The Bold Return to In-Person Conferences

But there are advantages as well. Many of us who follow the PFP track will occasionally decide to slip into an interesting-looking estate planning or tax strategies session. The most compelling reason to smoosh all those separate meetings together under one roof is scale; the combined conference can afford to bring in nationally known keynote presenters that none of the individual meetings could have afforded. This year, the keynote roster was toned down, but it included Ambassador Caroline Kennedy, and a motivational session featuring professional soccer player Amobi Okugo, American footballer Jeremy Bloom and Nicole Lynn, president of football operations at Klutch Sports.

What was different about this year? Just about everything, including the attendance – 1,500 attendees was about a third of what ENGAGE normally attracts. An additional 500 people followed the sessions virtually, offering a preview of the new normal in the conference experience. Even more ”different” was the fact that more than a hundred people made hotel reservations and then, after the Delta variant emerged, changed their registration to virtual. But (this is the interesting part) they came to the Aria hotel anyway – watching the sessions on their computers from the comfort of their rooms or by the pool. I was on the elevator several times with people in bathing suits who told me that they were planning to attend my session virtually the next day.

Another sign of the new normal in the conference space were the virtual presenters. This hit home early for the financial planning crowd, as opening keynote presenter (JP Morgan economist) David Kelly presented virtually from his office, visible on the big screen, talking about the markets and answering questions from a live moderator. One of my panel discussions featured two live panelists on the podium and one more-than-life-size panelist on the big screen. (I told the audience that Alan Moore of XY Planning Network was doing an awesome job of social distancing; he was talking with us from his offices in Bozeman, MT.) One of the other panel discussions featured a lone panelist sitting the podium, and two other panelists plus the moderator all grouped together on the screen.

Of course, there was additional spacing of chairs in the session rooms; instead of chairs being linked together, cheek to jowl, they were spaced two and a half feet apart, which was, frankly, much more comfortable – a change I hope that conferences will keep going forward. (Look for this in our Insider’s Forum conference in October.)

Managing clients (and portfolios)

During this first back-to-in-person meeting, I moderated two panels – in person. One focused on the most recent (and most important) technology innovations in the advisor ecosystem. The second was a group conversation about how CPA planners are managing portfolios in uncharted territory, with historically low interest rates, recent inflation scares, historically high U.S. stock valuations, Robinhood and meme trading, and clients asking for advice on cryptocurrency investment ”opportunities.”

My panelists in this session were Scott Sprinkle of Sprinkle & Associates in Littleton, CO; Mark Astrinos of Libra Wealth in the Silicon Valley area; and Paula McMillan, with Stearns Financial Group in Summerfield, NC. They immediately delved into the behavioral finance issues around this unique market situation and talked about their strategies for keeping uneasy clients from deviating from the long-term plan.

Managing portfolios in this environment is about managing clients.

Sprinkle noted that there are three categories of clients. The first are people he’s worked with through previous market downturns, who know the drill and are largely unaffected by breathless headlines or short-term volatility. On one side of these people, he said, are clients who are nervous that the market may be at a top and want to get out while there’s still time. On the other side, he’s hearing from clients who are experiencing severe FOMO after watching their diversified portfolios underperform the FAANG stocks and want to go all in on big tech and abandon diversification.

“This is a time where nobody’s comfortable where they’re at,” he told the audience. But then he said that for clients on either side of the divide, he has a wonderful ally: the brief 2020 bear market, where the S&P 500 lost 35% in a month, bottomed on March 23, and then rallied strongly for the next 15 months.

“For the clients who want to get out of the market,” said Sprinkle, “we remind them of how nervous they were last March, and what they would have missed if they’d gone to the sidelines.” The subsequent rally, even as the pandemic was gaining strength, was an object lesson in how hard it is to predict how the markets are going to behave.

For those clients, he also talks about the danger of fighting the Fed, the fact that consumers are receiving a new stimulus package, and a huge infrastructure bill that is coming. Valuations are high, but so too are earnings.

Clients who want to go all-in on equities receive a different message. “I remember back in the tech bubble,” Sprinkle said, “when a client came to me with a list of 10 stocks that he wanted me to invest in. I think Intel and Cisco were on the list,” he adds, “but the other eight stocks never made it through the downturn.” The lesson: with valuations this high, there’s a high probability that clients who are buying in today will overpay and underperform going forward.

McMillan told the audience that her best strategy is to keep communicating with clients, stressing the importance of staying with the plan. But she says that her messaging will vary from bullish to bearish, showing clients that there are two sides to the current market opportunities. “I’ll send messages talking about the fact that the Fed has pushed a lot of cash in the market and there’s a lot of stimulus coming from Congress,” she said. “That cash had to go somewhere, and it did: it elevated the market, which has led to historically high stock prices.”

But in the same message, she might point to the dangers inherent in those high valuations, and the fact that the markets often behave in mysterious ways. “We just don’t know how long we’re going to be on this ride,” McMillan said.

Astrinos had an interestingly different take on client communications. “A lot of that stuff [that the other panelists were talking about] is interesting, but I think sometimes when you give that information, it exacerbates the problem,” he said. “It leads clients to think we actually know what’s going on, but I believe that nobody actually knows.”

So instead of talking about the relative merits of staying or leaving, Astrinos emphasizes that he doesn’t have any foresight to offer, and no amount of market knowledge or study is going to give him any. “My main communication through up and down markets doesn’t change,” he said. “Stick with the things that we can control and stick with the plan. The plan doesn’t call for being more or less aggressive depending on market conditions.”

If a client is persistent, then Astrinos will add an extra disclaimer. “Most of the people I work with got to where they are because they were overachievers,” he said. “I tell them:

Everything you did during your life worked, because you worked harder and smarter. But when it comes to investing, it truly is different; all those things can actually work against you if you think that you’re smarter than the aggregate of millions of investors. Mr. Market is pretty efficient and definitely unpredictable. Thinking we can be smarter is not a bet that I would be willing to take.”

Providing a sense of control

It is surely important to know the most effective things to say to clients who are uncomfortable with today’s markets, but helping clients stick to the plan is boring. The panelists each mentioned, in passing, helping their clients feel more in control of their portfolios. How does an advisor provide that sense of control when your advice is to sit tight?

Sprinkle accomplishes this by setting aside a year’s worth of his retired clients’ living expenses in cash, and another two years’ worth in high-quality fixed-income investments. He will show clients that market downturns rarely last more than three years, so the chances of having to liquidate stock positions at a loss are accordingly diminished.

Interestingly, Sprinkle will incorporate guard-rail decumulation strategies in this set-aside. “We make sure their basic needs – like housing, utilities and food – are covered by the liquidity,” he told the group. “And then we calculate the cost of their ‘wants,’ like vacations and things. If we have a year where there is a big pullback,” he added, “then they can decide not to go to Europe and go to Yellowstone instead.”

With some clients early in retirement, Sprinkle might set aside a risk-off ”wants” bucket specifically to pay for the traveling that they had been planning for their first few retirement years. “That way, if the markets go down, it doesn’t crush their dreams,” he said.

McMillan will direct her uncomfortable clients’ attention to their bond allocations, where the yields are not generous. “I show them some alternatives,” she said. “One might be dividend-paying stocks; we could do a little bit higher allocation to that. Or dividend growers, private lending or alternatives like real assets.” She added: “We’ve allocated to one fund that invests in timber, agriculture and infrastructure. Another invests in private real estate. They decide what they want to move a portion of their bond allocation, and it gives them something they can control.”

Astrinos once again took the conversation in a different direction. “Things that we’re already planning to do, I’ll let the client know, and let them make a decision,” he said. “Let’s say clients are in a 50/50 portfolio and the markets have gone up,” he explained. “My plan is to rebalance to keep the risk posture level. But I might call the client and say, you’re slightly out of tolerance. I understand that you’re concerned about the market being frothy. Do you want to take some gains off the table? They’ll say, yeah, let’s do that. Then they hang up the phone and say, ‘My advisor is thinking about this; he understands me.’”

When markets are down, Astrinos will call clients and ask about buying stocks on sale, or tax-loss harvesting to make the most of the down market. During the March 2020 downturn, he was talking to clients about doing Roth conversions. “It makes them feel like they’re doing something to take advantage of the situation,” said Astrinos. “They can see the value in having me thinking about them and their situation.”

Loss harvesting during the March 2020 downturn reaped some unexpected gratitude from Astrinos’s clients. “Some clients came back to me and said, I don’t know what you did, Mark, but we got a refund on our tax bill,” he told the group. “Other clients sent me chocolates as a gift and said they had never before gotten a refund from the IRS.”

Managing inflation fears

With the recent runup in inflation, clients are asking about whether we’re about to enter a period when their purchasing power will be devastated. Astrinos will take that question straight back to the portfolio.

“Someone who is retiring around age 60 or 65,” he said, “is going to live another 30 years, potentially, and that money needs to grow. And that means,” Astrinos continued, “that they need to have some exposure to risk assets which are their best chance to maintain their purchasing power.”

Sprinkle has talked some of his older clients through a process where they took out mortgages on their houses at today’s remarkably low rates.

How does that relate to inflation? “We know those rates are going to rise at some point, even if we don’t know when,” he said. “The mortgages give them liquidity in their investment portfolios, and I have had clients say to me, if you can’t beat 3% over the next 30 years, I’m going to fire you anyway,” Sprinkle continued.

He told the story of a professor he knew who took out a mortgage he really didn’t need right before the huge runup in inflation and interest rates back in the late 1970s. “Eventually,” said Sprinkle, “he bought a Treasury bond at 15% that would pay off his 5% mortgage. I don’t know if we’re going to have that same kind of opportunity,” he added, “but I suspect that sometime over the next 10-20 years, they might have an opportunity to have the government pay a lot of their mortgage. It’s a rare time in the markets.”

Crypto questions

The most talked-about quote of the conference came when keynoter David Kelly was asked about bitcoin, and he said that he believes that bitcoin “is more of a cult than a currency.”

So how have the panelists been answering client questions about whether they should go all in on crypto, or merely add cryptocurrencies to an otherwise diversified portfolio?

“I think people have to understand what it is and what it is not,” said Sprinkle. “David Kelly went on to say that real currencies are transparent and stable. Bitcoin is neither of those.” He might also point out to clients that there’s some additional risk to crypto holdings that aren’t related to the markets. “Some 22% of the total bitcoins are out of circulation, because people either lost the passwords to their digital wallets or died and the password was lost,” he said. This, of course, is in addition to the hacking that the crypto exchanges are constantly reporting. “There is no help desk you can call to get your money back,” Sprinkle added.

Astrinos offered a more basic assessment of the crypto ”opportunity.” “I tell my clients that I wouldn’t have a job if I put everyone in high-risk asset classes that don’t have a defined history of expected return,” he said. “People come to me to stay wealthy, not to get rich on some speculative investment. If they want to do it on their own, I say, by all means, as long as it doesn't affect the core portfolio.

“That usually kills the conversation,” Astrinos added. “But if clients are still interested, we carve out some money and they do what they want. Not many people take me up on that. I honestly don’t think the bitcoin founders intended for it to be a get-rich-quick scheme.”

Taxes and portfolios

Many of the ENGAGE sessions were focused on how to plan for the various tax proposals percolating in Congress. Sprinkle said that the immediate implication of higher tax rates – and potentially higher capital gains rates for anyone reporting over $1 million in income in any one year – was to turn conventional wisdom on its head.

“Instead of harvesting losses, as we normally would, we’re planning to be gain-harvesting this year at today’s lower rates,” he said. “And we’re deferring losses into the next tax year, where they’ll potentially be more valuable.”

Sprinkle also noted that the last tax bill was passed in late December, giving advisors just 11 days to respond with whatever strategies they were planning to implement. Therefore, he suggested that the advisors in the room talk to their clients now about proposed strategies and get everything set up ahead of time.

Such as? “If you have gains in your taxable portfolio, donor-advised funds are a slam dunk,” he said. “But for your clients who have charitable intent, you need to get all that arranged beforehand.” He is talking with clients about Roth conversions at today’s lower rates, filling up the lower tax brackets for clients.

McMillan said that it’s important for advisors to reach out to clients who won’t be affected by the proposals, but who have heard vaguely alarming things and might be worried. “Nobody is totally free of being impacted,” she said, “but if there is a low likelihood that this will hit them in a material way, and you reach out to them, they might be able to sleep better at night.”

Each panelist is talking with clients who might have a significant liquidity event coming up – the sale of a business or recognizing gains on stock options – which might push them over $1 million in an anomalous year ($1 million is a threshold that has been proposed to trigger a higher capital gains tax rate). That also impacts the gains-harvesting decision; if a client has a liquidity event, you don’t want to harvest gains that would push him or her over the $1 million threshold.

“The clients who are about to sell a house or a business, those are the clients you need to talk to right away,” said Sprinkle. “If capital gains rates do go up, most of the people who will be hit by this are in these one-time situations.”

Astrinos, following up on what Sprinkle said, is setting the table for his clients making qualified charitable distributions out of their traditional IRA accounts – which allows them to, effectively, get the full value of the charitable deduction despite today’s high standard deduction threshold. “You have to get those accounts set up ahead of time,” he told the group. “You don’t want to be pushing this all through in December.”

The panelists were bullish on the long-term future of their clients’ investments, even if some caution is warranted in the short term. “If you look at all the changes,” said Sprinkle, “We have not had a true shift in the global economic landscape since the late 1800s. But you see what’s happening today with driverless cars and 3D printing, robotics and the revolution in bioengineering and medicine – I think we’re going to see exponential growth and advancements that we cannot currently fathom.”

He added that it would be folly to predict which companies will be the winners in that new reality, just as the client who predicted those 10 winners back in the tech boom got it wrong on eight of them. “I tell clients, we don’t have to buy Amazon at the IPO,” he told the audience. “If we buy Amazon 10 years after it happened, we’re fine. If you’re well-diversified, if something does hit, our clients have participated. I think it’s going to be really exciting what’s going to happen in the next 10 to 20 years.”

Bob Veres' Inside Information service is the best practice management, marketing, client service resource for financial services professionals. Check out his blog at: www.bobveres.com.

More Portfolio Building Topics >