Money Talk with Carl Stuart

Carl Stuart takes caller and text questions on topics like the pros and cons of passive and active investing, also what to do when inheriting property, and whether to use home equity loans to pay off high-interest debt – and more!

The full transcript of this episode of Money Talk with Carl Stuart is available on the KUT & KUTX Studio website. The transcript is also available as subtitles or captions on some podcast apps.

KUT Announcer Laurie Gallardo [00:00:01] This is Money Talk with Carl Stuart. Carl Stuart is an investment advisor representative of Stuart Investment Advisors. Call or text him with your questions at 512-921-5888. Now, here’s Carl.

Carl [00:00:22] I’m Carl Stuart and you’re listening to KUT News 90.5 and the KUT app. Money Talk is a broadcast about the world of financial and investment planning where you always determine our agenda by calling or texting 512-921-5888.

It’s a terrific idea to call or text early in the broadcast. Last week we got some calls at the very end of the hour that I wasn’t able to take. I do take today’s calls first. And then today’s text and then any previous text that I have been unable to answer. You will hear the text coming in at 512-921-5888 and if you do not text and you do call then that will give me an opportunity to bloviate and long-term listeners know what a problematic situation that could be. So let me do the numbers one more time before I get started, 512-921-5888.

When you look at your 401k or your own investment account and you’re considering the types of mutual funds or exchange traded funds to purchase, one of the major decisions is called active or passive investing.

This is a big deal. A passive investing, a passive investment, let’s say in the Standard& Poor 500 Index, attempts to have the same companies in the same waiting. As the companies have in the index. And that has grown dramatically in the long career that I’ve had. And there’s always a robust debate, particularly in the stock market investing about the pros and cons of passive investing versus active investing. And I would say to you that there are at least a couple of benefits on the passive side.

First is that they tend to be very, very inexpensive. And so just as you would think, if you had two funds and they grew at 7% a year, but one had an expense ratio of 1%, for example, and the other had an expensive ratio of one-tenth of 1%. Over that 10-year period, you’re going to end up having more money at the end, simply because you have lower expenses.

So passive investing is known for low expensive because There aren’t a lot of bright, intelligent, highly paid portfolio managers picking stocks if we’re talking about stock indexes. The other thing that can happen is that passive indexes tend to be quite tax efficient. We’ve had mutual funds for many years. In fact, they are regulated by the 1940 Mutual Fund Securities Act. But in the last few years, we’ve also seen the proliferation of exchange traded funds. These are, like other passive funds, when you buy the index exchange traded fund, very inexpensive, but they also have a feature that causes them to be tax efficient. They seldom if ever pay out capital gains. Naturally, if it’s a stock fund and the stocks in the index pay dividends, you’re going to get those dividends which, of course, I believe you should reinvest. So that’s passive investing. My experience is this. You wanna have some passive exposure to the equity market, both domestic and international. There’s pretty good evidence that most active managers underperformed their particular benchmark. Now, there’s something between active and passive, and that’s taking a look at different factors. You may say, okay, we’re gonna have the 500 companies and the S&P 500, but we’re going to put our finger on the scale with one factor or another. You heard that come in? By the way, call or text 512-921-5888. My father owns property and has owned it for decades. There is no lien on the property and he wants to give it to me. It’s three acres of raw land. What’s the best way to transfer it without incurring a tax penalty? Can he just gift it to you? Thank you. So when someone wants to you an asset and you are receiving the asset and they own it free and clear, it’s not in an IRA or a tax deferred environment. The person who the beneficiary of the Yip does not have a tax liability. Now, there is, however, some complications here. The law says that this year you have, your father has a lifetime exemption from state taxes of just under fourteen million dollars. And if he were to give it next year, the lifetime exemption goes up to fifteen million dollars so he can give you this land during his lifetime. And upon his demise, let’s just say that the land’s worth $2 million. And let’s say, and we of course hope doesn’t happen, that he passes away next year. His lifetime exemption of 15 million will be reduced by the 2 million value of the gift that he gave you, and now he has a $13 million life exemption. The other thing is, when you are given property, stocks, bonds, mutual funds, real estate, you inherit from a living person. You inherit their cost basis. So whatever, not the market value at the time of the gift, that’s for the lifetime exemption, but you inherit your father’s cost basis on the three acres. If and when you sell those three acres, your gain, if it is a gain, will be from his original purchase price to your sales price. Now capital gains taxes are taxed at a lower rate than income taxes. It could still be a significant liability to you at the times. But he could simply give it to you. Obviously you want to go to an attorney that specializes in real estate to make sure the documentation is properly done, but you do not have a tax liability at that time, nor in my view does he. Thanks.

You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888 and by the way You can listen to past KUT Money Talk shows by going to kut.org slash money talk. Here’s another text.

[Text] Carl, a peer mentioned that there is a 30% tax on thrift saving plans at the age of 70 and recommended moving my money upon retirement. I haven’t looked into it yet as I’m still quite a bit younger than 70 and also pretty happy with my account. Any insight that you can share, thank you. So Thrift Savings Plan is generally, as I recall, a benefit that’s available to people who are in the federal workforce and are part of the employee’s retirement system. And it is like a 401k. Your contributions are voluntary. And if they grow over time, as long as they’re in the Thrift savings plan, you have no tax liability. And when you take the money out, because you had no taxes on your contributions and no taxes any growth, it comes out as ordinary income. There’s absolutely nothing required that you do anything at age 70. It’s just not my understanding. There’s something called a required minimum distribution. This year, I believe you have to be 74 before you take that out, and that goes up incrementally over time. But as long as you were working and a participant in the Thrift Savings Plan, it’s my understanding that you do not have a required debt distribution. I know that’s the case in the for-profit sector with 401Ks. If you’re 74 and working and have a 401K, it’s my understanding, that you’re not subject to that required minimum distribution. But if you quit, then you are. So whoever your peer is that mentioned there’s a 30 percent tax that is incorrect. The tax you will pay when you start taking money out will be taxed at your income tax rate. It’s called the marginal rate. You would take all your other income, dividends, interest, social security, in your case a defined benefit plan, a pension, and you would add to that the amount that you take out of TSP and that would determine what your tax liability would be.

You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888.

So as I was finishing up talking about active and passive investing in equities, there’s something kind of in between just absolutely matching the index and having a smaller, actively managed portfolio of equities. And these are ideas that come out of the academy. Research has been done, and the proponents of this say, we think we can identify that we think small cap stocks over time outperform large cap, or that stocks that have momentum, or stocks that quality balance sheets, or stocks have earnings growth. I’m just throwing these out. And so we will put our finger on the scales. We’ll still, we’re not gonna buy and sell these companies unless they fall out of our criteria. And that’s another way to look at it. Active management. Portfolio managers have a set of criteria in selecting equities, and they then build those portfolios. If you’re going to choose active management, based on my experience, I find that there’s two kinds of active stock pickers. There are those whose methodology tends to cause them to outperform in rising markets, and those whose methodologies tend to out perform in falling markets by not going down as much. It’s very rare indeed that you would find active managers that tend to go down less in the bear market, go up more in the bull market. I just don’t think that that’s just not my experience. So one way to decide how would I find out how I’m going to do is you take, you wouldn’t want to buy a fund that’s been around for a year or two, but if you take a fund and you look at the calendar year returns versus the relative benchmark, what you want to do is you want to look at good years. Like say recently 2023 and 2024, and bad years like 2022 to see how they perform. And then you’ll have a chance to think, okay, this group of people, this person tends to have this characteristic. Do I wanna take a bit of my stock allocation and put it there? The answer can be yes or it can be no. And then one other factor is tax efficiency. Some active managers actively manage their portfolio in such a fashion. That they give very little in the way of capital gains.

You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888.

Now I wanna move over to the bond market where you can also do passive or active. Let’s take probably the two biggest, I’m guessing at this, passive, is that you can buy an exchange traded fund. And remember, on Money Talk, I don’t make recommendations. I don’t know your situation. This is just my observation. The major index that follows bonds is called the Bloomberg Aggregate Bond Index, and you can buy an exchange-traded fund that follows that, the symbol is AGG. It’s my understanding that the other really large bond fund that’s passive is Vanguard’s Total Bond Market. The symbol is BND, and both of those funds. Their job is to follow that index.

So the question then is, are there pros and cons to indexing bonds, just like in stocks?

Now I’ll get back to that answer when I come back from a break, but it’s also a terrific time for you to call or text 512-921-5888. I’ll be back.

KUT Announcer Jimmy Maas [00:13:01] Money Talk airs every Saturday at five o’clock on KUT News 90.5 FM on the KUT app and at KUT.org. This podcast is produced by KUT and KUTX Studios as part of KUT Public Media, home of Austin’s NPR station and the Austin Music Experience. We are a nonprofit media organization. If you feel like this is something worth supporting, set an amount that’s right for you and make a donation at supportthispodcast.org

KUT Announcer Laurie Gallardo [00:13:31] This is Money Talk with Carl Stuart. Call or text him with your questions at 512-921-5888. Now…

Carl [00:13:44] Welcome back to Money Talk. I’m Carl Stuart and you’re listening to KUT News 90.5 and on the KUT app. When you have a financial or investment plan in question, call or text 512-921-5888.

So today I’m bloviating about active investing and passive investing. I’ve talked a bit about the pros and cons of stocks and if I don’t get a text like you just heard or a call, we’ll get further into bonds. Here we go.

[Text] Hi Carl! In the case of divorce, does the cost basis for selling a house go back to the date of house purchase or the date the divorce? It is now some years after my divorce and I am trying to understand how to calculate cost basis from when I decide to sell. My understanding is this, and of course I always remember I’m not a CPA, my understanding is there’s no step up or change in basis when you get a divorce. And there is I’m told if you kept really good records and you made major upgrades to the house or major investments in the house, that that would increase your cost basis. But your cost bases, if you got the house and the divorce, which seems to make sense, there’s no change in the gain. And if you’re now single, It’s my understanding that the first $250,000 of gains is not subject to tax. And then everything above that is subject to long-term capital gains tax. So there’s no change in the cost basis. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888.

[Text] Hi Carl, no question here, but I’m listening to your show for the first time and really appreciate the information. Well, thanks. I look forward to learning more each week.

Well thanks, keep listening. 512-921-5888. So, what made me think about this topic today was that Morningstar came out with a report called The Bond Market as Fertile Ground for Active Management. If you’re not familiar with Morningstar, it’s a separate company. Their business model is to gather data on mutual funds and exchange traded funds and then to study those and if they’re actively managed they’ll cover them, they’ll have an analyst go talk with the active managers and then what they do is they come out with a ranking and the ranking basically talks about their performance over time. It can be a little tricky just because they have a five-star ranking and my experience is it’s nice to have a 5-star fund but sometimes in active management a fund’s can go out of favor. That doesn’t mean that it’s necessarily a bad fund. In any way, they had a number of key, what they call key takeaways about the bond market. And remember I said that there are a lot of people that feel that active management in stocks tends to underperform passive management. Morningstar said, and I’m just gonna touch on a few of these, but by the way, don’t forget to call or text your financial or investment planning questions at 512-921-5888. Here’s what they say, here are some key takeaways. Fairly, oh good, I know that’s the threat of loviation. Five one two, nine two one, five eight eight eight. I’m inheriting a large sum. Should I pay off a 5% mortgage or invest and continue to payments? That’s a terrific question. And if you called, I’d be asking you the following questions. So you’re gonna have to answer these on your own. Number one Do you have any other liabilities? Do you any other, do you have a car note, a credit card note, credit card debt? Are you saving for college for children or grandchildren? Are you participating in your employer sponsored defined contribution plan like a 401K or a 403B? These all really matter because a house, and I know this is gonna bother some listeners, And my view is not an investment. I’m a homeowner, been one for a long time, but it’s an illiquid asset that you’re not gonna sell and live in your car. So I don’t see it as an investment because you can’t sell off your kitchen if you need a quick $40,000. Do I like real estate? I think income producing real estate, along with stocks, are the two asset classes that have historically outpaced inflation over long periods of time. So the question then is, If you’ve answered all these other questions and your only liability is the mortgage, and you have other assets, financial assets, retirement plans, savings, et cetera. Back when you had a 3% mortgage, it was a pretty straightforward question because the odds were that over time, your return in a properly balanced financial asset portfolio would outperform 3%. 5% you’re getting up into, now you got a question. Because While the stock market has done better than 5%, probably in high single digits over long periods of time, and the bond market probably in four to 5% is certainly not guaranteed. And when you pay off the mortgage, you have an imputed return of 5%. I would tell you this, if you feel like you’re behind your savings for retirement, I would not pay it off. I think if you had a 7% mortgage, which is about where mortgage rates are today, I’d probably encourage you to pay down on the mortgage. But you need several pillars to your financial independence. You need to have the ability to know that when you retire and your expenses don’t all go to zero, that in addition to Social Security, you can take your assets and draw down from your assets. So you’re right on the cusp, but I’d be probably be inclined to invest the money.

Thanks for the question. You’re listening to Money Talk on KUT News 90.5 and then the KUTF. Call or text 512-921-5888. OK, here is a live message.

[Text] Hi, Carl. You’re giving out the old phone number. For calls and texts, we need 512. Now, that’s interesting. Thank you, Mark, because this is what I have on my sheet here. We now have a new number. Fantastic. No wonder you have it. For calls or texts, we need to give out five, one, two. Four seven eight eighty six hundred you know i think i better write that down because i’ve been saying the other one since early april of this year okay all right five one two four seven five eighty six 100 all right let’s go back to the text here we go all right

[Text] Carl, I just sold a rent house and received $500,000, not a 1031 exchange. I want tax-free income on that until April 15th of 2026. Any other options besides munis? The answer is no, simply because you could do a tax-exempt money market fund. You’re going to get a low nominal return, but it’s going to be absolutely not subject to income tax, number one, and number two, you’re not going to have fluctuations in the bond market. That you have to worry about. So I would think a tax exempt money market fund, if you’re willing to take a bit of a risk, a shorter term investment grade municipal bond fund will have some fluctuation. But what you wanna do is you wanna compare the yields on a tax-exempt money market funds and a short term investment-grade tax-Exempt municipal bond funds. And unless there’s a meaningful pick-up in yield, Because of the risk of price fluctuation, I’d probably stay with the money market fund. Thanks for the text. You’re listening to Money Talk on KUT News 90.5 and the KUT app. Call or text 512-475-8600. I wonder how they’re getting that number and we’re getting these texts. That’s pretty interesting. Carl, is it unwise? To take an equity loan to pay off high interest debt. There has to be a reasonable difference, what we would call in the bond market, a spread between the note price or interest that you’re paying on the home equity loan versus the interest on a high interest debt. That lender on the Home Equity Loan is going to no doubt want a variable rate because they want to make a profit and if their cost of funds go up. They’re going to want to charge you a higher rate. So you have some uncertainty over time on the interest rates you’re going to pay on the home equity loan. But if the spread, to use something extreme, if you have credit card debt and you’re paying 20% interest, you’re certainly going to pay a lower interest rate because on credit card, MasterCard or Visa have no equity, there’s nothing they can fall back on. You’re using a home equity loan where they have a collateral, the lender has a collateral your home so you should have a substantially lower rate than credit card debt. So I would look at the spread between the two and then determine that. You’re listening to Money Talk on KUT News and 90.5 and the KUT app. Call or text 512-475-8600. Here’s the text. Hi Carl, love the show. Do you have an opinion regarding foreign stocks versus domestic stocks with the current US tariff situation? Do you think foreign companies that are not actively involved in the US market, for example Philip Morris, will benefit? I have been, if it feels like forever, a fan of having international equities. I just think the world’s a big place. I’ve read that roughly 50% of public companies are headquartered outside the United States, so having no exposure to that I think is a mistake. So I’ve had for a long time in the equity portion of my portfolio about 75% domestic and 25 percent. Foreign. It has been a long slog because we have been in this period that they call on Wall Street U.S. Exceptionalism and where U. S. Equities have strongly outperformed foreign. But because I’ve been doing this for so long, I’ve lived through long periods when the opposite has occurred. So far this year we are in one of those periods. Naturally, I have no idea if this will persist, but as of today, if you own the SPY, which is the ETF. The State Street has that follows the S&P 500, you have a return of 9.37%. If you own the Vanguard total stock market outside the US, Vanguard XUS, which is symboled VXUS, you’re up 20.76%. That’s twice as much. In my view, two reasons for that. One, taking an aggregate, foreign equities are less expensive than US equities. Secondly, you have the tailwind of the falling dollar. And so what happens is that when those shock prices are taken back into U.S. Dollars, you get a second bump. The outlook for a strong dollar, I would suggest, is not terribly great given our fiscal situation and rising government debt. And given the extended valuations of U. S. Equities, particularly in the AI IT sector, I would be inclined to have. A nice healthy allocation outside the United States. I don’t think tariffs are a good reason one way or the other, but I do think there are other factors that would lead me to do that. Thanks for the text. You’re listening to Money Talk on KUT News 90.5 and the KUT app. Call or text 512-475-8600. Okay, I’ve got a call coming in. Let’s just see here. We have a new software on the computer. So let’s just hope that I get the right one here. Bear with me. Really? You’re on the air? How may I help?

Maria [00:26:59] How may you help me? We would check it on Money Talk. Yes, it’s coming up.

Carl [00:27:04] Please go ahead and ask your question.

Maria [00:27:07] This one’s gonna come in the car!

Carl [00:27:09] Can’t hear you have your radio on, you need to turn the radio off or we’re not going to be able to talk.

Maria [00:27:18] This is Maria, N-A-R-I-E.

Carl [00:27:21] Okay, memory, please, go ahead, how may I help?

Maria [00:27:25] I haven’t done my paperwork to be able to get any money on my 401k because I’ve worked with transportation for two years but I haven’t t filed for that but I’ve been living on disability for the last five years which is only nine hundred dollars but I got to move because of the problems because it made me get in trouble with the office and I’m going to have to move because they want to run me out of my house and they’re Come and just figure out the ending of it. I think the green is going to win.

Carl [00:27:59] So what is your question, Marie? I’m sorry.

Maria [00:28:01] Uh, you told me to call you and that you could help me maybe do my paperwork.

Carl [00:28:05] No, ma’am, I’m so sorry, that’s not the case, I can’t help you with your paperwork. I’m sorry, I cant help you. You’re listening to Money Talk on KUT News 90.5 and the KUT App Call or Text 512-475-8600. Okay, let’s go back to these texts. I know you’ve answered this question numerous times. Well, that’s okay. When you’ve been doing this over 30 years, it’s highly likely. But I took money out of a fund whose fees were too high, planning to rebalance investments and repair my car. How long do I have to pay withholding on the part of that withdrawal that I don’t reinvest? Let me go over this again. I took the money out a fund, whose fees are too high planning to be rebalance investments and repair in my car.” How long do I have to pay withholding on the part of that withdrawal that I don’t reinvest? I think if you pulled it out of a fund and it was in a taxable account, meaning it was your own, it wasn’t in the 401k, that’s a taxible event. And there’s not a question of withholding tax on that. You’ll pay taxes because you’ll get a 1099 from the mutual fund company or from the custodian. Now if you took it out of an IRA and you didn’t have withholding taken out of that or a 401k, that amount will be added to your income and then that will determine your tax liability. So there’s not a withholding unless it’s a retirement account. You’re listening to Money Talk on KUT News 90.5 and the KUT App. Call or text. Four seven I got it here five one two four seven five eighty six hundred it’s time for me to take a break I’m going to talk with Bob when I return.

KUT Announcer Laurie Gallardo [00:30:24] This is Money Talk with Carl Stuart. Call or text him with your questions at 512-921-5888. Now, here’s Carl.

Carl [00:30:38] Welcome back to Money Talk, I’m Carl Stuart and you’re listening to KUT News 90.5 and the KUT app and apparently I wasn’t the only one that knew we changed the number because the intro to the show has the old number. I’m told now from my good friend Marc it’s 512-475-4600. Let’s go to the lines. Bob, you’re on the air. How may I help?

Bob [00:31:02] Oh Carl, how are you doing today?

Carl [00:31:04] I’m good, thanks, what’s up?

Bob [00:31:07] I think I already know the answer to the question, but I just want to throw it out there. You know, Trump signed an executive order, I think, where we can invest private equity and crypto and all kinds of non-traditional assets into our company retirement accounts. And I’ve been in private equity for five years and I think it’s a… now time for me to move along because I don’t think the average investor knows the risk of private equity and I understand the risk and it’s been good to me but it’s just one of those deals so I’d love to hear your opinion of it.

Carl [00:32:01] I’ve been in this investment world coming up on 47 years, and my experience is when unusual investments like private equity and private credit, which have been popular with endowments and foundations and sophisticated investors like you, by the time they get to the average person, you wanna run away as fast as you can. I learned this the hard way in the early 80s in oil and gas investments. Wall Street came with partnerships and the people that made the money were the general partner that the good prospects had already been taken and I would tell you that I think this is an extremely bad idea and I think you’re putting illiquid assets in a retirement plan. I think that’s a terrible idea and the big companies that are going to offer this have got to do big deals and I know a fair amount about private equity I serve on. At Division One University Endowment Investment Committee, and I’ve seen the data on private equity and the smaller and mid-market private equity deals have historically a much, much better return than the large ones. And if Fidelity’s gonna do this or BlackRock or whoever, they’re gonna have to use big deals. They’re gonna to do business with KKR or Apollo or Carlyle. And the history on big deals is in terms of rates of return. Are not nearly as attractive as small mid-market deals of, say, 100 to 250, 300 million dollars. So I happen, maybe for the same reasons or different reasons, Bob, but I just think it’s a very bad idea and I would encourage listeners not to do it.

Bob [00:33:48] I just, I just think the expense ratio is gonna eat their, whatever return they have, it’s gonna eat them up. And then it’s hard to get out of some of the…

Carl [00:33:57] Of course, you’d get your 5 to 10 year lock up and the fees are 2% of the assets and 20% of the gains, you’re right. Well thanks for the call. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-475-4600.

[Text] Hi Carl, I love your show. Thanks. My nieces are 19 and 21 years old and both have jobs. I would like to get them started with Roth IRAs. Are there options that don’t have a minimum dollar amount to start the account? I am only able to give them $100 each to get started, thanks. Boy, that’s a tough one. Because it’s hard for Fidelity or Vanguard or Schwab or UBS or Merrill Lynch to make any money on that size contribution, simply because What’s going to happen is their expenses are just going to lose money on it. So I think what I would do is go to the do-it-yourself investors like Fidelity and Schwab and Vanguard and go to their website and look at their Roth and look two things, the minimum initial investment and then additional investments. And then what you’re going to have to do is save the $100, save until you have enough for the minimum. And they’re young, so you want to start them at a stock index fund. You didn’t ask this, but the first one would be a total stock market, the US. And then the second later on would be a totally international, probably exchange traded funds. That’s how you want do this. But the economics of small dollar investments are quite difficult. Once you get in, my experience is the subsequent investments are much smaller and you can even get into something called an ACH where you will give one of those companies information regarding your checking or savings account. And at your control every month or every two months, however you want to do it, they will draft that and go immediately into it. So I think you’ve got a hurdle to begin with. I think there’s a barrier of entry to get it, barrier to entry to getting in. But I think once you’re in. The subsequent investments will be less, so good luck. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-475-4600. Carl, any recommendations on finding a good financial advisor? It’s so funny you would ask this because I had written that down as a possible bloviation situation today. I’m going to tell you how I would do this. First of all, you’ve got to know yourself. And I think, having observed over my career, that most unhappy investors are the do-it-yourself person who likes to, I don’t know, change the oil in his car, do her own taxes. Just by their personality, they want to learn and they want do it themselves. But for whatever reason, they engage a financial advisor. And then they’re constantly looking over her shoulder. Well, I read this in the paper. I read in the Wall Street Journal. What about this? What about that? And they’re never happy because they’ve given up control and it drives them crazy. The second really unhappy person is the person who’s a do-it-yourself investor in a bull market. And so stocks go up 20% one year. The next year they go up 23%. And the next year, they go down 30%. And all of a sudden he finds out this is not. Kind of fun I thought it was. This is really hard stuff. And I don’t have the time and the interest and the desire to do this. I don’t want to do my own taxes, I’m gonna hire a CPA. I don’t want to my own investing. I want to find somebody that has what? Integrity, intelligence, and experience. So nobody’s gonna advertise I have no integrity, no intelligence, no experience. So it’s okay. People who you believe are in somewhat the same situation you are financially to ask if they’re using someone who it is. It’s okay to do your own shopping online, but eventually you wanna have, if you can, a face-to-face conversation. In this day of Zoom and Microsoft Teams, you can do that, although it’s not as good as seeing the person face- to-face. And there’s gonna be a lot of questions that you’re gonna wanna ask, but when you go to see this person, This is a diagnostic process. You don’t go to your doctor if you’re not feeling well, and the doctor says, well hello Gene, take this pill and call me in six weeks. The doctor wants to understand what your symptoms are. It’s the same thing here. If this person doesn’t ask about you, about your personal story, to try to understand you, and ultimately what your goals and objectives are. What are your sources of income? What financial liabilities do you have? Are you working? How long do you plan on working? I mean, these are really critically important questions. Not the one about, help me understand what your risk tolerance is. That’s a dumb question. You need to disclose stuff, just like you would to your primary care physician, if you hope to have any help. And then this person, or if it’s a team of people, should be able to at least answer these three vitally important questions, how do you invest money for someone like me? In other words, What’s your investment strategy? What’s you investment philosophy? They ought to be able to articulate that. And it ought to make sense to you. And if it doesn’t make sense to you, then keep looking. Or if it makes sense and you don’t like it, that’s okay. If they start off by quoting you really good investment returns, or they use words like guarantee, run as fast as you can in the other direction. Because investing is tough. If it was easy, everybody’d be rich. All right, so number one, you want to know their investment strategy or philosophy. Secondly, there’s a lot of data that I read years ago that when people engage a financial, I should say, a service professional, a CPA, an architect, a lawyer, a financial advisor, if they become unhappy, frequently, it’s not as much about their performance of that individual or group, it’s a mismatch of expectations. I never heard from you. Or I thought you were gonna do this and you didn’t do it. So the second question is, help me understand, how does a happy and healthy relationship look like? A client advisor relationship. How are we going to communicate? Are we gonna communicate in print, by email? Are we going have face-to-face meetings? Help me understand exactly what I can anticipate and expect from this relationship. Because if you get full clarity about that, and they do that, that’s gonna be great. And if they don’t, well then you’ve got a problem, but at least you went into this with your eyes open. And the third thing, not the first, a lot of people are like, what’s the fee? That’s a mistake, because if you don’t know their strategy and approve it, and if you know what a happy, healthy client relationship looks like, frankly, it doesn’t matter what the heck the fee is. So they’re gonna, how are they compensated? There’s one of two ways you’re gonna be compensated. By the transaction. Or you’re going to pay them an asset-based fee. Buy the transaction is the oldest. I mean, think about the term stockbroker, which we haven’t heard in many years. The stockbrokers are, we call people who are financial advisors, can do either one of these. That is not a term of law, it’s a term art. So they can be compensated by the transaction. That doesn’t make them bad people. They can be ethical people. Uh, if- It’s an opaque product, and here’s where it gets dicey. If they’re starting to talk to you about something that’s an insurance product, those are really hard to understand, and they frequently have fees that are very hard to understanding. And if the person says, you can have this indexed annuity or this deal, and you don’t pay me anything, that’s another reason to get up and run as fast as you can in the other direction. If you understand the fees, that’s fine. But I would say, that the fastest growing element or fastest growing model of the delivery of financial services to human beings is the advisory model. This is where the advisor charges you a fee based on the value of the assets. Now there are two or three things that I think are really beneficial in this one. First of all, the people who do this are called investment advisors, that’s the term of law, and they are regulated by the Securities and Exchange Commission. And they have to put your interest before theirs. They cannot receive any transaction-based compensation. And they have what the law calls a duty of care. They’re gonna charge you every three months for the value of your portfolio. And if it goes up, the fee goes up. And if goes down, the feed goes down. The best option for this, in my view, is number one, it eliminates the appearance of conflict of interest. If they tell you they’re gonna move from fund A to fund B. You don’t have to think to yourself, are they doing this for me, or are they going this to generate a commission or a sales charge, because they’re not getting paid anything to do that. Their economic interests are the same as yours, you both want it to grow. Secondly, it opens up a much broader universe of mutual funds and exchange-rated funds. They want this one from Fidelity and that one from American funds and this one JPMorgan and this from Vanguard, they can do that, so they can put together a portfolio of what they believe are the best best. Products, if you will, the best investments for you. And then third, they have what’s called fiduciary responsibility, maybe I talked about that, and they have this ability to go wherever they want to get to the best thing for you, and in my view, if your doing this, you wanna give this person legal discretion. You want them to do what’s best for you and they’re not gonna call you every time they wanna make a change, that’s not their job, their job is to do was best for your and to communicate with you what they’re doing. So that is a really long-winded answer. That is a real important question. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-475-4600. Here comes a call. Jennifer, you’re on the air. How may I help?

Jennifer [00:45:00] And my car i am calling because i have uh… And a small real estate investor i’ve got seven properties good i’ve been managing that thank you have been managing them for about ten years and i’m uh… A little bit tired of uh… The duties of management

Carl [00:45:19] Jennifer, years ago, I couldn’t stand it. I bought two buddies and I bought a rental house within walking distance of UT, because everybody else is getting rich in real estate. Guess what, it was the late 80s, early 90s, and the rent went from $1,600 a month at $800 a month, but I noticed the operating expenses didn’t go down 50%.

Jennifer [00:45:38] Uh… Right right and so of course that happened now rented rent are going down and i’m still getting my phone call in the middle of the night about that or whatever

Carl [00:45:47] Oh, good lord.

Jennifer [00:45:49] So, one thing that I got in the mail, I really know nothing about this, but I thought a little bit about real estate investment trust and this one looks like a 721 exchange. Do you know anything about that and can you tell me, is it a good idea to buy into one these exchanges and also how do I find one that is a good one?

Carl [00:46:10] That’s a great question. I think it might be a 1031 exchange, but if the idea is you place your real estate, there’s a transaction by which you can sell the real estate you’ve got and end up owning other real estate and postponing the capital gains tax on the sale. That’s the big-

Jennifer [00:46:31] Sorry, that’s not what this is. I guess I’m reading. This is where you basically sell your group of properties into a flock fund is what they’re calling it. And so then I guess the flock owns a lot large amount of properties. And I don’t know if that’s a good thing to do and how you trust that they’re going to manage them well and they’re going to choose good properties.

Carl [00:46:55] Yeah, boy, it makes me anxious just hearing you say that.

Jennifer [00:46:58] Okay, okay. Yeah. Well, yeah, that’s kind of how I know I’ve been sitting on my desk for so long

Carl [00:47:04] Yeah, because that probably has very light regulatory oversights, not like mutual funds where they’ve got a really tight leash on them with the government. That makes me anxious. Because you would have to dig into the document that they offer. You’d have to see if you could get some performance numbers. Obviously, you’d like to get some geographic diversification. And probably all your properties. Or in central Texas, you’d like something that had a national footprint. Also, you’re a sophisticated real estate investor. Are they gonna have multifamily? Are they going to have warehouse? Are they’re gonna have hospitality? All those things make a big difference because as you know, bad things happen. There’s public real estate investment trusts and you can imagine when COVID hit, what would happen to the ones that had shopping centers. So it makes me really anxious because I doubt that you or I or anybody else could do enough in-depth analysis to really get at the quality of the management. And we both know that it’s all about quality of management. Secondly, how much leverage or debt are in their deals. And then third, it’s gotta be an illiquid asset. So what are the liquidity features? You know, some of these liquidity features are really bad where, you know, they only allow so much of the asset value out. There was a big one with Blackstone called B-R-E-I-T and when COVID hit, people wanted their money and guess what, they couldn’t get it. So there’s so many hurdles before I’d get comfortable with it that I’m not inclined, it makes me anxious. It would not be something that I’d be excited about doing if I were in your shoes, Jennifer.

Jennifer [00:48:54] Super helpful. It’s going in then.

Carl [00:48:57] Okay. Thank you. I appreciate that. You’re welcome. Thanks for calling. You’re listening to Money Talk on KUT News 90.5 and on the KUT app and I’m going to give you, well, I’ll give you the number because if you text, I can take it next week as well. I’ve got one more here, I think. 512-475-4600. Actually, it’s just a nice one. Thank you for both answers today and I love the program. You are very welcome. Okay, we’re going to bloviate here for a couple of minutes on the pros and cons of passive investing in bonds in AGG or BND. Fairly priced, I’m quoting Morningstar, fairly priced active management in bonds, fixed income, makes sense for fundamental reasons rooted in the nature of the bond market. So market cap weighted indexes work differently in stock and bond markets. So the Vanguard. Index fund, the Fidelity, NASDAQ, those are what are called market cap weighted. While getting exposure to an issuer in proportion to its success in size is the entire idea behind buying a stock index fund. The dominance of bond index members is measured by how heavily indebted and potentially vulnerable to distress they are. So think about that. You may have more of a weak credit because it’s got more debt outstanding. You probably rather own a bond of an issuer that had less credit and fewer bonds and less debt outstanding, but a market cap weighted bond index is gonna go in the other direction. Here’s another good reason for active management. Index coverage is not comprehensive for major parts of the bond market. Extending to only about 80% of agency mortgage-backed securities, that’d be Fannie Mae and Freddie Mac, and only 60 to 70% of commercial mortgage- backed securities and roughly one-third of asset-back security. Asset-back securities are car loans, credit card debt, things like that. So the conclusion that Morningstar has is they’re not talking… And negatively about stock indexing, but they are about bond indexing. You wanna keep that in mind. I wanna thank Marc for doing a great job this afternoon and remind you next Saturday after the news at five to be sure and tune in to Money Talk.

KUT Announcer Laurie Gallardo [00:51:33] You’ve been listening to Money Talk with Carl Stuart. Carl Stuart is an Investment Advisor representative of Stuart Investment Advisors. And this is KUT and KUT HD1 Austin.

This transcript was transcribed by AI, and lightly edited by a human. Accuracy may vary. This text may be revised in the future.