatically too.

 

Jon Jamieson:  Correct. It can be daunting but there’s great tools out there to help us vet these funds and find the ones that are worthy of investment.

 

Aaron Kirsch:   Which is one of the things we do at Spotlight, which is the investment management, helping find the right investments for our clients. Jon, thank you for sharing your knowledge with us today on the podcast.

 

Jon Jamieson:  My pleasure Aaron. Anytime.

 

Aaron Kirsch:   If you have questions about what we discussed today or any other questions about investments, please contact your wealth manager at Spotlight Asset Group. For Jon Jamieson and the rest of the team at Spotlight Asset Group, this is Aaron Kirsch. Thanks for listening.

 

Our podcasts are intended to provide general information about our business, not to provide investment advice or solicit or offer to sell our investment advisory services. You should not make any financial, legal, or tax decisions without consulting with a properly credentialed and experienced professional. Any specific situations we reference in our podcasts are for illustrative purposes only and should not be construed as a testimonial, and any mention of past performance is not a guarantee of future success. 

How Will the New Tax Code Affect You?

In 2017 Congress passed the most sweeping update to the tax code in 30 years. How will the new tax code affect you? Our guest on Episode #3 is Kermith Boffill, a lead tax partner and CPA at Grobstein Teeple, an accounting firm with offices in California and Washington DC.

Episode: How Will the New Tax Code Affect You?
Guest: Kermith Boffill, lead tax partner and CPA at accounting firm Grobstein Teeple.

Spotlight on Your Wealth Podcast

Aaron: Welcome to Episode Number 3 of The Spotlight on Your Wealth Podcast.  “In this world nothing can be said to be certain except death and taxes.”  This may be Benjamin Franklin’s most famous quote.  Taxes are inevitable and taxes are contentious.  In the 18th Century British taxes on the American Colonies led to an American Revolution and the founding of the United States.  Congress imposed the first personal income tax almost a century later to pay for the Civil War.  And in the 20th Century Congress ratified the 16th Amendment giving itself the power to lay and collect taxes on incomes.

Contentious as they are federal income taxes are here to stay.   Over the years there have been many changes to the tax code and income tax brackets. The most recent changes were enacted in 2017.  Love it or hate it this new legislation is the most sweeping update to the tax code in 30 years. Here to guide us through the changes is Kermith Boffill who is a lead tax partner and CPA at Grobstein Teeple, an accounting firm with offices in California and Washington DC. Welcome Kermith.

Kermith: Thank you.

Aaron: Kermith, I’d like to learn a little bit more about you but before you do please tell us about Grobstein Teeple.

Kermith: Grobstein Teeple was started by five partners who were friends for many years and decided they wanted to get out of the big national firm and start a small consulting firm with the abilities of a national firm but with a touch of a smaller, more friendly, more client oriented type of boutique firm. We are now five years old and we kind of like to say that we started backwards. We started a consulting firm first and we helped in all matters of litigation support and restructuring for companies that were in trouble and now we are working our way to creating a more robust, more traditional accounting firm with tax practice.  I am the tax lead and I’m taking that part of the business bigger, and we have audit, and we are doing the more traditional, more black and white type of accounting functions that will help us grow.  We just celebrated our fifth year and hopefully we have got another 30, 40, 50 years to go.

Aaron: Fantastic.  Kermith, tell us about your background in accounting.

Kermith: I started in private practice.  I did private practice as a CFO for a company for about 15 years while I was going to school.  I decided, once I got close to finishing school, I decided that you know, I might as well get into public accounting.  That was in 2003 and since 2003 I’ve been working in public accounting.  When I started my career I did both audit and tax and at some point I was made to choose.  I chose, I think the beauty of both, which is tax.  There are few people that need to love tax and I, fortunately, am one of them.

Aaron: Well, we’ve got the right guy for our podcast today don’t we?

Kermith: Yes we do.

Aaron: Kermith, we had a tax code that before 2017 was how many pages long?

Kermith: Actually, that’s a good question.  I don’t know the number of pages but I know it’s a pretty big book.

Aaron: And now after the new tax code?

Kermith: It’s probably just as big or bigger!

Aaron: That’s what I thought.  All right, well let’s get into this then, please. Tell us what are some of the significant changes to the personal income tax?

Kermith: The biggest change for the personal income tax is the change in tax rates.  Generally speaking, they went down anywhere between 2% to 3% per bracket and they widened the brackets.  So more of your income will be subject to the lower brackets.  The goal there is to have an overall depressing of the amount of taxes owed, so if last year you had $200,000 of income and your marginal rate was, say 30%, the goal now is to have more of the $200,000 taxed at a lower rate, thereby saving you taxes.  That’s the biggest change.  They went from having I believe it was eight tax brackets to now six and that was all in the spirit of lowering taxes and hopefully simplifying the application of the brackets.

Aaron: Got it, so we have fewer tax brackets-

Kermith: Fewer tax brackets, bigger range within the brackets themselves, and lower in terms of percentages as well.  So your next dollar should be tax at a lower rate.

Aaron: Got it.

Kermith: That’s taxable income.

Aaron: That’s taxable income.  We know this will help reduce taxes from most taxpayers but not everyone will benefit from this, right?

Kermith: That’s right.  They made some changes to the deductions that came out of the taxes paid to states.  Those are severely limited and so if you happen to reside in California or New York or some other state like- even Illinois has a little bit of an elevated tax rate, you are capped. You can’t take more.  So if you have $200,000 as I have used in my previous example and you are at a 10% marginal rate, for state purposes you owed $20,000 of taxes roughly.  Under the old rules you would be able to deduct those $20,000 without impediment.

Now under the new rules, you’re capped at $10,000 so even though you paid to your state $20,000 you can only deduct $10,000.  So it’s a bit of a penalty for those high taxed states.  While I said earlier that your taxable income is exposed to lower brackets, now because of the deduction limitations to state taxes, primarily your taxable income will be higher.  So instead of having the $200,000 of taxable income you had previously it’s not going to be $210,000 because you have to pick up the undetectable portion of your state taxes.

Aaron: Got it, so if you live in a high tax state, California, Illinois or New York-

Kermith: New York, right tax states you’re at a disadvantage.

Aaron: You are at a disadvantage.

Kermith: There are certain states that’s coming up with some creative ways of trying to get a deduction, bypass the Federal limitations, but we’ll see how that goes. I don’t think it’s going to happen but we’ll see.

Aaron: For the people in those high-income states, it might just be a wash.  They’re paying lower federal income tax brackets but because of this cap on the state income tax, it may just be a wash.

Kermith: That’s right and one of the things that will likely help out those people in the high-income tax states is AMT limitations rose considerably.  So while last year’s brackets captured a lot more people in the AMT, which stand for Alternative Minimum Tax, now the limit is a million dollars of Alternative Minimum taxable income- not very many people are going to reach that.  One of the adjustments to the AMT is an ‘add back’ for state taxes.  Now that less and less people will be subject to the AMT, the hope is that that lack of AMT tax will make up for the lost state deductions.  We’ll see how it all plays out but that’s the theory behind it.

Aaron: Got it.  And the Alternative Minimum Tax, the AMT, was something that was passed by Congress many decades ago and was never indexed for inflation so it was initially set up to tax people in the higher income tax bracket but then it turned out that a lot of people in the middle got caught up in the AMT.

Kermith: Yes, and in every year more, and more, and more middle-class people were, at least were respect to the AMT, defined as rich. Which we all know is not the case.

Aaron: Right.

Kermith: So I think last year if you were somewhere around $200,000, which in a state like California and New York is pretty common, you likely were in AMT.  And so now you will not be in AMT although you don’t get to deduct the state taxes. You will no longer have to pay that AMT so hopefully you balance out that way.

Aaron: And then there are also major changes to the deductions- the standard deduction.  Can you tell us a little bit about that?

Kermith: Yes so it used to be that you got, depending on your filing method- If you are filing single you would get a standard deduction which was about $6,000 and change, and then if you were filing as married filing couple, for example, you would get another deduction.  Now what they did was they said, no we’re going to do away with that. We’re going to do away with your standard deduction and your exemptions.

A family of four would get $4,000 per person being reported on the tax returns so a family of four could have realized somewhere between, actually it was about $16,000 of exemptions on their tax return. That’s gone, so what they said was a single individual will get $12,000 of standard deduction, and a married filing jointly couple, regardless of how many dependents they have, will get $24,000.

The purpose behind that was to twofold (1) Try to make up for some of those lost deductions and (2) To simplify the compliance portion of filing tax returns. The theory is that now under the larger standard deductions, less and less people will be incentivized to itemize their tax returns thereby making the filing a lot simpler process- you don’t have to do a Schedule A,  you don’t have to itemize, to have to keep receipts for certain things.  And so, that’s the goal. We’ll see how it all plays out, but that’s goal.

Aaron: Okay so it might simplify things but it might also be a penalty for people with a lot of kids.

Kermith: Exactly.

Aaron: So don’t have lots of kids.

Kermith: Unless you really want them.

Aaron: Unless you really want them but don’t do it for tax purposes.

Kermith: That’s right.

Aaron: Are there any other personal Income tax issues that are a dramatic change from the previous year?

Kermith: Yes, there are. One of the things that going into the tax negotiations at the end of 2017 was they wanted to simplify the tax code. They wanted to simplify it so much that CPA’s were like, we’re going to be put out of a job.  One of the concerns that had as this law was being formulated and negotiated and ultimately passed was that compliance was going to be so easy that it would put all of out of a job.  It turns out that rather than simplifying some of these issues the really, really, really made it a little more complicated.

What I mean by that, there is something called a “Qualified Business Deduction” for those people who own their own businesses. That is a really big change to the tax code and it’s a change that is causing practitioners a lot of consulting time, a lot of questions, a lot of research because we ourselves don’t understand it entirely.  What’s happening is they are coming out with regulations and guidance.  As they come up with that they need to determine what that guidance is.

Generally what this QBI deduction intends to do is equalize the changes in the corporate tax law with those people who have businesses that would otherwise be changed to the corporate structure to take advantage of the lower tax rate.  So now they are trying to make it so they prevent business owners from changing say an LLC for example into a C-corp. That’s what they’re trying to prevent and so they come up with this QBI deduction that is really really complicated.  I think maybe it’s outside the scope of this conversation but it’s really complicated and it’s something that’s out there and for those of your clients that have these types of pass-through entities: S-Corps, LLC’s, Schedule C businesses where there’s a sole owner/sole  practitioners to really consult their tax advisor because it is very important, probably the most important thing that came out of this tax law.

Aaron: To go back to the origins of this of the tax law, part of it was really to a big deduction for corporations.

Kermith: Yes.  So, in other words, it was to bring down the corporate tax rate which was very similar to the individual tax rate.  What I mean by that- it was progressive in nature so the more income you earned the higher you got taxed.  And so that’s how corporate law used to be.  If you hear, that was all over the news.  We have the highest corporate tax rates in the world, they impede business and all these things.

Truth is yes it does impede business but very few corporations ever paid that high tax bracket because they had accountants who would help them mitigate some of that impact of the high progressive tax rates. So the whole thing was like, it’s impeding businesses, we have to change it,  and so they came up with the flat tax rate which is 21%.  How they determine 21% is still unclear to me but I have my theories. But I think that 21% automatically got everyone thinking, “Wow I have an S-Corp, I have an LLC, I’m just going to switch to a C-Corp and pay 21%.  Why am I going to pay my high tax rates when I can pay my tax at a C-Corp level?”  The government saw this.  The people that were writing this document, Gary Cohen who’s a brilliant guy, he saw this and decided he had to come up with something to prevent an exodus of taxpayers converting their S-Corps and LLCs into C Corps.

So what he did was, he came up with this QBI deduction and it’s supposed to equate the benefit you get from a C-Corp to an LLC and a S-Corp.  The only problem is C-Corp tax reductions are permanent and individuals are not.  As a matter of fact most of the changes they made to the individual taxes only are in effect from 2018 and they expire in 2025 which makes it kind of hard because if you are planning for long-term growth of a company whose currently an LLC or an S-Corp it’s very hard because you don’t know what’s going to happen after 2026.  My hunch is that it will be extended because once a policy is put into effect and enough people like it, it kind of becomes politically impossible to change.  And so I think it will stay that way but that’s just my guess.

Aaron: Congress try to simplify something and instead they mucked it up.

Kermith: Go figure.

Aaron: If you are a business owner is there now a difference between an S-Corporation, LLC, or Sole Proprietorship?

Kermith: The difference between those three types of entities is more related to a C-Corp.  They are more similar than they are not similar.  They differ most from a C-Corp. The LLC and the S-Corp will still pass the through.  The biggest difference between the S-Corp and the LLC is how the income is taxed.  From an LLC, it’s subjected to taxes that an S-Corp is not subject to.  Namely: self-employment taxes.  In an S-Corp they’re not applicable but you have to draw a wage in which you get a paycheck.  That is how you pay the self-employment taxes.  Whereas an LLC- you don’t have to do that but all of the income is subjected to self-employment taxes. With a sole proprietor/Schedule C for example, your whole taxable income, in other words the money you make from that activity, is all subjected to self-employment tax. They are very similar.  The only difference is how they’re structured but in terms of the ultimate effect on the individual, they are very similar.

Aaron: Let’s talk a little bit about the changes to estate taxes.

Kermith: That’s actually a great planning source, a great area of the new tax law that allows us to do some planning, especially with respect to people who exceed the thresholds.  Just generally speaking, what changed was, there was a 5.6 limitation –

Aaron: 5.6 million dollars.

Kermith: 5.6 million dollar limitation on how much a person could leave to his or her heir without paying any estate taxes on it. The new tax law changed that from 5.6 to 11.2 per person. It would be 11.2 million dollars per taxpayer that they can leave to their heirs. There is kind of a wrench in the whole thing, and that is again as I mentioned earlier this portion of the law is set to expire in 2025.  While earlier I said that sometimes when a law is very popular it affects a lot of people ,it’s hard to change.  I think in this case you may have the opposite effect because very few people will benefit from this and so it may change. That offers accountants and practitioners a good grey area in which to operate and plan.

There are very different ways that you can take this.  One of the constraints is obviously we don’t know if this is going to permanent forever.  And then lastly, what happens if you take advantage of an exemption today or you gift something to try and take advantage of your exemption but it’s a property and you lose the step-up that you would otherwise get.  There are some planning where we are trying to gift out the assets a taxpayer has so that we can take advantage of the 11.2.  The reason we’re doing that is because if it changes in 2025 and it goes back to $5 million or even prior to that, I believe in 2000 it was $600,000, if it goes back to those numbers they’ve already utilized the 11.2 million dollars of exemption and they can’t take it back.  So you’ve already given all of these assets tax-free, which is a great thing, especially for your heirs. You don’t have to pay any taxes on it.  We’re looking into strategies to utilize that.

The other one is if you do happen to have a tax payer pass away and they did not use their 11.2 exemption, you have what’s called “Portability.”  Portability means that if I don’t use my exemption, I can leave it to my husband or wife.  He or she will not only have their current exemption, whatever it is at that time, plus your unused portion of the spouse that previously passed away.  That’s also a planning portion we’re taking advantage of.

Essentially what we need to understand, and how people can take advantage of the new higher level of exemptions, is if they have any assets that they are intending to leave to their heirs, it’s probably better to start thinking about gifting them now when we know what the law is then waiting to 2025 when we don’t know what the law will be.  Those are the two big things that changed in the estate tax law.

Aaron: Kermith, let’s go through some examples.  If you would, please give us a couple of examples of how it’s different now than it was just a year ago.

Kermith: The two most common scenarios involve a married couple with two kids and an individual with no kids.  Prior to last year’s changes, if you had a married couple with two dependents, two kids and you weren’t doing any itemization, you weren’t itemizing your deductions.  You would just taken the standard deduction.  What you would get is $12,750 of standard deduction.  With that you would get $16,200 in personal exemptions so you are essentially getting in total deduction $28,950.  Under the new law that’s all gone.  Now all you get is $24,000 of standard deduction, no exemptions.  So the big change is your standard deduction is higher but your exemptions are gone.  So you have a decrease in total deductions under this scenario of $4,960.  Depending on the income level it may mean a lot, it may mean not so much, depending on how much income that family earns.

Now a single individual with no dependents surprisingly does a little bit better.  Under the old law they would normally get a $6,350 standard deduction plus they would get their personal exemption of $4,050.  Under the new law all they get is $12,000 of standard deduction.  Under the old law total deductions would have been $10,400 and under the new law, it’s a $12,000 straight standard deduction.  The individual taxpayer with no dependents actually is better off by $1,600.  The whole point is every case will be different, every taxpayer situation will be different, and so some people you would least expect that will benefit do. Those who you think will most benefit may not.

Aaron: So you got a lot of variables.

Kermith: Yes.

Aaron: Whether you’re single, whether you’re married, whether you have dependents, depending on what state you live in.

Kermith: That’s right.

Aaron: Whether you’re a business owner or an employee.

Kermith: That’s right.

Aaron: Kermith, along with all these other changes we’re talking about, we also have to the mortgage interest deduction.

Kermith: Yes we do.  Under the old law you could take a million dollars of acquisition debt plus a hundred thousand dollars of line of equity to improve the house and things like that.  Under the new law the total is $750,000, so that’s all you get.  When they first changed the law there was a discussion as to whether or not previously existing loans would be subjected to the $750,000 limitation and it turns out that no.  It’s only for loans originated when the new tax law was in effect, so after January 1st, 2017.  That’s very important for houses in states that houses generally exceed $750, 000. Now for example, if you want to buy a house in our neighborhood in Woodland Hills, you’re lucky if you can find something that’s $750,000.

We are telling clients now that if they want to buy that million dollar house, unfortunately what they can do is give a bigger down payment and get your loan balance down so the amount you finance to buy the house is under the $750,000 limit to be able to take advantage of deductions.

Aaron: Kermith, there is also now a change to what you can deduct for advisory fees.  You used to be able to deduct fees paid to your accountant, to your financial advisor, and other service providers.  What’s the new change?

Kermith: In a nutshell, bottom line, they eliminated that deduction.  Those deductions used to be deducted in the part of your Schedule A tax return that was titled “Deductions Subject to a 2% Floor.”  A lot of people took advantage of that section, advisor fees as you mention, people who pay their tax accountants to prepare their tax returns, there was a PO box deduction in there, but the largest chunk of people that took advantage of that section of the form were teachers, fireman, traveling salesman- people who paid expenses in carrying out their jobs but were never reimbursed for them- construction workers who bought steel toe boots, various professions that need to spend to get something.

Teachers were probably the biggest one.  They bought supplies out of their own pocket.  They bought things they needed for the classroom for instruction. They can no longer deduct that so it’s an impact that will affect a lot of people, I think bigger than probably any other change.  Union dues, PO boxes, tax accountants, all that stuff is gone.  Previously you could get a nice little deduction from use of your home for business purposes that you did the reimbursement for, for example, you can no longer do that.

It’s a big impact.  It will affect a lot of people. People who probably needed those deductions to begin with.

Aaron: Are there any changes to what you can deduct for health care expenses?

Kermith: It all depends on whether or not the health care expenses are done through a business or not.  If you’re individually employed, you have a sole proprietorship or a C-Corp or maybe have an S-Corp or an LLC, typically you could use that pay for your insurance.  Under the old law, to be able to deduct medical fees you need to exceed 10% of your AGI.  So if you had $100,000 of AGI you can deduct the first dollar once you exceed 10% of your AGI which would have been $10,000, so on $10,001 when you can start deducting.

It was very hard to actually take it over.  What they did is they lowered that to 7.5%. The goal is to have more and more people take advantage of that deduction and hopefully make some of the burdens of buying and paying for things related to medical a little bit easier but even then I don’t know if most people will exceed that especially because a lot of people are getting insurance through their work and the expenses they otherwise would use is minimal, but we’ll see.  As part of the tax law they changed or they eliminate the mandate under Obamacare to buy health care or have insurance. The goal of that was to create cheaper alternatives.  Usually, with those cheaper alternatives the coverage isn’t as great as we have with some of the more expensive plans than Obamacare requires. And if that’s the case you may see an increase in expenditures with respect to medical and doctors visits because less and less will be covered.  Hopefully, with the lower 7.5% threshold, you can deduct some of that.

Aaron: Are premiums included in that 7.5%?

Kermith: If you don’t deduct it otherwise, yes. Normally, like I said earlier, if you have a business you likely would deduct your premiums through your company but if you’re not deducting them elsewhere, yes then you would be able to deduct them under Schedule A.

Aaron: To sum it up, we now see a somewhat simplified tax code for individuals who don’t have a lot of deductions or have some deductions because a lot of the deductions are going away, but now there’s a higher standard deduction.  If you have a business it gets really complicated and there are a lot of moving parts, and the IRS are still issuing guidance on that.

Kermith: That’s right.

Aaron: There are new limits for mortgages, health care costs-

Kermith: Miscellaneous expenses, and there’s QBI which is not a limitation but it’s good, AMT is gone which is a good thing, and there are changes to the tax brackets- they’re widened, they’re lower.  So hopefully all in all people come out a little bit better than they did.  We see how it all plays out.

Aaron: But after listening to this podcast I’m sure everyone who is listening thinks well, things aren’t any more simple than they were before and I still need an accountant to help me so-

Kermith: That’s right.

Aaron: So please consult your tax professional and if you need a tax professional the partners at Grobstein Teeple can help you out as well.

Kermith: That’s right. We’re here to help.

Aaron: This was Episode 3 of the “Spotlight on Your Wealth Podcast.”  You can subscribe to our series on Apple iTunes or wherever you listen to your favorite podcasts.  For Kermith Boffill  and all the professionals at Grobstein Teeple and Spotlight Asset Group, thanks for listening.

 

Our podcasts are intended to provide general information about our business, not to provide investment advice or solicit or offer to sell our investment advisory services. You should not make any financial, legal, or tax decisions without consulting with a properly credentialed and experienced professional. Any specific situations we reference in our podcasts are for illustrative purposes only and should not be construed as a testimonial, and any mention of past performance is not a guarantee of future success. 

The views and opinions expressed during this podcast are those of the host and/or guest, and not necessarily those of Spotlight Asset Group, Inc.

 

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In 2017 Congress passed the most sweeping update to the tax code in 30 years. How will the new tax code affect you? Our guest on Episode #3 is Kermith Boffill, a lead tax partner and CPA at Grobstein Teeple, an accounting firm with offices in California and Washington DC.

Episode: How Will the New Tax Code Affect You?
Guest: Kermith Boffill, lead tax partner and CPA at accounting firm Grobstein Teeple.

Spotlight on Your Wealth Podcast

Aaron: Welcome to Episode Number 3 of The Spotlight on Your Wealth Podcast.  “In this world nothing can be said to be certain except death and taxes.”  This may be Benjamin Franklin’s most famous quote.  Taxes are inevitable and taxes are contentious.  In the 18th Century British taxes on the American Colonies led to an American Revolution and the founding of the United States.  Congress imposed the first personal income tax almost a century later to pay for the Civil War.  And in the 20th Century Congress ratified the 16th Amendment giving itself the power to lay and collect taxes on incomes.

Contentious as they are federal income taxes are here to stay.   Over the years there have been many changes to the tax code and income tax brackets. The most recent changes were enacted in 2017.  Love it or hate it this new legislation is the most sweeping update to the tax code in 30 years. Here to guide us through the changes is Kermith Boffill who is a lead tax partner and CPA at Grobstein Teeple, an accounting firm with offices in California and Washington DC. Welcome Kermith.

Kermith: Thank you.

Aaron: Kermith, I’d like to learn a little bit more about you but before you do please tell us about Grobstein Teeple.

Kermith: Grobstein Teeple was started by five partners who were friends for many years and decided they wanted to get out of the big national firm and start a small consulting firm with the abilities of a national firm but with a touch of a smaller, more friendly, more client oriented type of boutique firm. We are now five years old and we kind of like to say that we started backwards. We started a consulting firm first and we helped in all matters of litigation support and restructuring for companies that were in trouble and now we are working our way to creating a more robust, more traditional accounting firm with tax practice.  I am the tax lead and I’m taking that part of the business bigger, and we have audit, and we are doing the more traditional, more black and white type of accounting functions that will help us grow.  We just celebrated our fifth year and hopefully we have got another 30, 40, 50 years to go.

Aaron: Fantastic.  Kermith, tell us about your background in accounting.

Kermith: I started in private practice.  I did private practice as a CFO for a company for about 15 years while I was going to school.  I decided, once I got close to finishing school, I decided that you know, I might as well get into public accounting.  That was in 2003 and since 2003 I’ve been working in public accounting.  When I started my career I did both audit and tax and at some point I was made to choose.  I chose, I think the beauty of both, which is tax.  There are few people that need to love tax and I, fortunately, am one of them.

Aaron: Well, we’ve got the right guy for our podcast today don’t we?

Kermith: Yes we do.

Aaron: Kermith, we had a tax code that before 2017 was how many pages long?

Kermith: Actually, that’s a good question.  I don’t know the number of pages but I know it’s a pretty big book.

Aaron: And now after the new tax code?

Kermith: It’s probably just as big or bigger!

Aaron: That’s what I thought.  All right, well let’s get into this then, please. Tell us what are some of the significant changes to the personal income tax?

Kermith: The biggest change for the personal income tax is the change in tax rates.  Generally speaking, they went down anywhere between 2% to 3% per bracket and they widened the brackets.  So more of your income will be subject to the lower brackets.  The goal there is to have an overall depressing of the amount of taxes owed, so if last year you had $200,000 of income and your marginal rate was, say 30%, the goal now is to have more of the $200,000 taxed at a lower rate, thereby saving you taxes.  That’s the biggest change.  They went from having I believe it was eight tax brackets to now six and that was all in the spirit of lowering taxes and hopefully simplifying the application of the brackets.

Aaron: Got it, so we have fewer tax brackets-

Kermith: Fewer tax brackets, bigger range within the brackets themselves, and lower in terms of percentages as well.  So your next dollar should be tax at a lower rate.

Aaron: Got it.

Kermith: That’s taxable income.

Aaron: That’s taxable income.  We know this will help reduce taxes from most taxpayers but not everyone will benefit from this, right?

Kermith: That’s right.  They made some changes to the deductions that came out of the taxes paid to states.  Those are severely limited and so if you happen to reside in California or New York or some other state like- even Illinois has a little bit of an elevated tax rate, you are capped. You can’t take more.  So if you have $200,000 as I have used in my previous example and you are at a 10% marginal rate, for state purposes you owed $20,000 of taxes roughly.  Under the old rules you would be able to deduct those $20,000 without impediment.

Now under the new rules, you’re capped at $10,000 so even though you paid to your state $20,000 you can only deduct $10,000.  So it’s a bit of a penalty for those high taxed states.  While I said earlier that your taxable income is exposed to lower brackets, now because of the deduction limitations to state taxes, primarily your taxable income will be higher.  So instead of having the $200,000 of taxable income you had previously it’s not going to be $210,000 because you have to pick up the undetectable portion of your state taxes.

Aaron: Got it, so if you live in a high tax state, California, Illinois or New York-

Kermith: New York, right tax states you’re at a disadvantage.

Aaron: You are at a disadvantage.

Kermith: There are certain states that’s coming up with some creative ways of trying to get a deduction, bypass the Federal limitations, but we’ll see how that goes. I don’t think it’s going to happen but we’ll see.

Aaron: For the people in those high-income states, it might just be a wash.  They’re paying lower federal income tax brackets but because of this cap on the state income tax, it may just be a wash.

Kermith: That’s right and one of the things that will likely help out those people in the high-income tax states is AMT limitations rose considerably.  So while last year’s brackets captured a lot more people in the AMT, which stand for Alternative Minimum Tax, now the limit is a million dollars of Alternative Minimum taxable income- not very many people are going to reach that.  One of the adjustments to the AMT is an ‘add back’ for state taxes.  Now that less and less people will be subject to the AMT, the hope is that that lack of AMT tax will make up for the lost state deductions.  We’ll see how it all plays out but that’s the theory behind it.

Aaron: Got it.  And the Alternative Minimum Tax, the AMT, was something that was passed by Congress many decades ago and was never indexed for inflation so it was initially set up to tax people in the higher income tax bracket but then it turned out that a lot of people in the middle got caught up in the AMT.

Kermith: Yes, and in every year more, and more, and more middle-class people were, at least were respect to the AMT, defined as rich. Which we all know is not the case.

Aaron: Right.

Kermith: So I think last year if you were somewhere around $200,000, which in a state like California and New York is pretty common, you likely were in AMT.  And so now you will not be in AMT although you don’t get to deduct the state taxes. You will no longer have to pay that AMT so hopefully you balance out that way.

Aaron: And then there are also major changes to the deductions- the standard deduction.  Can you tell us a little bit about that?

Kermith: Yes so it used to be that you got, depending on your filing method- If you are filing single you would get a standard deduction which was about $6,000 and change, and then if you were filing as married filing couple, for example, you would get another deduction.  Now what they did was they said, no we’re going to do away with that. We’re going to do away with your standard deduction and your exemptions.

A family of four would get $4,000 per person being reported on the tax returns so a family of four could have realized somewhere between, actually it was about $16,000 of exemptions on their tax return. That’s gone, so what they said was a single individual will get $12,000 of standard deduction, and a married filing jointly couple, regardless of how many dependents they have, will get $24,000.

The purpose behind that was to twofold (1) Try to make up for some of those lost deductions and (2) To simplify the compliance portion of filing tax returns. The theory is that now under the larger standard deductions, less and less people will be incentivized to itemize their tax returns thereby making the filing a lot simpler process- you don’t have to do a Schedule A,  you don’t have to itemize, to have to keep receipts for certain things.  And so, that’s the goal. We’ll see how it all plays out, but that’s goal.

Aaron: Okay so it might simplify things but it might also be a penalty for people with a lot of kids.

Kermith: Exactly.

Aaron: So don’t have lots of kids.

Kermith: Unless you really want them.

Aaron: Unless you really want them but don’t do it for tax purposes.

Kermith: That’s right.

Aaron: Are there any other personal Income tax issues that are a dramatic change from the previous year?

Kermith: Yes, there are. One of the things that going into the tax negotiations at the end of 2017 was they wanted to simplify the tax code. They wanted to simplify it so much that CPA’s were like, we’re going to be put out of a job.  One of the concerns that had as this law was being formulated and negotiated and ultimately passed was that compliance was going to be so easy that it would put all of out of a job.  It turns out that rather than simplifying some of these issues the really, really, really made it a little more complicated.

What I mean by that, there is something called a “Qualified Business Deduction” for those people who own their own businesses. That is a really big change to the tax code and it’s a change that is causing practitioners a lot of consulting time, a lot of questions, a lot of research because we ourselves don’t understand it entirely.  What’s happening is they are coming out with regulations and guidance.  As they come up with that they need to determine what that guidance is.

Generally what this QBI deduction intends to do is equalize the changes in the corporate tax law with those people who have businesses that would otherwise be changed to the corporate structure to take advantage of the lower tax rate.  So now they are trying to make it so they prevent business owners from changing say an LLC for example into a C-corp. That’s what they’re trying to prevent and so they come up with this QBI deduction that is really really complicated.  I think maybe it’s outside the scope of this conversation but it’s really complicated and it’s something that’s out there and for those of your clients that have these types of pass-through entities: S-Corps, LLC’s, Schedule C businesses where there’s a sole owner/sole  practitioners to really consult their tax advisor because it is very important, probably the most important thing that came out of this tax law.

Aaron: To go back to the origins of this of the tax law, part of it was really to a big deduction for corporations.

Kermith: Yes.  So, in other words, it was to bring down the corporate tax rate which was very similar to the individual tax rate.  What I mean by that- it was progressive in nature so the more income you earned the higher you got taxed.  And so that’s how corporate law used to be.  If you hear, that was all over the news.  We have the highest corporate tax rates in the world, they impede business and all these things.

Truth is yes it does impede business but very few corporations ever paid that high tax bracket because they had accountants who would help them mitigate some of that impact of the high progressive tax rates. So the whole thing was like, it’s impeding businesses, we have to change it,  and so they came up with the flat tax rate which is 21%.  How they determine 21% is still unclear to me but I have my theories. But I think that 21% automatically got everyone thinking, “Wow I have an S-Corp, I have an LLC, I’m just going to switch to a C-Corp and pay 21%.  Why am I going to pay my high tax rates when I can pay my tax at a C-Corp level?”  The government saw this.  The people that were writing this document, Gary Cohen who’s a brilliant guy, he saw this and decided he had to come up with something to prevent an exodus of taxpayers converting their S-Corps and LLCs into C Corps.

So what he did was, he came up with this QBI deduction and it’s supposed to equate the benefit you get from a C-Corp to an LLC and a S-Corp.  The only problem is C-Corp tax reductions are permanent and individuals are not.  As a matter of fact most of the changes they made to the individual taxes only are in effect from 2018 and they expire in 2025 which makes it kind of hard because if you are planning for long-term growth of a company whose currently an LLC or an S-Corp it’s very hard because you don’t know what’s going to happen after 2026.  My hunch is that it will be extended because once a policy is put into effect and enough people like it, it kind of becomes politically impossible to change.  And so I think it will stay that way but that’s just my guess.

Aaron: Congress try to simplify something and instead they mucked it up.

Kermith: Go figure.

Aaron: If you are a business owner is there now a difference between an S-Corporation, LLC, or Sole Proprietorship?

Kermith: The difference between those three types of entities is more related to a C-Corp.  They are more similar than they are not similar.  They differ most from a C-Corp. The LLC and the S-Corp will still pass the through.  The biggest difference between the S-Corp and the LLC is how the income is taxed.  From an LLC, it’s subjected to taxes that an S-Corp is not subject to.  Namely: self-employment taxes.  In an S-Corp they’re not applicable but you have to draw a wage in which you get a paycheck.  That is how you pay the self-employment taxes.  Whereas an LLC- you don’t have to do that but all of the income is subjected to self-employment taxes. With a sole proprietor/Schedule C for example, your whole taxable income, in other words the money you make from that activity, is all subjected to self-employment tax. They are very similar.  The only difference is how they’re structured but in terms of the ultimate effect on the individual, they are very similar.

Aaron: Let’s talk a little bit about the changes to estate taxes.

Kermith: That’s actually a great planning source, a great area of the new tax law that allows us to do some planning, especially with respect to people who exceed the thresholds.  Just generally speaking, what changed was, there was a 5.6 limitation –

Aaron: 5.6 million dollars.

Kermith: 5.6 million dollar limitation on how much a person could leave to his or her heir without paying any estate taxes on it. The new tax law changed that from 5.6 to 11.2 per person. It would be 11.2 million dollars per taxpayer that they can leave to their heirs. There is kind of a wrench in the whole thing, and that is again as I mentioned earlier this portion of the law is set to expire in 2025.  While earlier I said that sometimes when a law is very popular it affects a lot of people ,it’s hard to change.  I think in this case you may have the opposite effect because very few people will benefit from this and so it may change. That offers accountants and practitioners a good grey area in which to operate and plan.

There are very different ways that you can take this.  One of the constraints is obviously we don’t know if this is going to permanent forever.  And then lastly, what happens if you take advantage of an exemption today or you gift something to try and take advantage of your exemption but it’s a property and you lose the step-up that you would otherwise get.  There are some planning where we are trying to gift out the assets a taxpayer has so that we can take advantage of the 11.2.  The reason we’re doing that is because if it changes in 2025 and it goes back to $5 million or even prior to that, I believe in 2000 it was $600,000, if it goes back to those numbers they’ve already utilized the 11.2 million dollars of exemption and they can’t take it back.  So you’ve already given all of these assets tax-free, which is a great thing, especially for your heirs. You don’t have to pay any taxes on it.  We’re looking into strategies to utilize that.

The other one is if you do happen to have a tax payer pass away and they did not use their 11.2 exemption, you have what’s called “Portability.”  Portability means that if I don’t use my exemption, I can leave it to my husband or wife.  He or she will not only have their current exemption, whatever it is at that time, plus your unused portion of the spouse that previously passed away.  That’s also a planning portion we’re taking advantage of.

Essentially what we need to understand, and how people can take advantage of the new higher level of exemptions, is if they have any assets that they are intending to leave to their heirs, it’s probably better to start thinking about gifting them now when we know what the law is then waiting to 2025 when we don’t know what the law will be.  Those are the two big things that changed in the estate tax law.

Aaron: Kermith, let’s go through some examples.  If you would, please give us a couple of examples of how it’s different now than it was just a year ago.

Kermith: The two most common scenarios involve a married couple with two kids and an individual with no kids.  Prior to last year’s changes, if you had a married couple with two dependents, two kids and you weren’t doing any itemization, you weren’t itemizing your deductions.  You would just taken the standard deduction.  What you would get is $12,750 of standard deduction.  With that you would get $16,200 in personal exemptions so you are essentially getting in total deduction $28,950.  Under the new law that’s all gone.  Now all you get is $24,000 of standard deduction, no exemptions.  So the big change is your standard deduction is higher but your exemptions are gone.  So you have a decrease in total deductions under this scenario of $4,960.  Depending on the income level it may mean a lot, it may mean not so much, depending on how much income that family earns.

Now a single individual with no dependents surprisingly does a little bit better.  Under the old law they would normally get a $6,350 standard deduction plus they would get their personal exemption of $4,050.  Under the new law all they get is $12,000 of standard deduction.  Under the old law total deductions would have been $10,400 and under the new law, it’s a $12,000 straight standard deduction.  The individual taxpayer with no dependents actually is better off by $1,600.  The whole point is every case will be different, every taxpayer situation will be different, and so some people you would least expect that will benefit do. Those who you think will most benefit may not.

Aaron: So you got a lot of variables.

Kermith: Yes.

Aaron: Whether you’re single, whether you’re married, whether you have dependents, depending on what state you live in.

Kermith: That’s right.

Aaron: Whether you’re a business owner or an employee.

Kermith: That’s right.

Aaron: Kermith, along with all these other changes we’re talking about, we also have to the mortgage interest deduction.

Kermith: Yes we do.  Under the old law you could take a million dollars of acquisition debt plus a hundred thousand dollars of line of equity to improve the house and things like that.  Under the new law the total is $750,000, so that’s all you get.  When they first changed the law there was a discussion as to whether or not previously existing loans would be subjected to the $750,000 limitation and it turns out that no.  It’s only for loans originated when the new tax law was in effect, so after January 1st, 2017.  That’s very important for houses in states that houses generally exceed $750, 000. Now for example, if you want to buy a house in our neighborhood in Woodland Hills, you’re lucky if you can find something that’s $750,000.

We are telling clients now that if they want to buy that million dollar house, unfortunately what they can do is give a bigger down payment and get your loan balance down so the amount you finance to buy the house is under the $750,000 limit to be able to take advantage of deductions.

Aaron: Kermith, there is also now a change to what you can deduct for advisory fees.  You used to be able to deduct fees paid to your accountant, to your financial advisor, and other service providers.  What’s the new change?

Kermith: In a nutshell, bottom line, they eliminated that deduction.  Those deductions used to be deducted in the part of your Schedule A tax return that was titled “Deductions Subject to a 2% Floor.”  A lot of people took advantage of that section, advisor fees as you mention, people who pay their tax accountants to prepare their tax returns, there was a PO box deduction in there, but the largest chunk of people that took advantage of that section of the form were teachers, fireman, traveling salesman- people who paid expenses in carrying out their jobs but were never reimbursed for them- construction workers who bought steel toe boots, various professions that need to spend to get something.

Teachers were probably the biggest one.  They bought supplies out of their own pocket.  They bought things they needed for the classroom for instruction. They can no longer deduct that so it’s an impact that will affect a lot of people, I think bigger than probably any other change.  Union dues, PO boxes, tax accountants, all that stuff is gone.  Previously you could get a nice little deduction from use of your home for business purposes that you did the reimbursement for, for example, you can no longer do that.

It’s a big impact.  It will affect a lot of people. People who probably needed those deductions to begin with.

Aaron: Are there any changes to what you can deduct for health care expenses?

Kermith: It all depends on whether or not the health care expenses are done through a business or not.  If you’re individually employed, you have a sole proprietorship or a C-Corp or maybe have an S-Corp or an LLC, typically you could use that pay for your insurance.  Under the old law, to be able to deduct medical fees you need to exceed 10% of your AGI.  So if you had $100,000 of AGI you can deduct the first dollar once you exceed 10% of your AGI which would have been $10,000, so on $10,001 when you can start deducting.

It was very hard to actually take it over.  What they did is they lowered that to 7.5%. The goal is to have more and more people take advantage of that deduction and hopefully make some of the burdens of buying and paying for things related to medical a little bit easier but even then I don’t know if most people will exceed that especially because a lot of people are getting insurance through their work and the expenses they otherwise would use is minimal, but we’ll see.  As part of the tax law they changed or they eliminate the mandate under Obamacare to buy health care or have insurance. The goal of that was to create cheaper alternatives.  Usually, with those cheaper alternatives the coverage isn’t as great as we have with some of the more expensive plans than Obamacare requires. And if that’s the case you may see an increase in expenditures with respect to medical and doctors visits because less and less will be covered.  Hopefully, with the lower 7.5% threshold, you can deduct some of that.

Aaron: Are premiums included in that 7.5%?

Kermith: If you don’t deduct it otherwise, yes. Normally, like I said earlier, if you have a business you likely would deduct your premiums through your company but if you’re not deducting them elsewhere, yes then you would be able to deduct them under Schedule A.

Aaron: To sum it up, we now see a somewhat simplified tax code for individuals who don’t have a lot of deductions or have some deductions because a lot of the deductions are going away, but now there’s a higher standard deduction.  If you have a business it gets really complicated and there are a lot of moving parts, and the IRS are still issuing guidance on that.

Kermith: That’s right.

Aaron: There are new limits for mortgages, health care costs-

Kermith: Miscellaneous expenses, and there’s QBI which is not a limitation but it’s good, AMT is gone which is a good thing, and there are changes to the tax brackets- they’re widened, they’re lower.  So hopefully all in all people come out a little bit better than they did.  We see how it all plays out.

Aaron: But after listening to this podcast I’m sure everyone who is listening thinks well, things aren’t any more simple than they were before and I still need an accountant to help me so-

Kermith: That’s right.

Aaron: So please consult your tax professional and if you need a tax professional the partners at Grobstein Teeple can help you out as well.

Kermith: That’s right. We’re here to help.

Aaron: This was Episode 3 of the “Spotlight on Your Wealth Podcast.”  You can subscribe to our series on Apple iTunes or wherever you listen to your favorite podcasts.  For Kermith Boffill  and all the professionals at Grobstein Teeple and Spotlight Asset Group, thanks for listening.

 

Our podcasts are intended to provide general information about our business, not to provide investment advice or solicit or offer to sell our investment advisory services. You should not make any financial, legal, or tax decisions without consulting with a properly credentialed and experienced professional. Any specific situations we reference in our podcasts are for illustrative purposes only and should not be construed as a testimonial, and any mention of past performance is not a guarantee of future success. 

The views and opinions expressed during this podcast are those of the host and/or guest, and not necessarily those of Spotlight Asset Group, Inc.

Crain’s Wealth Manager Roundtable

Spotlight CEO Steve Greco recently participated in a roundtable discussion about the wealth management industry that was conducted by Crain’s Custom Media, a division of Crain’s Chicago Business, a leading weekly business newspaper published by Crain Communications. This is a paid advertising section that we chose to participate in along with other independent wealth management firms. Click the link below to read Steve’s insights about Spotlight’s investment strategies and processes, recent events in wealth management, and the challenges ahead for the industry.

https://www.chicagobusiness.com/html-page/821231

Join the Spotlight Asset Group Newsletter

Spotlight CEO Steve Greco recently participated in a roundtable discussion about the wealth management industry that was conducted by Crain’s Custom Media, a division of Crain’s Chicago Business, a leading weekly business newspaper published by Crain Communications. This is a paid advertising section that we chose to participate in along with other independent wealth management firms. Click the link below to read Steve’s insights about Spotlight’s investment strategies and processes, recent events in wealth management, and the challenges ahead for the industry.

https://www.chicagobusiness.com/html-page/821231

How to Choose a Financial Advisor

Our podcast guest for episode 2 is Jason Howard, General Counsel and Chief Compliance Officer for Spotlight Asset Group. On this episode Jason tells us how to choose a Financial Advisor and what questions you should consider when looking for a Financial Advisor.

Episode: How to Choose a Financial Advisor
Guest: Jason Howard, General Counsel & CCO

Spotlight on Your Wealth Podcast

Aaron:             This is Aaron Kirsch, Managing Director at Spotlight Asset Group.  Welcome to Episode 2 of the Spotlight On Your Wealth Podcast.  Our guest today is Jason Howard, General Counsel and Chief Compliance Officer for Spotlight Asset Group.   Welcome, Jason.

Jason:              Thanks Aaron.

Aaron:             This podcast subject is “How to Choose a Financial Advisor” and I’m really excited about this because most people choose an advisor based upon what they hear from an advisor that they’re interviewing to get the job and I’m excited to speak to you because you have a unique perspective, so please start by telling us a little bit about your background

Jason:              Of course, and Aaron, before we get into talking about my background, just one note on what you said about most people choosing an advisor based on what they hear from the advisor.  I’ll go one step further: they’re in front of that advisor because someone had referred them to them and they kind of just go with the flow and I hopefully this podcast will help people be a little bit more thoughtful and diligent about choosing an advisor since it’s such an important decision.  But in terms of my background, I’m an attorney by trade.  I spent all of my adult professional life in public service including the first 13 years of my legal career at the United States Securities and Exchange Commission.  When I was at the SEC, I worked in the Division of Enforcement where I investigated and litigated cases involving broker dealer misconduct, investment adviser fraud, hedge funds, and private equity, municipal bonds and public pensions, among other things.

Aaron:             Why we’re doing this podcast is, it’s a complicated world out there.  Employees used to get pension plans from their companies and now there’s 401(k)s, so employees have to provide for their own retirement. There’s also complicated terminology and job titles.  So, as a client you’re in control, but it’s your responsibility to yourself and your family to make the right decisions and so you’re going to help us with that today, Jason. Let’s start with terminology.  What’s the difference between a broker and an investment adviser?

Jason:              In my view, there’s two primary differences between a broker and an investment adviser.  One is a functional difference and the other one is a difference that relates to their responsibility or obligation to their customer or their client.  For the functional difference, brokers are… there in the business of buying and selling securities, and that’s generally how they’re compensated.  They’re paid a commission based on the trades that they recommend to their clients. On the other hand, advisers are in the business of providing their clients with individually tailored investment advice and they’re generally paid a fee based on the amount of money that they manage for their clients rather than a commission based on the securities that the client buys or sells,

Aaron:             What is the difference in obligation between a broker and an investment adviser?

Jason:              Well, when I say that there’s a different obligation, I mean that they’re held to different standards, legally.  For a broker, they’re held to what’s called the suitability standard.  What that means is that a broker simply has to have a reason to believe that a particular investment, for example the purchase or sale of a stock or a bond, is suitable for that client, given that client’s individual circumstance, their age, their net worth, and other factors like that.  It doesn’t take anything else into consideration.  For an investment adviser on the other hand- investment advisers are held to what’s called the fiduciary standard, which is legally a higher standard and it’s a legal obligation of the investment adviser to act as a fiduciary for their client.

Aaron:             So, an investment that is suitable isn’t necessarily the best investment for a client. It’s just suitable, whereas a fiduciary really needs to pick the absolute best, in that adviser’s opinion, the absolute best investment for the client.

Jason:              Correct.  For example, a broker can recommend a trade for a client even if that trade happens to be better for the broker in terms of commissions and his firm versus it’s absolutely the best thing for the client.  Whereas an investment adviser, the fiduciary duty is an obligation, a legal obligation for an investment adviser to act in the client’s best interest, and what that means is to always be putting the client’s interests ahead of the adviser’s interest.

Aaron:             That’s a pretty big difference.

Jason:              It is a big difference, Aaron, and you know what?  It all boils down to conflicts of interest and disclosure, which is important to the client.  For the broker’s side, like we said, it just needs to be a suitable investment and the broker is under no obligation to disclose the exact compensation fee he’s receiving that relates to the trades that he’s recommending.  And for the adviser, that fiduciary standard means that they have a legal obligation to not only disclose any conflicts of interest to you, but to avoid those conflicts to the fullest extent possible and really that’s the difference. That’s a big difference for an investor, in terms of being able to understand the reasons and motivations behind a trade recommendation from their broker or from their investment adviser.

Aaron:             There are a lot of other titles out there. What other titles do investment professionals use and what do they mean?

Jason:              Yeah, that’s kind of where it gets confusing for a lot of people.  I think because there are a lot of different titles that float around the industry.  We’ve touched on brokers, we’ve touched on investment advisers, but those aren’t really the titles that people use when they’re explaining what their role is.  A lot of times you’ll see “financial consultant,” “financial advisor” with an O-R, “investment consultant,” and things like that.  And really, they don’t mean anything.  You could pretty much put anything you want on your signature line if you’re a financial advisor or financial planner. Where the big difference is, is in what your certification is or what your registration is.  So, if you’re an investment adviser or investment adviser representative, that means you’re registered with the Securities and Exchange Commission or registered with the state securities regulator and that you meet certain requirements.  It doesn’t connote any level of skill or anything like that, but it does mean that you are registered and that you are able to give investment advice to those clients.  If you are a registered broker or a registered representative of a broker, that means you are legally able to buy and sell securities.  So those are really the differences that are important and so when clients see a title like “financial advisor” or “financial consultant: or “financial wizard” under someone’s name, they really need to ask that person or look into that person’s background to find out what that means.  It could mean they’re registered as an investment adviser representative. It could mean they are registered as a broker dealer, and it could mean they’re not registered at all. They could just be a financial planner who’s not certified and that’s why it’s important to ask that question

Aaron:             And another way a client can figure out the difference between a financial advisor and a financial wizard is how they’re compensated.  Can you tell us a little bit about the different ways that advisors /investment professionals make money?

Jason:              Yeah. I touched on that a bit when I was explaining the difference between a broker and adviser, but what it really comes down to is a fee-based arrangement or a commission-based arrangement.  The details can be different within each one of those, but those are the main differences.  On a commission-based arrangement, which you usually see with a broker dealer, they get commissions based on the products that they are selling.  For example, if you are one of their clients and you buy d certain investment product f or each one of those sales, that broker is getting a commission, most of the times. Contrast that with an investment adviser where you’re generally not getting paid based on products that are sold and that sort of thing. You are getting a fee that is based on the amount of assets that the investment adviser is managing for the client

Aaron:             Investment advisers who charge a fee- they’re making more money as their clients make more money, so they’re almost incentivized to do well for their clients because they’re on the same side of the table.

Jason:              Exactly. It’s critical… understanding the compensation structure is critical and understanding the conflicts that they may have.  For example, a broker and the commissions they may be receiving or how their interests may or may not be aligned with yours.  For example, that advisory fee and like you said, it’s a situation where you make money, we make money kind of thing. Where the interest is aligned, and the adviser wants to see your account grow not only because they are a fiduciary and act in your best interest, but what’s good for the client is what’s good for the investment adviser.

Aaron:             For a client then, it all comes down to understanding how your advisor is compensated and it really all comes down to transparency.

Jason:              Exactly Aaron.  At Spotlight Asset Group our three guiding principles are transparency, technology and total wealth, and we have transparency in there because of its importance.  We think clients should understand where potential conflicts of interest may be and understand that this is their money and it’s their family’s future. So, they should be understanding what they’re getting, what it costs, and they should be able to effectively monitor what their adviser is doing for them and that’s only done through a completely transparent process.

Aaron:             We had an overview of job titles and how people are compensated, the difference between suitability and the fiduciary standard. Now, let’s get into some questions, Jason, about what clients should ask either their potential advisers or their existing advisers if they already have one.

Jason:              I think those first issues we covered are paramount.  One, what is your role?  Are you a broker? Are you an adviser?  What’s your obligation to me?  How are you compensated?  I think those are very important questions.  In addition to those, clients also need to understand the services that are offered, and how those would benefit the client, and how much they would cost.  So, ask your potential adviser that.  Ask them what they do, ask them how they can work for me and how much it’s going to cost me.  And the other thing to keep in mind when you’re asking these questions is that different advisers do different things.  They provide different services.  Some do financial planning, some don’t do financial planning. Some are strong on the investment side, some aren’t as strong on the investment side.  The last area clients need to focus on is the adviser’s investment philosophy and their approach.  Different advisers have different philosophies on how they approach the markets and trading and how they’re going to handle the clients’ accounts. I think that’s important to make sure that you as a client are on board with what that adviser’s approach is.

Aaron:             What questions should clients ask about the team surrounding that adviser?

Jason:              Well, that’s a great question because there are a lot of investment advisers- it could be a one-man shop, it could be a couple of people, or could be a huge team and that’s important because it relates to the level of service you might get.  If it’s  just one person you really need to make sure that they know what they’re doing, that they can handle the workload, and they can handle all the things that you need. So, ask that question. You’re sitting in front of the adviser, say, “Who else is working for me? Who else do you have on your team? Are you leveraging other companies that you use to do your back office or do your research for you or do all the administrative stuff, so you can focus on me and my needs in terms of financial planning and investment management?”  So, find out who those people are and find out what they can do and what they can do for you.  And it also kind of brings up the point of, if you’ve just got one person who is your investment adviser, what happens when you can’t get in touch with that person or something happens to that person. What happens to your account?  What happens to your investments?

Aaron:             What happens if they get hit by the proverbial bus?

Jason:              Exactly.

Aaron:             It’s important for clients to ask these questions, but it’s also important for clients to do their own due diligence and to do some research on the adviser and the team and the company they’re potentially hiring. What kinds of research should clients do to make sure that they’re hiring the right person?

Jason:              That’s a great point, Aaron.  You know, ultimately it is on the client to do their homework and figure out whether or not that adviser fits them, and there is a wealth of information out there and there are plenty of tools out there for them to do that. The SEC and FINRA have websites where you can pull up information about a broker or an investment adviser or the firm. For example, on FINRA Broker Check, you can check their registration history, their employment history, if they were forced to disclose any incidents in their past that pertain to their ability to handle clients or their trustworthiness.  So, pull up those reports and check out who you’re meeting with, so you can follow up on some of the things you see in those reports and ask questions.  Those reports also allow you to see a particular broker or investment adviser representative’s qualifications and certifications, and there’s a whole host of other information that you can use there to guide your questions for the adviser and make sure that you’re comfortable with them. For example, you can see what their level of education is, their level of experience in the industry- what that is, you can see if there are any gaps or if there are any inconsistencies in their background that you might want to ask about just to get comfortable with who they are.  In addition to those specific websites, of course you always have Google so you can always do an internet search and see what comes up when you put that particular adviser or broker’s name into a search engine and see what comes up.  I think that should be an obligation for the client to make sure you do a little bit of homework, so when you’re sitting down with that adviser or broker that you can test them and make sure that you’re comfortable with them and that you’re getting honest answers

Aaron:             We’ll put the links to some of those websites in the show notes so clients can research their adviser and the company they work for. What about certifications? There’s CFA, CFP. What do those mean and why are they important?

Jason:              Yeah, there’s an alphabet soup of certifications and licenses that are out there. Whether you’re a broker and you have your Series 7 or Series 65 and 64 and all these different things, if you’re looking at particular broker and you don’t understand what those certifications and qualifications are, I would urge you to look them up.  When you see that someone is a CFA, which means that they are a Chartered Financial Analyst, or they’re a CFP, a Certified Financial Planner, you need to look that up and see what that means. Generally, what it means is, as with most certifications is that they have taken on an additional level of education and training to give you better advice or to understand the advice they’re giving you in the first place. So, there’s a lot of different ones that are out there, CFA and CFP being the main ones but if you see something, do some research on it and see if that’s important, if that qualification is important to you and the services you’re looking for.

Aaron:             Yeah, I think a lot of what we’re getting at here is that people need to ask a lot of questions and don’t be afraid to ask questions.  Ask hard questions because if the person you’re interviewing can’t answer those, maybe that’s a red flag.  And if the advisor you have had for years can’t give you straight answers, that could be a red flag. So, talking about red flags, moving into red flags- Jason, you were a SEC Enforcement Attorney for 13 years.  What are of the red flags people should be looking for when they’re interviewing a potential adviser or talking to their existing adviser?

Jason:              Aaron, I think you mentioned the biggest red flag, is if you’ve done your homework and you’re sitting down with a potential adviser and they’re hesitant to answer questions or you’re not comfortable with the questions or the answers they’re giving you.  I think that in itself is a red flag and you should be wary of that and your antenna should just kind of stick up in that situation.  This is a relationship.  You’re exploring a potential relationship and it’s an important one. Outside of your family and your closest friends, a financial advisor can be a lifelong relationship for a lot of people and it’s important that you are comfortable with that person, that you trust that person, and that you understand that person in terms of their motivations, their processes, and their capabilities.  And so that, I think is probably the biggest red flag to watch out for, is if you have someone who’s not being forthright with you and you think that if you have a bad feeling about it, you feel like they’re hiding something or feeling they’re just not being very direct and honest about how they’re answering your questions, then I think that you need to ask more questions.   And if you’re getting a bad feeling about it, move on. There are lots of advisers out there, there’s lots of qualified great people out in this industry that are more than willing to help you.

Aaron:             For people who have existing relationships with an adviser, what red flags should they be looking for?

Jason:              That raises a great point. Once you get an adviser and you’re comfortable with them and you trust them, and you get set up in a process, your obligations as a client don’t end there.  I think you have an ongoing obligation to continue managing that relationship, so to speak.  If your circumstances change either financially or with your family, you need to let your adviser know so they can take that in consideration when they’re making investment decisions for you. The other thing you have an obligation to do is review your statements whether you’re getting that monthly, or quarterly, or whenever.  When you get a statement from your adviser, you should be taking a look at it.  Make sure that the transactions that are shown and reflected in that statement match what you discussed with your adviser or your broker.  If you have a discretionary account with an investment adviser, take a look at what the performance is and what the fees are that are coming out of that and make sure it tracks with what your understanding of the relationship was and what you think should be going on.  If there’s something in that statement that stands out while you’re scrutinizing it or that just confuses you and you’re unsure of, you should definitely speak up.  You need to reach out to your adviser or whoever your contact is at the firm and ask them about it and they should be happy to discuss it with you.  They should be available, they should be willing, and they should be candid about anything that you don’t understand in those statements and they should be able to explain what they’ve done in a way that you understand and are comfortable with.  And if they can’t, again, that’s another red flag.

Aaron:             Jason, you used the word obligation several times in that last answer and it’s important for people to understand that they have an obligation. This is a relationship. It’s not one way. You don’t just handle your money to the adviser and hope for the best.  It’s your obligation.  It’s your money, it’s your future.  You need to make sure that you understand what you’re doing, what the adviser’s doing, and follow up.  Do the research, make sure you’re getting what you’re paying for. So, Jason, any final thoughts?

Jason:              No, I think just that Aaron, you know, It’s a two-way street.  You can sit down with your adviser and set them up and have them manage your investments and never check in.  If that’s what you want to do, that’s fine, but I think again, you still have those obligations to check your statements and make sure things are going as you expect them to.  And it’s again, like any other relationship, the more you put into it, the more you’re going to get out of it, the more you stay in touch with your advise r and inform them of your situations and your goals and the changes to those situations or goals, the better they’re going to be able to serve you and the better the relationship is going to be in the long run.

Aaron:             Thanks Jason, this is really valuable information that I hope everyone takes to heart, so I appreciate you being on our podcast today.

Jason:              Thank you Aaron, thanks for having me.

Aaron:             Thank you for listening to episode #2 of the Spotlight On Your Wealth Podcast. You can subscribe to our podcast on Apple iTunes, Google Play, and Spotify to get these podcasts automatically on your listening device.   So, for Jason Howard and Spotlight Asset Group, this is Aaron Kirsch. Thanks for listening.

ADDITIONAL SHOW NOTES

FINRA Broker Check website: https://brokercheck.finra.org/

United States Securities and Exchange Commission (SEC) Investment Adviser Public Disclosure website: https://www.adviserinfo.sec.gov/

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Our podcast guest for episode 2 is Jason Howard, General Counsel and Chief Compliance Officer for Spotlight Asset Group. On this episode Jason tells us how to choose a Financial Advisor and what questions you should consider when looking for a Financial Advisor.

Episode: How to Choose a Financial Advisor
Guest: Jason Howard, General Counsel & CCO

Spotlight on Your Wealth Podcast

Aaron:             This is Aaron Kirsch, Managing Director at Spotlight Asset Group.  Welcome to Episode 2 of the Spotlight On Your Wealth Podcast.  Our guest today is Jason Howard, General Counsel and Chief Compliance Officer for Spotlight Asset Group.   Welcome, Jason.

Jason:              Thanks Aaron.

Aaron:             This podcast subject is “How to Choose a Financial Advisor” and I’m really excited about this because most people choose an advisor based upon what they hear from an advisor that they’re interviewing to get the job and I’m excited to speak to you because you have a unique perspective, so please start by telling us a little bit about your background

Jason:              Of course, and Aaron, before we get into talking about my background, just one note on what you said about most people choosing an advisor based on what they hear from the advisor.  I’ll go one step further: they’re in front of that advisor because someone had referred them to them and they kind of just go with the flow and I hopefully this podcast will help people be a little bit more thoughtful and diligent about choosing an advisor since it’s such an important decision.  But in terms of my background, I’m an attorney by trade.  I spent all of my adult professional life in public service including the first 13 years of my legal career at the United States Securities and Exchange Commission.  When I was at the SEC, I worked in the Division of Enforcement where I investigated and litigated cases involving broker dealer misconduct, investment adviser fraud, hedge funds, and private equity, municipal bonds and public pensions, among other things.

Aaron:             Why we’re doing this podcast is, it’s a complicated world out there.  Employees used to get pension plans from their companies and now there’s 401(k)s, so employees have to provide for their own retirement. There’s also complicated terminology and job titles.  So, as a client you’re in control, but it’s your responsibility to yourself and your family to make the right decisions and so you’re going to help us with that today, Jason. Let’s start with terminology.  What’s the difference between a broker and an investment adviser?

Jason:              In my view, there’s two primary differences between a broker and an investment adviser.  One is a functional difference and the other one is a difference that relates to their responsibility or obligation to their customer or their client.  For the functional difference, brokers are… there in the business of buying and selling securities, and that’s generally how they’re compensated.  They’re paid a commission based on the trades that they recommend to their clients. On the other hand, advisers are in the business of providing their clients with individually tailored investment advice and they’re generally paid a fee based on the amount of money that they manage for their clients rather than a commission based on the securities that the client buys or sells,

Aaron:             What is the difference in obligation between a broker and an investment adviser?

Jason:              Well, when I say that there’s a different obligation, I mean that they’re held to different standards, legally.  For a broker, they’re held to what’s called the suitability standard.  What that means is that a broker simply has to have a reason to believe that a particular investment, for example the purchase or sale of a stock or a bond, is suitable for that client, given that client’s individual circumstance, their age, their net worth, and other factors like that.  It doesn’t take anything else into consideration.  For an investment adviser on the other hand- investment advisers are held to what’s called the fiduciary standard, which is legally a higher standard and it’s a legal obligation of the investment adviser to act as a fiduciary for their client.

Aaron:             So, an investment that is suitable isn’t necessarily the best investment for a client. It’s just suitable, whereas a fiduciary really needs to pick the absolute best, in that adviser’s opinion, the absolute best investment for the client.

Jason:              Correct.  For example, a broker can recommend a trade for a client even if that trade happens to be better for the broker in terms of commissions and his firm versus it’s absolutely the best thing for the client.  Whereas an investment adviser, the fiduciary duty is an obligation, a legal obligation for an investment adviser to act in the client’s best interest, and what that means is to always be putting the client’s interests ahead of the adviser’s interest.

Aaron:             That’s a pretty big difference.

Jason:              It is a big difference, Aaron, and you know what?  It all boils down to conflicts of interest and disclosure, which is important to the client.  For the broker’s side, like we said, it just needs to be a suitable investment and the broker is under no obligation to disclose the exact compensation fee he’s receiving that relates to the trades that he’s recommending.  And for the adviser, that fiduciary standard means that they have a legal obligation to not only disclose any conflicts of interest to you, but to avoid those conflicts to the fullest extent possible and really that’s the difference. That’s a big difference for an investor, in terms of being able to understand the reasons and motivations behind a trade recommendation from their broker or from their investment adviser.

Aaron:             There are a lot of other titles out there. What other titles do investment professionals use and what do they mean?

Jason:              Yeah, that’s kind of where it gets confusing for a lot of people.  I think because there are a lot of different titles that float around the industry.  We’ve touched on brokers, we’ve touched on investment advisers, but those aren’t really the titles that people use when they’re explaining what their role is.  A lot of times you’ll see “financial consultant,” “financial advisor” with an O-R, “investment consultant,” and things like that.  And really, they don’t mean anything.  You could pretty much put anything you want on your signature line if you’re a financial advisor or financial planner. Where the big difference is, is in what your certification is or what your registration is.  So, if you’re an investment adviser or investment adviser representative, that means you’re registered with the Securities and Exchange Commission or registered with the state securities regulator and that you meet certain requirements.  It doesn’t connote any level of skill or anything like that, but it does mean that you are registered and that you are able to give investment advice to those clients.  If you are a registered broker or a registered representative of a broker, that means you are legally able to buy and sell securities.  So those are really the differences that are important and so when clients see a title like “financial advisor” or “financial consultant: or “financial wizard” under someone’s name, they really need to ask that person or look into that person’s background to find out what that means.  It could mean they’re registered as an investment adviser representative. It could mean they are registered as a broker dealer, and it could mean they’re not registered at all. They could just be a financial planner who’s not certified and that’s why it’s important to ask that question

Aaron:             And another way a client can figure out the difference between a financial advisor and a financial wizard is how they’re compensated.  Can you tell us a little bit about the different ways that advisors /investment professionals make money?

Jason:              Yeah. I touched on that a bit when I was explaining the difference between a broker and adviser, but what it really comes down to is a fee-based arrangement or a commission-based arrangement.  The details can be different within each one of those, but those are the main differences.  On a commission-based arrangement, which you usually see with a broker dealer, they get commissions based on the products that they are selling.  For example, if you are one of their clients and you buy d certain investment product f or each one of those sales, that broker is getting a commission, most of the times. Contrast that with an investment adviser where you’re generally not getting paid based on products that are sold and that sort of thing. You are getting a fee that is based on the amount of assets that the investment adviser is managing for the client

Aaron:             Investment advisers who charge a fee- they’re making more money as their clients make more money, so they’re almost incentivized to do well for their clients because they’re on the same side of the table.

Jason:              Exactly. It’s critical… understanding the compensation structure is critical and understanding the conflicts that they may have.  For example, a broker and the commissions they may be receiving or how their interests may or may not be aligned with yours.  For example, that advisory fee and like you said, it’s a situation where you make money, we make money kind of thing. Where the interest is aligned, and the adviser wants to see your account grow not only because they are a fiduciary and act in your best interest, but what’s good for the client is what’s good for the investment adviser.

Aaron:             For a client then, it all comes down to understanding how your advisor is compensated and it really all comes down to transparency.

Jason:              Exactly Aaron.  At Spotlight Asset Group our three guiding principles are transparency, technology and total wealth, and we have transparency in there because of its importance.  We think clients should understand where potential conflicts of interest may be and understand that this is their money and it’s their family’s future. So, they should be understanding what they’re getting, what it costs, and they should be able to effectively monitor what their adviser is doing for them and that’s only done through a completely transparent process.

Aaron:             We had an overview of job titles and how people are compensated, the difference between suitability and the fiduciary standard. Now, let’s get into some questions, Jason, about what clients should ask either their potential advisers or their existing advisers if they already have one.

Jason:              I think those first issues we covered are paramount.  One, what is your role?  Are you a broker? Are you an adviser?  What’s your obligation to me?  How are you compensated?  I think those are very important questions.  In addition to those, clients also need to understand the services that are offered, and how those would benefit the client, and how much they would cost.  So, ask your potential adviser that.  Ask them what they do, ask them how they can work for me and how much it’s going to cost me.  And the other thing to keep in mind when you’re asking these questions is that different advisers do different things.  They provide different services.  Some do financial planning, some don’t do financial planning. Some are strong on the investment side, some aren’t as strong on the investment side.  The last area clients need to focus on is the adviser’s investment philosophy and their approach.  Different advisers have different philosophies on how they approach the markets and trading and how they’re going to handle the clients’ accounts. I think that’s important to make sure that you as a client are on board with what that adviser’s approach is.

Aaron:             What questions should clients ask about the team surrounding that adviser?

Jason:              Well, that’s a great question because there are a lot of investment advisers- it could be a one-man shop, it could be a couple of people, or could be a huge team and that’s important because it relates to the level of service you might get.  If it’s  just one person you really need to make sure that they know what they’re doing, that they can handle the workload, and they can handle all the things that you need. So, ask that question. You’re sitting in front of the adviser, say, “Who else is working for me? Who else do you have on your team? Are you leveraging other companies that you use to do your back office or do your research for you or do all the administrative stuff, so you can focus on me and my needs in terms of financial planning and investment management?”  So, find out who those people are and find out what they can do and what they can do for you.  And it also kind of brings up the point of, if you’ve just got one person who is your investment adviser, what happens when you can’t get in touch with that person or something happens to that person. What happens to your account?  What happens to your investments?

Aaron:             What happens if they get hit by the proverbial bus?

Jason:              Exactly.

Aaron:             It’s important for clients to ask these questions, but it’s also important for clients to do their own due diligence and to do some research on the adviser and the team and the company they’re potentially hiring. What kinds of research should clients do to make sure that they’re hiring the right person?

Jason:              That’s a great point, Aaron.  You know, ultimately it is on the client to do their homework and figure out whether or not that adviser fits them, and there is a wealth of information out there and there are plenty of tools out there for them to do that. The SEC and FINRA have websites where you can pull up information about a broker or an investment adviser or the firm. For example, on FINRA Broker Check, you can check their registration history, their employment history, if they were forced to disclose any incidents in their past that pertain to their ability to handle clients or their trustworthiness.  So, pull up those reports and check out who you’re meeting with, so you can follow up on some of the things you see in those reports and ask questions.  Those reports also allow you to see a particular broker or investment adviser representative’s qualifications and certifications, and there’s a whole host of other information that you can use there to guide your questions for the adviser and make sure that you’re comfortable with them. For example, you can see what their level of education is, their level of experience in the industry- what that is, you can see if there are any gaps or if there are any inconsistencies in their background that you might want to ask about just to get comfortable with who they are.  In addition to those specific websites, of course you always have Google so you can always do an internet search and see what comes up when you put that particular adviser or broker’s name into a search engine and see what comes up.  I think that should be an obligation for the client to make sure you do a little bit of homework, so when you’re sitting down with that adviser or broker that you can test them and make sure that you’re comfortable with them and that you’re getting honest answers

Aaron:             We’ll put the links to some of those websites in the show notes so clients can research their adviser and the company they work for. What about certifications? There’s CFA, CFP. What do those mean and why are they important?

Jason:              Yeah, there’s an alphabet soup of certifications and licenses that are out there. Whether you’re a broker and you have your Series 7 or Series 65 and 64 and all these different things, if you’re looking at particular broker and you don’t understand what those certifications and qualifications are, I would urge you to look them up.  When you see that someone is a CFA, which means that they are a Chartered Financial Analyst, or they’re a CFP, a Certified Financial Planner, you need to look that up and see what that means. Generally, what it means is, as with most certifications is that they have taken on an additional level of education and training to give you better advice or to understand the advice they’re giving you in the first place. So, there’s a lot of different ones that are out there, CFA and CFP being the main ones but if you see something, do some research on it and see if that’s important, if that qualification is important to you and the services you’re looking for.

Aaron:             Yeah, I think a lot of what we’re getting at here is that people need to ask a lot of questions and don’t be afraid to ask questions.  Ask hard questions because if the person you’re interviewing can’t answer those, maybe that’s a red flag.  And if the advisor you have had for years can’t give you straight answers, that could be a red flag. So, talking about red flags, moving into red flags- Jason, you were a SEC Enforcement Attorney for 13 years.  What are of the red flags people should be looking for when they’re interviewing a potential adviser or talking to their existing adviser?

Jason:              Aaron, I think you mentioned the biggest red flag, is if you’ve done your homework and you’re sitting down with a potential adviser and they’re hesitant to answer questions or you’re not comfortable with the questions or the answers they’re giving you.  I think that in itself is a red flag and you should be wary of that and your antenna should just kind of stick up in that situation.  This is a relationship.  You’re exploring a potential relationship and it’s an important one. Outside of your family and your closest friends, a financial advisor can be a lifelong relationship for a lot of people and it’s important that you are comfortable with that person, that you trust that person, and that you understand that person in terms of their motivations, their processes, and their capabilities.  And so that, I think is probably the biggest red flag to watch out for, is if you have someone who’s not being forthright with you and you think that if you have a bad feeling about it, you feel like they’re hiding something or feeling they’re just not being very direct and honest about how they’re answering your questions, then I think that you need to ask more questions.   And if you’re getting a bad feeling about it, move on. There are lots of advisers out there, there’s lots of qualified great people out in this industry that are more than willing to help you.

Aaron:             For people who have existing relationships with an adviser, what red flags should they be looking for?

Jason:              That raises a great point. Once you get an adviser and you’re comfortable with them and you trust them, and you get set up in a process, your obligations as a client don’t end there.  I think you have an ongoing obligation to continue managing that relationship, so to speak.  If your circumstances change either financially or with your family, you need to let your adviser know so they can take that in consideration when they’re making investment decisions for you. The other thing you have an obligation to do is review your statements whether you’re getting that monthly, or quarterly, or whenever.  When you get a statement from your adviser, you should be taking a look at it.  Make sure that the transactions that are shown and reflected in that statement match what you discussed with your adviser or your broker.  If you have a discretionary account with an investment adviser, take a look at what the performance is and what the fees are that are coming out of that and make sure it tracks with what your understanding of the relationship was and what you think should be going on.  If there’s something in that statement that stands out while you’re scrutinizing it or that just confuses you and you’re unsure of, you should definitely speak up.  You need to reach out to your adviser or whoever your contact is at the firm and ask them about it and they should be happy to discuss it with you.  They should be available, they should be willing, and they should be candid about anything that you don’t understand in those statements and they should be able to explain what they’ve done in a way that you understand and are comfortable with.  And if they can’t, again, that’s another red flag.

Aaron:             Jason, you used the word obligation several times in that last answer and it’s important for people to understand that they have an obligation. This is a relationship. It’s not one way. You don’t just handle your money to the adviser and hope for the best.  It’s your obligation.  It’s your money, it’s your future.  You need to make sure that you understand what you’re doing, what the adviser’s doing, and follow up.  Do the research, make sure you’re getting what you’re paying for. So, Jason, any final thoughts?

Jason:              No, I think just that Aaron, you know, It’s a two-way street.  You can sit down with your adviser and set them up and have them manage your investments and never check in.  If that’s what you want to do, that’s fine, but I think again, you still have those obligations to check your statements and make sure things are going as you expect them to.  And it’s again, like any other relationship, the more you put into it, the more you’re going to get out of it, the more you stay in touch with your advise r and inform them of your situations and your goals and the changes to those situations or goals, the better they’re going to be able to serve you and the better the relationship is going to be in the long run.

Aaron:             Thanks Jason, this is really valuable information that I hope everyone takes to heart, so I appreciate you being on our podcast today.

Jason:              Thank you Aaron, thanks for having me.

Aaron:             Thank you for listening to episode #2 of the Spotlight On Your Wealth Podcast. You can subscribe to our podcast on Apple iTunes, Google Play, and Spotify to get these podcasts automatically on your listening device.   So, for Jason Howard and Spotlight Asset Group, this is Aaron Kirsch. Thanks for listening.

ADDITIONAL SHOW NOTES

FINRA Broker Check website: https://brokercheck.finra.org/

United States Securities and Exchange Commission (SEC) Investment Adviser Public Disclosure website: https://www.adviserinfo.sec.gov/

Introducing the Spotlight On Your Wealth Podcast

For our inaugural podcast our guest is Stephen Greco, Founder and CEO of Spotlight Asset Group. On this episode Steve tells us why he left his position as Director of Wealth Management at the top firm in America to start Spotlight Asset Group.

Transcript: Episode 1 – Steve Greco

Spotlight on Your Wealth Podcast

Aaron:            This is Aaron Kirsch, managing director at Spotlight Assets Group. Welcome to Episode 1 of the Spotlight on your Wealth Podcast. Our guest today is Stephen Greco, founder and CEO of Spotlight Assets Group. Welcome Steve.

Steve:              Thank you Aaron.

Aaron:            Steve, there are over 10,000 independent registered investment advisor firms in the United States, and yet in 2017 you left your position as Director of Wealth Management at the top firm in America to start a new wealth management company. I would love for you to tell our audience about your motivation to do this, but before we talk about your decision to start Spotlight Assets Group, please tell us a little bit about your background.

Steve:              Sure Aaron. So, I have been in the business for about 16 years. The first half of that was on the brokerage side, the majority of which was with TD Ameritrade. I used to run their downtown Chicago office. And as I got towards the end of my career there, the registered investment advisor space started becoming more and more popular and it was an extremely appealing to me because as a registered investment advisor, you can be a true fiduciary. You didn’t have to sell products, you can only be paid in one way.  So I decided at that point that’s where I wanted to spend the rest of my career.  At that point I started with an investment advisory group out of Cincinnati where I opened a local Chicago office for them and was there for about two years.  At the time I met Peter Mallouk who is the CEO of Creative Planning and they were growing at a tremendous rate.  He needed somebody who could help in the Director of Wealth Management space. So, we hit it off pretty well. I decided to join Creative Planning and I was there for about three and a half years and during my time there we grew from 50 wealth managers and about $7 billion in assets under management when I started to around 140 wealth managers and $33 billion in assets when I left. And during my time there I was the Director of Wealth Management. I was on the investment committee and I was managing a portfolio of individual stocks using options, so I just felt that I had done enough where I was comfortable enough to go ahead and go off on my own.

Aaron:            So, you had plenty of knowledge and experience to start your own company, but what was your motivation to give up being a Director at the number one firm in the country and take on a big risk by starting Spotlight Assets Group?

Steve:              Well, during my time in the registered investment advisor space I sat down with thousands of clients and, just looking through the frustrations and what I’d seen from the client end of things, most investment companies are really set up to attract and retain assets. They’re not really the best user experience for clients. There’s a lot of hidden fees, not great technology for the end user. And I wanted to set up something that would be different. So, what I tried to do was really reverse engineer what would be the best company from the client user experience, and I wanted to set up something that would be truly geared towards that. So, we decided to start a company that was focused on transparency, technology, and total wealth in order to give clients a better user experience than what I had seen out in the market.

Aaron:            It sounds like you’ve created a company that is truly client centric, focusing on transparency, technology, and total wealth. Let’s talk about each of these. Steve, how does Spotlight Assets Group think about transparency?

Steve:              Transparency is a pretty popular buzzword these days. You hear it quite a bit. For us, what it meant was giving clients more insight and control over their own financial situation. So, for example, I can’t tell you how many financial statements I’ve looked at for clients regarding their investment accounts where even me being in the business, I couldn’t tell how much a client was up or down in dollars or total return, nor what they were paying. So, we wanted to create a setup with something just as simple that with statements you can clearly tell at any time exactly what you’re paying. We provide a billing statement to show what your fee rate is, how much you’re paying us in dollars, and then what your net return is, and then that way it’s very, very easy when we start reviews with clients or when they get something in the mail to know exactly where they stand. Also, from the transparency side, we thought it was very important to create a very flat and simple fee system. What a lot of people have gone towards is more of a tiered fee rate for investment management clients where they’ll charge one fee and the first 500,000 and another fee on a next set of money, another fee, and really for a client it’s difficult to see exactly what you’re paying. So, we wanted to create a flat fee rate system that included the commission charges for the trades we recommended so clients would always have a very good idea and could figure out simply exactly what they were paying. And then finally, we wanted to provide an atmosphere where clients would be able to hold us accountable more. We wanted to show clients not only how much they’ve returned in their portfolio, but also give them some benchmarks so that they had some perspective and can judge our performance. It’s very different if you’re up 8% in any given year and the market’s up 9% of the market’s up 7%. It’s a completely different story if you’re up 8% and the market’s up 30%. So, we wanted to provide some perspective for clients so that they could hold us accountable and really know where they stood compared to what was going on in the general market.

Aaron:            How does Spotlight Assets Group leverage technology to improve our clients’ experience?

Steve:              So, another frustration I see or heard from clients was that a lot of advisors don’t provide clients with good end technology. So for example, if a client wants to know what their financial plan looks like after a bad month or everal weeks in the market, a lot of times they have to call up their advisor, asked them to rerun their plan, send it to them, and then the advisor can really spin what’s going well or what’s not doing well in their portfolio. We wanted to give clients a portal where their financial plan would update automatically. They could log any account outside of what we’re managing and then allow whether or not we can see those accounts, that way they can have a one stop portal for their banking, for their investment accounts, for what we’re managing and then be able to compare it to other managers and then that way clients would just have more control over their overall situation as opposed to having an asking advisor to rerun things for them and then get back to them.

Aaron:            You’ve covered transparency and technology. What does total wealth mean?

Steve:              Well, it starts with an investment management, so obviously most people hire financial advisors to manage their investments and that’s something we do, and I think we do well and that’s also where we get our fees. But, I also thought if you look at where the business is going, in addition to investment management I thought it was important to be able to provide value in other areas. So, if you look at a typical client, they have their investment manager. They’re managing their own investments. They have a separate CPA.  They have a separate estate planning attorney.  They have a separate insurance person. And it’s really left to the client to have to coordinate all of these items and it’s just natural that some things are going to fall through the cracks. We wanted to position ourselves so that we could fill that gap, help them be the coordinator of all of these different areas and then also be able to provide value in those spaces as well. So, for example, we have the capabilities to be able to do tax planning, tax advice, and also tax returns for clients. We can give clients estate planning advice, we can review insurance. So ultimately, we wanted to set up a one stop shop where we could partner with the client to help give them advice in all areas of their financial life instead of just focusing on the investment management.

Aaron:            That makes perfect sense to me. Steve, where do you think the financial services business is headed in the future and how will it benefit clients?

Steve:              Sure, so I think one of the benefits with technology in our society is that you’ve seen more and more of these Robo advisors and online investment management pop up.  One of the really good things about it is it’s forced prices down for the end user client, but it’s also provided for a lot more transparency and clients are just more informed these days so they have a better idea of what they’re getting and what they’re not getting. So, for us it was important to, as I said earlier, be able to deal with clients in the most transparent way possible so they always know exactly where they stand and then also be able to provide additional value outside of just the investment management piece. If you can go to a Robo advisor that’s going to manage things for a very minimal fee and you’re going to charge something higher, what is the additional value that you could provide for those clients? And for us we think it’s the customization, the higher end financial planning, and the ability to help a client with all areas of their financial life as opposed to just doing the investment management. The way we look at it, is it’s analogous to if you’re running a business and you hire a CFO to help you run that business, you’re not giving up control over everything from the investment decision standpoint or your financial life. You’re bringing on a partner to help you run things. And that’s the way we view ourselves. Our job is to inform our clients, be a partner for them, and then allow them to ultimately make the final decisions on their own financial future.

Aaron:            I mentioned in the beginning of this podcast that there are over 10,000 independent advisor firms in the United States and that you decided to start yet another firm. So how is Spotlight different from the 10,000 other companies out there?

Steve:              I think we’re different in a few areas. So, one: not every investment advisor does total wealth planning, and not only do they think we do it, but I think we do it well. One of the things that we focused on in Spotlight was, before we brought on other advisors and really started to scale up our client acquisition, we wanted to make sure we had experts in every area of what we were looking to do so that we could not just give advice, but make sure we can give the best advice possible. Also, on the investment management side, what you find with a lot of companies is they become experts in one area of investment management. So, for example, they may manage money by just using ETF’s or index funds or they may just use stocks, or they may use a just use mutual funds. What we wanted to do was be able to build out an investment management setup where we can provide the expertise and be able to implement portfolios that used all of these things. So rather than focusing on just one area of investment management, we have portfolios that use ETF’s and index funds. We have individual stock portfolios. We can do individual bonds for clients, we can use options in order to try and create a little bit of protection or enhance income or we can mix any of these, so ultimately what we do with clients instead of having one cookie cutter approach for everybody is we could sit down, customize a plan, and then develop a specific investment proposal for that client that can leverage a lot of different areas of investment management. So, I think that’s one of the ways we’re different for most investment advisors is that we truly are creating customized approach rather than forcing everybody into the same model based on a risk tolerance.

Aaron:            In other words, Spotlight treats individuals as individuals.

Steve:              Exactly. A novel concept with investment management.

Aaron:            Exactly. Steve, you started Spotlight Assets Group with just a small group of people. What has happened since and where is the company going from here?

Steve:              So. we got approved by the SEC and May of 2017 and we really spent the first 10 months of the business just working with my clients and really trying to set up the company so we could build out the best processes possible to be able to scale the business from there.  And we felt in March of this year that we had really gotten to the point where we could really start to scale the company and bring on more advisors. So, at this point we now have four wealth managers, including myself, we have three offices, so our headquarters is in Oak Brook, Illinois. Outside of Chicago we have an office as an Ann arbor, Michigan. and then we also have an office in Los Angeles which is actually in Calabasas. So we have three offices, we have 15 employees and we currently manage about $200, million in assets. So, at this point we’ve grown pretty significantly in a very short period of time. What we’d like to do going forward is continuing to probably add one to two advisors a quarter over the next year or two. But what we’re doing, which I think is a little bit different as rather than targeting specific markets in the US, we’re trying to build around the right partners. So, for example, Ann Arbor Michigan doesn’t jump out to you as a huge market or someplace you would look to put an office in, especially at the beginning stages of a company. But we found a great advisor named Dan Greulich who we thought would be a tremendous asset to the team. So, we decided to build an office around him there and those are the types of things we want to do going forward- finding the right partners no matter where they are and then build out the map from there. And I think going forward we’re just going to continue to look to add as much talent as possible as to our team.

I think we’re extremely unique in the way the company is set up. Not a lot of registered investment advisors have somebody who’s strictly dedicated to legal compliance and I don’t know of anybody in the investment management space who actually has a former SEC enforcement attorney as their head of legal compliance. But that’s something that was extremely important to me when I did start Spotlight is that, if we were going to focus on transparency, try to be something different.  We might as well find somebody who had legitimate expertise in that area to be able to help us. And, I think a year from now we could be twice the size of what we are now and continue to grow exponentially from there.

Aaron:            And with that growth, we’ll be able to provide more and more clients with customized financial planning and investment management. So, I am definitely looking forward to that. Steve, before I joined Spotlight Assets Group I asked where the name came from and I would love for you to tell our listeners that story.

Steve:              So yeah, it’s an interesting story. When I decided to start the company, my wife and I were discussing what we should name it and essentially we started with Spotlight because I wanted to shine a light on the dark corners of the industry, really focused on transparency and set up something that would be hopefully the guiding standard going forward of what investment management company should look like. So, we started with spotlight and then I wanted to start to have a play on my initials.  My name is Stephen Albert Greco, so we had the S and decided to try and fill in the rest and asset group came pretty quickly, and we decided to run with that from there. So, it’s a little unique, but ultimately we decided to build the name of the company around Spotlight and the whole focus on transparency.

Aaron:            Yeah, it’s great to have a name that not only describes what you do, but also has meaning and the message behind it. Steve, thank you for joining us today and telling us the Spotlight Asset Group story.

Steve:              My pleasure Aaron.

Aaron:            Well, this was episode 1 of the Spotlight On Your Wealth Podcast.  For Stephen Greco and Spotlight Assets Group, this is Aaron Kirsch. Thank you for listening.

 

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For our inaugural podcast our guest is Stephen Greco, Founder and CEO of Spotlight Asset Group. On this episode Steve tells us why he left his position as Director of Wealth Management at the top firm in America to start Spotlight Asset Group.

Transcript: Episode 1 – Steve Greco

Spotlight on Your Wealth Podcast

Aaron:            This is Aaron Kirsch, managing director at Spotlight Assets Group. Welcome to Episode 1 of the Spotlight on your Wealth Podcast. Our guest today is Stephen Greco, founder and CEO of Spotlight Assets Group. Welcome Steve.

Steve:              Thank you Aaron.

Aaron:            Steve, there are over 10,000 independent registered investment advisor firms in the United States, and yet in 2017 you left your position as Director of Wealth Management at the top firm in America to start a new wealth management company. I would love for you to tell our audience about your motivation to do this, but before we talk about your decision to start Spotlight Assets Group, please tell us a little bit about your background.

Steve:              Sure Aaron. So, I have been in the business for about 16 years. The first half of that was on the brokerage side, the majority of which was with TD Ameritrade. I used to run their downtown Chicago office. And as I got towards the end of my career there, the registered investment advisor space started becoming more and more popular and it was an extremely appealing to me because as a registered investment advisor, you can be a true fiduciary. You didn’t have to sell products, you can only be paid in one way.  So I decided at that point that’s where I wanted to spend the rest of my career.  At that point I started with an investment advisory group out of Cincinnati where I opened a local Chicago office for them and was there for about two years.  At the time I met Peter Mallouk who is the CEO of Creative Planning and they were growing at a tremendous rate.  He needed somebody who could help in the Director of Wealth Management space. So, we hit it off pretty well. I decided to join Creative Planning and I was there for about three and a half years and during my time there we grew from 50 wealth managers and about $7 billion in assets under management when I started to around 140 wealth managers and $33 billion in assets when I left. And during my time there I was the Director of Wealth Management. I was on the investment committee and I was managing a portfolio of individual stocks using options, so I just felt that I had done enough where I was comfortable enough to go ahead and go off on my own.

Aaron:            So, you had plenty of knowledge and experience to start your own company, but what was your motivation to give up being a Director at the number one firm in the country and take on a big risk by starting Spotlight Assets Group?

Steve:              Well, during my time in the registered investment advisor space I sat down with thousands of clients and, just looking through the frustrations and what I’d seen from the client end of things, most investment companies are really set up to attract and retain assets. They’re not really the best user experience for clients. There’s a lot of hidden fees, not great technology for the end user. And I wanted to set up something that would be different. So, what I tried to do was really reverse engineer what would be the best company from the client user experience, and I wanted to set up something that would be truly geared towards that. So, we decided to start a company that was focused on transparency, technology, and total wealth in order to give clients a better user experience than what I had seen out in the market.

Aaron:            It sounds like you’ve created a company that is truly client centric, focusing on transparency, technology, and total wealth. Let’s talk about each of these. Steve, how does Spotlight Assets Group think about transparency?

Steve:              Transparency is a pretty popular buzzword these days. You hear it quite a bit. For us, what it meant was giving clients more insight and control over their own financial situation. So, for example, I can’t tell you how many financial statements I’ve looked at for clients regarding their investment accounts where even me being in the business, I couldn’t tell how much a client was up or down in dollars or total return, nor what they were paying. So, we wanted to create a setup with something just as simple that with statements you can clearly tell at any time exactly what you’re paying. We provide a billing statement to show what your fee rate is, how much you’re paying us in dollars, and then what your net return is, and then that way it’s very, very easy when we start reviews with clients or when they get something in the mail to know exactly where they stand. Also, from the transparency side, we thought it was very important to create a very flat and simple fee system. What a lot of people have gone towards is more of a tiered fee rate for investment management clients where they’ll charge one fee and the first 500,000 and another fee on a next set of money, another fee, and really for a client it’s difficult to see exactly what you’re paying. So, we wanted to create a flat fee rate system that included the commission charges for the trades we recommended so clients would always have a very good idea and could figure out simply exactly what they were paying. And then finally, we wanted to provide an atmosphere where clients would be able to hold us accountable more. We wanted to show clients not only how much they’ve returned in their portfolio, but also give them some benchmarks so that they had some perspective and can judge our performance. It’s very different if you’re up 8% in any given year and the market’s up 9% of the market’s up 7%. It’s a completely different story if you’re up 8% and the market’s up 30%. So, we wanted to provide some perspective for clients so that they could hold us accountable and really know where they stood compared to what was going on in the general market.

Aaron:            How does Spotlight Assets Group leverage technology to improve our clients’ experience?

Steve:              So, another frustration I see or heard from clients was that a lot of advisors don’t provide clients with good end technology. So for example, if a client wants to know what their financial plan looks like after a bad month or everal weeks in the market, a lot of times they have to call up their advisor, asked them to rerun their plan, send it to them, and then the advisor can really spin what’s going well or what’s not doing well in their portfolio. We wanted to give clients a portal where their financial plan would update automatically. They could log any account outside of what we’re managing and then allow whether or not we can see those accounts, that way they can have a one stop portal for their banking, for their investment accounts, for what we’re managing and then be able to compare it to other managers and then that way clients would just have more control over their overall situation as opposed to having an asking advisor to rerun things for them and then get back to them.

Aaron:            You’ve covered transparency and technology. What does total wealth mean?

Steve:              Well, it starts with an investment management, so obviously most people hire financial advisors to manage their investments and that’s something we do, and I think we do well and that’s also where we get our fees. But, I also thought if you look at where the business is going, in addition to investment management I thought it was important to be able to provide value in other areas. So, if you look at a typical client, they have their investment manager. They’re managing their own investments. They have a separate CPA.  They have a separate estate planning attorney.  They have a separate insurance person. And it’s really left to the client to have to coordinate all of these items and it’s just natural that some things are going to fall through the cracks. We wanted to position ourselves so that we could fill that gap, help them be the coordinator of all of these different areas and then also be able to provide value in those spaces as well. So, for example, we have the capabilities to be able to do tax planning, tax advice, and also tax returns for clients. We can give clients estate planning advice, we can review insurance. So ultimately, we wanted to set up a one stop shop where we could partner with the client to help give them advice in all areas of their financial life instead of just focusing on the investment management.

Aaron:            That makes perfect sense to me. Steve, where do you think the financial services business is headed in the future and how will it benefit clients?

Steve:              Sure, so I think one of the benefits with technology in our society is that you’ve seen more and more of these Robo advisors and online investment management pop up.  One of the really good things about it is it’s forced prices down for the end user client, but it’s also provided for a lot more transparency and clients are just more informed these days so they have a better idea of what they’re getting and what they’re not getting. So, for us it was important to, as I said earlier, be able to deal with clients in the most transparent way possible so they always know exactly where they stand and then also be able to provide additional value outside of just the investment management piece. If you can go to a Robo advisor that’s going to manage things for a very minimal fee and you’re going to charge something higher, what is the additional value that you could provide for those clients? And for us we think it’s the customization, the higher end financial planning, and the ability to help a client with all areas of their financial life as opposed to just doing the investment management. The way we look at it, is it’s analogous to if you’re running a business and you hire a CFO to help you run that business, you’re not giving up control over everything from the investment decision standpoint or your financial life. You’re bringing on a partner to help you run things. And that’s the way we view ourselves. Our job is to inform our clients, be a partner for them, and then allow them to ultimately make the final decisions on their own financial future.

Aaron:            I mentioned in the beginning of this podcast that there are over 10,000 independent advisor firms in the United States and that you decided to start yet another firm. So how is Spotlight different from the 10,000 other companies out there?

Steve:              I think we’re different in a few areas. So, one: not every investment advisor does total wealth planning, and not only do they think we do it, but I think we do it well. One of the things that we focused on in Spotlight was, before we brought on other advisors and really started to scale up our client acquisition, we wanted to make sure we had experts in every area of what we were looking to do so that we could not just give advice, but make sure we can give the best advice possible. Also, on the investment management side, what you find with a lot of companies is they become experts in one area of investment management. So, for example, they may manage money by just using ETF’s or index funds or they may just use stocks, or they may use a just use mutual funds. What we wanted to do was be able to build out an investment management setup where we can provide the expertise and be able to implement portfolios that used all of these things. So rather than focusing on just one area of investment management, we have portfolios that use ETF’s and index funds. We have individual stock portfolios. We can do individual bonds for clients, we can use options in order to try and create a little bit of protection or enhance income or we can mix any of these, so ultimately what we do with clients instead of having one cookie cutter approach for everybody is we could sit down, customize a plan, and then develop a specific investment proposal for that client that can leverage a lot of different areas of investment management. So, I think that’s one of the ways we’re different for most investment advisors is that we truly are creating customized approach rather than forcing everybody into the same model based on a risk tolerance.

Aaron:            In other words, Spotlight treats individuals as individuals.

Steve:              Exactly. A novel concept with investment management.

Aaron:            Exactly. Steve, you started Spotlight Assets Group with just a small group of people. What has happened since and where is the company going from here?

Steve:              So. we got approved by the SEC and May of 2017 and we really spent the first 10 months of the business just working with my clients and really trying to set up the company so we could build out the best processes possible to be able to scale the business from there.  And we felt in March of this year that we had really gotten to the point where we could really start to scale the company and bring on more advisors. So, at this point we now have four wealth managers, including myself, we have three offices, so our headquarters is in Oak Brook, Illinois. Outside of Chicago we have an office as an Ann arbor, Michigan. and then we also have an office in Los Angeles which is actually in Calabasas. So we have three offices, we have 15 employees and we currently manage about $200, million in assets. So, at this point we’ve grown pretty significantly in a very short period of time. What we’d like to do going forward is continuing to probably add one to two advisors a quarter over the next year or two. But what we’re doing, which I think is a little bit different as rather than targeting specific markets in the US, we’re trying to build around the right partners. So, for example, Ann Arbor Michigan doesn’t jump out to you as a huge market or someplace you would look to put an office in, especially at the beginning stages of a company. But we found a great advisor named Dan Greulich who we thought would be a tremendous asset to the team. So, we decided to build an office around him there and those are the types of things we want to do going forward- finding the right partners no matter where they are and then build out the map from there. And I think going forward we’re just going to continue to look to add as much talent as possible as to our team.

I think we’re extremely unique in the way the company is set up. Not a lot of registered investment advisors have somebody who’s strictly dedicated to legal compliance and I don’t know of anybody in the investment management space who actually has a former SEC enforcement attorney as their head of legal compliance. But that’s something that was extremely important to me when I did start Spotlight is that, if we were going to focus on transparency, try to be something different.  We might as well find somebody who had legitimate expertise in that area to be able to help us. And, I think a year from now we could be twice the size of what we are now and continue to grow exponentially from there.

Aaron:            And with that growth, we’ll be able to provide more and more clients with customized financial planning and investment management. So, I am definitely looking forward to that. Steve, before I joined Spotlight Assets Group I asked where the name came from and I would love for you to tell our listeners that story.

Steve:              So yeah, it’s an interesting story. When I decided to start the company, my wife and I were discussing what we should name it and essentially we started with Spotlight because I wanted to shine a light on the dark corners of the industry, really focused on transparency and set up something that would be hopefully the guiding standard going forward of what investment management company should look like. So, we started with spotlight and then I wanted to start to have a play on my initials.  My name is Stephen Albert Greco, so we had the S and decided to try and fill in the rest and asset group came pretty quickly, and we decided to run with that from there. So, it’s a little unique, but ultimately we decided to build the name of the company around Spotlight and the whole focus on transparency.

Aaron:            Yeah, it’s great to have a name that not only describes what you do, but also has meaning and the message behind it. Steve, thank you for joining us today and telling us the Spotlight Asset Group story.

Steve:              My pleasure Aaron.

Aaron:            Well, this was episode 1 of the Spotlight On Your Wealth Podcast.  For Stephen Greco and Spotlight Assets Group, this is Aaron Kirsch. Thank you for listening.