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Talli Sperry: Research shows that wealth management guidance can benefit most investors, no matter how well we think we manage our portfolio. I’m Talli Sperry, and welcome to tonight’s live webcast, “Wealth management: Are you truly prepared?”

Now before we dive in, if you need to access technical help, it’s available by selecting the blue widget, and that’s on your left. And you can learn more about Vanguard services by clicking on the green Resource List widget, and that’s on the far right of your player, where you can view webcasts, replays, or listen to our latest podcast episode.

In this live webcast, we’ll discuss topics even savvy investors struggle with and explain how an advisor can help. We’ll talk about why wealth planning is more than simply asset allocation, the benefits of having a coach by your side, and tax-efficient cash-flow strategies.

And joining us today to answer your questions are Fran Kinniry, who holds the Chartered Financial Analyst® designation and is head of Portfolio Construction with Vanguard Investment Strategy Group, and Bryan Lewis, a Certified Financial Planner™ professional and a senior financial advisor with Vanguard Personal Advisor Services®. So, Fran and Bryan, welcome.

Bryan Lewis: Thanks.

Fran Kinniry: Thank you, Talli.

Talli Sperry: To help us understand your particular area of expertise, could you each share a little bit about what you do here at Vanguard? So, Fran, maybe we’ll start with you.

Fran Kinniry: Sure. Investment Strategy Group at Vanguard is really the research arm of Vanguard on the capital markets. So we talk about the economic outlook, our capital markets outlook, along with portfolio construction and wealth management. So we oversee our outlook on the capital markets, but then also how an investor may think about putting the portfolio together.

Talli Sperry: Great.

Bryan Lewis: So I’m a senior financial advisor with Vanguard Personal Advisor Services (PAS), and basically focus on wealth management for my clients. So I partner with families within our ultra-high-net-worth group and really help to build customized financial plans for them, help to manage their personal assets, their trusts, their foundations, their family partnerships, and really help to increase the likelihood that they’re going to be able to meet their long-term objectives; and I really help to not only just manage their portfolio but help to plan ahead for estate planning, tax planning, charitable giving, gifting strategies. So a lot of the elements to what Fran just talked about around wealth management.

Talli Sperry: That’s great. So, we’ve got two really important experts that can give us lots of practical advice here tonight. So thank you both for joining me.

So Fran and Bryan are here to answer your questions, some of which you submitted ahead of time, but it’s not too late. We do encourage everyone—whether you’re a member of the Vanguard community or if you’re here for the first time—to send us your questions throughout tonight’s webcast.

Shall we begin?

Bryan Lewis: Sounds good.

Talli Sperry: All right. So at Vanguard, our goal is to provide investors like you with the best chance of investment success; and so tonight’s discussion is all about you. We want to hear from you. And to help Fran and Bryan get to know you a little bit better, we have two poll questions we’d like you to answer.

Our first poll question is on your screen right now and that says, “When it comes to wealth planning, which of the following concerns you most: financial planning, estate planning, market volatility, or legacy planning?”

While everyone responds to the poll, Fran, let’s have you kick us off with maybe our first presubmitted question. So we’ve got Rowena from Westport, Washington, who asks a very comprehensive question, “What is wealth management?”

Fran Kinniry: Yes, so wealth management—you talked earlier about investment management—and so the differentiation is: investment management is clearly just on the investment side. So you think about how you would allocate between stocks and bonds, whether you would use the S&P 500 or the total stock market, how much you may want to have in international versus the U.S. So that’s really investment management.

Wealth management is more comprehensive. It includes the investment management, but then takes into consideration all the other stuff that that Bryan was talking about. So the investment management is just one small part. So, if I had all of my assets in a 401(k) plan, and that was 100% of my assets, a Target Retirement Fund would do a great job on the investment management side.

But as a high-net-worth person who has taxable assets and tax-deferred assets, you have to start thinking about things like asset location, legacy planning, financial planning; and they actually can have a dominant portion of success or lack of success as it relates to the wealth planning relative to the financial planning or the investment planning. So it’s a comprehensive strategy that puts it all together with one primary advisor.

Talli Sperry: Great. And I do see my clients finding that those comprehensive approaches make the difference between success or not.

So, I think our poll question is really interesting. We have almost an even split here. So, when we look at financial planning and estate planning, we’ve got about 30% in both buckets. And then I think we see clients are most concerned with market volatility next and then last, legacy planning. So, I think your point about comprehensive planning is really important here, because it looks like we have some portions we do need to talk about tonight.

So maybe as we move into our next questions I’d love your reactions on this poll.

Fran Kinniry: To me it’s not surprising, Talli. I mean it is a comprehensive plan. If you want to kind of think about your wealth in a different way, think about your health. You wouldn’t just concentrate maybe on your arm or your leg, but you want to think about the comprehensive health of yourself. And so wealth planning really does that. It’s all aspects of what is going to either generate wealth, preserve wealth, or to be able to give wealth to your next generation.

Talli Sperry: Great.

Bryan Lewis: Yes, I think a lot of people tend to just to focus on the investment management piece, to Fran’s point earlier. And it doesn’t surprise me that legacy planning is generally in the lower end of that. I do find with working with clients, it tends not to come up as far as a discussion with maybe the spouses. So, having that partnership with the advisor, you start to do this more comprehensive view of not only just the portfolio but the holistic wealth management, and really look at not just the portfolio but estate planning, tax planning, and just ways to maybe gift money to your heirs or to charities in the most tax-efficient manner.

Talli Sperry: That’s great. Big picture is always important. So furthering that theme, I’d love to get an idea of where our audience stands on just how they think about their portfolio amidst market volatility. So, we have another poll question for you, and this one says, “In times such as 2008 and 2009, the global financial crisis, do you tend to remain committed to your asset allocation?” It’s a big question here.

So our answers are, “My asset allocation remains consistent because I rebalance faithfully; My asset allocation changes but based on my goals and objectives changing; or My asset allocation changes based on how the market is performing.” So if you’d like to take a moment to answer that question, we’ll come back when we’ve got the results.

And in the meantime, Bryan, I’ve got one for you. So we have Valerie, from Portola Valley, California, who is asking, “I’ve been doing my own investing for many years. What are the issues I should watch for to know that I’ve reached a point where I need to turn it over to advisor services?”

Bryan Lewis: Yes. It’s a great question. I think in talking with clients, there’s a number of things that I’m looking for. Generally, there are themes that do stand out whether you’re a novice investor or an experienced investor, but ultimately, I think you need a plan and you need a strategy in place. You need to be able to define your goals to be able to build a balanced portfolio to achieve a specific target asset allocation. So you think of your stocks, your bonds, your cash, how much you should have in each. Look at the sub-asset classes around international versus domestic, large-, mid-, small-cap, or just the size of the companies and how much to have in each. But you have to do that through low-cost investing and you have to be disciplined.

And I think a lot of people are able to build that plan and look at the discipline piece, so, for example, if you’re someone who never rebalances, that’s generally a good indication that you need help. Or somebody that reacts emotionally to news that just came out, that could be a huge detriment to the portfolio in the long run.

But, ultimately, you do need to plan and even to take that a step further, you need to be able to look at the portfolio tax-efficiently. You need to be able to know which investments you should be buying in a nonretirement account versus in an IRA or a tax-deferred account around asset location. You need to think about the gifting strategies and maybe think ahead around estate planning strategies.

And a lot of the time as an advisor, I have to be very forward looking—meaning I’m not just looking about how something may impact the client today. I’m very much looking at, how are things going to impact the client maybe 5, 10, or even 15, 20 years from now?

And at the end of the day, you might say, “Bryan, you know what, I’m comfortable with everything that you’ve just outlined.” And my follow-up question is usually, “Well, what about your spouse?” So, if you’re married, how have you planned ahead as far as if you’re maybe the primary decision-maker when it comes to investing, which is generally very common, what about your spouse and what’s your plan to accomplish that should maybe you predecease your spouse?

But at the end of the day, I think it comes down to your time, your willingness, and your ability. And if you’re missing maybe one of those three key elements, then I think it’s probably likely that you should pursue working with a financial advisor.

Talli Sperry: I think that makes sense. It sounds like there’s a lot of things we need to think about at the same time and also think short and long term. And then you’ve got the piece of educating others to make sure your plan actually goes into effect. So there’s a lot there.

Bryan Lewis: Exactly.

Talli Sperry: I do look forward to diving into that a little bit more, but I want to get to our poll results. So this is interesting. We do have about 50% of our audience that says their asset allocation remains consistent because they’ve rebalanced faithfully. So a big thumbs up to all of you. That’s wonderful.

And then we’ve got about 24% that says their asset allocation changes, but it’s based on goals. And then we have 18% who are just really honest. Thank you so much. You noted that the market moves you. Any reactions to this?

Fran Kinniry: So one of our roles in the Investment Strategy Group is to study investor behavior, and so it’s probably one of the things I spend a lot of my time on. And so we watch cash flows in the industry and Vanguard cash flows. It doesn’t surprise me that we have a very well-behaved audience that’s attending tonight. But when we look at it in aggregate, chart after chart that we put out there, I put out something every month called the Vanguard risk speedometer. So if you want to go to, they’re up every month. And it shows what investors are doing. And, clearly, the average investor or the average dollars invested are following the markets.

We saw record low equity allocations in February of ’09, so equities went from 70% down to about 35%. Money markets went from about 20% to 55%. And so investors clearly struggle with rebalancing. Not this audience, but for the vast majority of investors and sophisticated investors. What we’ve learned really well is that IQ or sophistication has nothing to do with behavior. So I’m not looking at households, I’m looking at dollars.

And so wealth is concentrated in the top 1% to 2% and it’s also concentrated by endowments and foundations. And so when I’m talking about behavior, I’m talking about the most sophisticated behavior out there, and it follows the market. If clients were rebalancing, you would see almost a straight line across in stocks and bonds, but it really follows the market, which means that clients get a return that is much lower than the published returns of the funds.

Talli Sperry: That’s interesting. So there’s a lot there with the behavioral finance component. And we are emotional creatures as human beings, so that makes sense.

Bryan, we have a live question for you. And this one is from Timothy who’s asking, “How do I get connected with a Vanguard wealth management advisor?”

Bryan Lewis: So, I would encourage the individual to contact Vanguard and what they’ll do is schedule the appointment with the advisor. So, I would definitely give strong thought to starting to think about what your goals and objectives are because as an advisor, and certainly acting as a fiduciary, my objective and all of our advisors’ objectives would be to get to know the client and understand what they’re saving for. But the easiest way is just to contact Vanguard and we would schedule the appointment with the advisor.

Talli Sperry: That’s great. I’d also like to note, in our discussion in our Resources and our Tools on your browser, you’ll see something that says PAS Offer. And if you click on that in the Resource widget, you’ll see a little bit more information about the service and also how to contact us accordingly. And you’ll be lucky enough to speak with someone like a Bryan.

I’d like to move back to some of our presubmitted questions. So, Fran, you’re in the hot seat with this one. And this is from Bob from Simsbury, Connecticut, who’s asking, “How does Vanguard measure the degree to which the advice it provides adds value to client portfolios?” So important one.

Fran Kinniry: Yes, so Vanguard, actually, my team pioneered a whole body of work called Vanguard’s Advisors Alpha®. It’s become industry standard. And we did that in the early 2000s, and we’ve been tracking it ever since. And what we really have shown is the value of advice in most circumstances pays for itself. So you think about if you pay let’s say one-third of 1% or something close to that, and so that’s a cost; but then all the value that you get relative to if you had done that on your own.

And so we’ve been able to quantify this over time. And what we have shown is that the value of advice really pays for itself, back to the behavioral coaching. There are many things that come into it. Behavioral coaching is just one. A lot of the things that Bryan mentioned around tax planning or asset location. So we’ll see clients having the wrong instruments or the wrong funds and the wrong registrations.

Let’s just say you’re an investor who’s looking to spend wealth, how do you get money to your household in a very tax-efficient way using HIFO (highest in, first out) accounting.   Even if you have a 5% cash drag and the market tends to have a 5% to 6% premium over money market, just by someone making sure that there’s no cash that’s not supposed to be there laying around, that’s a third of 1% right there if you just have 5% or 10% of cash that’s misallocated.

So when it’s all said and done, the cost of advice—the returns that you get after paying for it, probably pays for itself 2, 3, 4, 5 times depending on the individual.

Talli Sperry: Sounds like we see it in our theory, in our research, and broadly. And then, Bryan, do you see it with your clients daily too?

Bryan Lewis: Yes. So, I think to Fran’s point around quantifying, so if you have 1 million dollars managed, you’re paying $3,000 for a management fee, you can wrap your hands around how much you paid for that.

Talli Sperry: Just incredible. That’s a really incredible price.

Bryan Lewis: Right. And looking at how investors actually react to that is very different by client. So I’ll have some clients who value that connection with their spouse. So getting to know the family is incredibly important to them. So putting a value on that is different to somebody who’s looking at Vanguard more for the rebalancing piece.

So it’s very different by client depending upon their needs, but I think at the end of the day—to your point around the fees—I think the idea is Vanguard believes a lot of people overpay for advice. And even when you factor in the expense ratios, the idea is there, try to keep the cost as low as possible.

Talli Sperry: That’s great. So it sounds like we provide value for investors across multiple components there.

Can you both dive into the behavioral coaching component? We’ve referenced that a couple of times and I’m not sure if everyone in our audience is familiar. So I’d like to draw that out because I think that’s as much of a value to the service as is the actual returns.

Fran Kinniry: Yes, so the behavioral coaching is one of the main modules of Advisor’s Alpha that we’ve developed. And for those of you watching, may be familiar with Morningstar, they do a behavioral gap. Vanguard has our own behavioral gap and it’s about 150 basis points. And it’s easy to look at.

Talli Sperry: And, Fran, what does that mean?

Fran Kinniry: I’m sorry. A basis point—so 150 basis points is 1.5%. And the way we know this factually is each fund at Vanguard—you can look at it on or on Morningstar—has the internal rate of return. We’re going to get a little technical, so I do apologize.

Talli Sperry: That’s okay. Just translate for us and we’ll track with you.

Fran Kinniry: But the internal rate of return (IRR)—it captures when the money is coming in. So if there was not a lot of money in the market in February of ’09 because investors were selling, but then the market went up big in 2010, the IRR is smaller than the time-weighted return, which would be the published fund return.

So investors trail the funds and their asset allocation on average by 1.5% a year due to their own behavior. And study after study, whether you look at Morningstar and many of our other competitors—we run our own. I’ve been tracking this for my entire career at Vanguard. I started it. It’s about 1.5%. That’s on average. Some clients it could be 5%. Other clients it may be smaller than that. But for almost all investors we see that drag being much larger than the cost of advice.

Talli Sperry: So we step on our own feet.

Fran Kinniry: Correct.

Talli Sperry: Bryan, what do you see with your clients?

Bryan Lewis: I think that’s the value of working with an advisor. So, I think of 2016, there were a number of events that had happened in 2016. You had the concern with China and a hard landing. A lot of professional money managers were moving to cash. The markets went up. You had Brexit in the summer. People moved to cash. The markets did the exact opposite. And we all know what happened with the election. The exact opposite had happened with the markets. So I think the behavioral piece and the discipline I can provide to my clients is that I can continue the conversation and I know my clients. I know what their goals and objectives are. And we’ll be able to talk through why it may make sense to make a change versus most likely it does not make sense to make a change.

Talli Sperry: That’s helpful, really helpful.

Fran Kinniry: Yes, I think there is this idea that, “Maybe I can do it better.” There’s always the, “I’m unique or different.” But it’s really hard to have a contrarian mindset, you know, to think about buying something that’s off 50%. So I do applaud the 50% of investors who did stay the course in 2008. And I actually think we see some behavior with wealth, because if you have $10 million and you’re off 50%, that might be a little different than if you have $100,000. The stakes are larger.

And so the behavioral coaching at the larger wealth pools really seem to be where you want to be coaching, because if I have $100,000 and I go to $50,000, I might be able to stay the course.

Talli Sperry: You could recover.

Fran Kinniry: As a young investor, you could stay the course. But once you’re in wealth preservation mode and you have $5 million and now you’re at $2.5 million, to stay rebalanced in that environment, that’s quite a challenge.

Talli Sperry: And that can mean the difference between giving your family a legacy gift or not. So that’s significant.

I think it’s interesting to think about the different times we need to be cautious. So it’s not always just when our emotions get the best of us on the downside and when we’re fearful. Sometimes joy can cause us to overestimate too.

Bryan, what do you see across your ultra-high-net-worth clients? I think we talk about this behind the scenes as a pretty frequent thing we see happen.

Bryan Lewis: It is and there’s a lot of simple things investors can do. So we talked about the asset location concept. That is something that can make an immediate savings. And when you look at the tax benefits of lowering the costs and then you think of the compounding effects of that over many, many years.

Talli Sperry: And I’m just going to ask you to define asset location and compounding because we have a wide audience tonight.

Bryan Lewis: Sure. So, asset location, the idea is if you have a nonretirement account and a tax-deferred account, like an IRA, the structuring of this is incredibly important. And this is one of the most common things that’s overlooked by a lot of investors is Vanguard is a strong believer of owning the tax-inefficient investments in an IRA or a tax-deferred account. And by tax inefficient, I mean investments that generate significant amounts of income. For example, bonds, taxable bonds are ideal for IRAs, investments that generate significant amount of capital gains distributions. So you think of actively managed investments, REITs. So, ideally, those should be in a tax-sheltered account where you don’t have to worry about the taxes because that’s in a tax-sheltered vehicle versus the nonretirement account, such as a joint account, you want to own stock index and stock ETFs ideally because they don’t generate nearly as much distributions and the capital gains risk is minimal.

So if you structure it that way, based on Fran’s research, it helps to save money and you get to keep more of that net return because you’re paying less in taxes.

Talli Sperry: That’s great. So I do just want to make a point of clarification. We’re getting a lot of your questions about what is an ultra-high-net-worth client? And at Vanguard our offer for ultra-high-net-worth clients starts at $5 million and then anywhere between $5 million and above. Any other insight to add on just general perspective on ultra-high-net-worth clients?

Fran Kinniry: I mean the one that we also see is family governance or when do you talk to your adult children, in many cases? So as we age more, we’re no longer gifting to maybe 30-year-olds. We may be gifting to 50- and 60-year-olds. I get to work with some of our largest clients at Vanguard. The question we most get is, “When would I feel comfortable sharing my plan and my wealth strategy and how much is there, how much may I leave to charity versus to my children?” And so those conversations I think are something that is very unique to this profile of a client. The “when” and the “where” and the “how” the assets may eventually go is something, obviously, unique to a $5 million+ family.

Talli Sperry: I think that’s fair. I think the higher dollar amount we see the more comprehensive needs are there, right?

Bryan Lewis: Yes, I agree. And, also, I think some of the fundamentals that we’re talking about is applicable across the board, not just for ultra-high-net-worth clients. But if you have $50,000 or $50 million, a lot of what we’re talking about today is very applicable.

Talli Sperry: I would agree, yes. So even for those kids and those grandkids that might be inheriting from an ultra-high-net-worth client or starting to save themselves. I know we were just talking about your daughter and her 529, right?

Bryan Lewis: Exactly.

Talli Sperry: So anywhere. All right. Let’s move to some presubmitted questions. So, Fran, we are going to stick with you in the lead here. We’ve got Sharon from Dennis, Massachusetts, who’s asking, “What’s a reasonable asset management fee?”

Fran Kinniry: I would say it’s very unique, meaning that you really should align yourself first and foremost with someone that you really trust. And does the provider you’re working with have fully your best interest in mind? So the first thing I would always ask—people ask me all the time, you know—I always look at what are the incentives. And so are the incentives 100% aligned to your family, and then trust.

But then what type of relationship do you want? Do you want a very high-touch relationship where you’re meeting on a very frequent basis in a local setting, or are you more comfortable dealing with maybe a more virtual situation? And there’s not a right or wrong answer. Personally, I don’t know you have to put a high premium on the high-touch service—because I would argue that what we can provide, or any other provider, if they’re doing things right, if the incentives are aligned and they have a good wealth planning and financial planning core, which most places will do—whether you work virtually or you want to pay for a premium is really your own unique preference.

But, again, we talked about $3,000 on $1 million. If 1% is the normal run rate of advice, so now you’re $10,000 on $1 million

Talli Sperry: Which is a big difference.

Fran Kinniry: So, for that $7,000—I don’t want to be cynical—but I think what you’re really getting then is just the ability to walk in and shake hands.

Talli Sperry: Yes.

Fran Kinniry: Or they’re a golfing buddy or they’re someone in your local community. That may be fine and that may be perfectly fine for anyone, but that’s a premium you have to decide as your own family.

Talli Sperry: And you have to make a conscious choice and then even look at the compounding, to your point earlier, of what does that add up to over X number of years?

Bryan Lewis: Yes, I think a lot of clients it very much depends on the situation. But if they’re really only providing asset allocation advice, well, then, yes, I think you’re probably overpaying for that advice.

But as you look into all these different complexities, it’s very unique to each person whether you value that or not. But at the end of the day, I think lowering fees is a good thing for the investor.

Talli Sperry: Great. So I love that we’re getting to so many of your questions tonight. And please continue to submit them so we get more live questions. Stay in the discussion with us; it is for you. And in the meantime, we’ll talk about Myra from Andover, New Hampshire’s, question. And she says, “Please explain Vanguard’s investment methodology.” So we’ve got the right person to do that tonight.

Fran Kinniry: Yes, so our methodology, in short—because I could go on for the rest of the video, which I won’t do. So the general principles we believe in is that each investor family has unique goals and objectives. And so there’s not a right answer. An 80% stock portfolio, 20% bonds is totally appropriate for one family, and at the other end maybe a 20% stock, 80% bond is the total right allocation for the other family. So I think what we really do well is figure out what are the goals and objectives, the risk tolerances of the family.

And then from there within the asset class, we very much believe in being market cap-weighted or market proportional, meaning that we don’t overweight large, or growth, or small, or value. We own the market because the market is a really free-functioning auction market, so every day prices are set by consensus, so when we set a market cap-weighted and then low cost.

And a lot of people think it’s all indexing. It doesn’t have to be indexing. Almost all of our tax-exempt bond funds—which many of the clients watching own—are active. It’s really active/passive is out of context. It’s really is it low cost highly professionally run? But at the high level, it’s what are the unique goals and objectives, then market proportional/market cap-weighted, and then implementation is with talent and low costs.

Talli Sperry: Great. Good comprehensive explanation.

So we have a question that’s a live one, and it’s from Philip who’s asking, “In order to rebalance my portfolio, I would have significant tax consequences. The consequences seem to make it very expensive to rebalance.” And I think we had a presubmitted question that was very similar, so this seems on the mind. Fran?

Fran Kinniry: Yes, we always try to tell everyone, “Do not let the tax tail wag the dog.” I’ve seen so many families—and I do empathize with you—but we’ve seen so many cases where market returns are so much more volatile than paying the tax. I think the submitted question that you had, Talli, was around someone who may have concentrated equity. We see that a lot. So, whether it’s rebalancing or a concentrated stock option or anything else, you have to think about it.

First off, if you have let’s say even a double, a 50% gain and then you have a 20% capital gain rate, the hit on that net/net is about 10%. There’s days where the market was moving 3%, 4% and so we’ve seen many events where the market go off 20%.

So what I would first do is try to use any new cash flow to rebalance. Make sure that you’re doing that. But beyond that, I would definitely—if you’re really out of balance—take the capital gain and make sure you have the right asset allocation for all markets.

Talli Sperry: Because it becomes a healthy starting point, right?

Fran Kinniry: Yes. I mean it’s not going to go away. Obviously, we don’t want to get into step-up in basis, but all you’re doing is deferring the tax unless you are, unfortunately, near death, which would be a step-up in basis, which is technical, but we don’t need to get into that. But, obviously, you want to have the right asset allocation. The market volatility is significantly greater than the taxes owed.

Bryan Lewis: Yes. and I will say that there’s ways to reduce that concentration as well, so Fran alluded to the point where, all right, maybe you have an actively managed fund. Ideally that’s not preferred for a nonretirement account or just an investment that’s highly concentrated. You could maybe change the dividend or capital gain election so that you’re not reinvesting more into that position.

For those that are philanthropically inclined, you could maybe gift and focus on that asset as source of the gifting. Maybe it’s to charities or to family, but at the end of the day, you might have some losses that you could use to offset those gains and then chip away at it.

And those are exactly what I do with my clients—there could be a million or two dollar capital gain for a position. No, you may not want to do that all at once, but there’s ways that we can work with you to try to reduce that concentration.

Talli Sperry: That’s great. Bryan, we’ve got someone asking, and this is Winston from Burbank, and he’s asking, “How often do you meet with your clients to influence their behavior?”

Bryan Lewis: It’s a good question. So for our clients that we manage, we look at their portfolios on a quarterly basis. So it’s very dependent on the client need. Some prefer just talking once a year, some prefer more than quarterly, as far as discussion. I want to be clear we’re not actually rebalancing every single time we’re doing the quarterly reviews, but we’re making sure that the portfolios are remaining disciplined and on track.

I do travel to meet my clients, so being able to see them in person is an option as well, which is great. We do video conference, so being able to connect with the clients via video is just another way to be able to put a face with the voice on the other end of the line.

Talli Sperry: That’s great. So we see a little bit of your personality environment and get that kind of coffee across the table feel.

Bryan Lewis: Exactly.

Talli Sperry: That’s good. Fran, you’re sparking a lot of interest with your notations about your research. Mary from Metz is asking, “How does a Vanguard investor get access to the research that Fran’s group publishes?”

Fran Kinniry: Yes. So the web, you know, so we have, multiple websites  that anyone can go out and use. They could Google my name or Google Vanguard’s Investment Strategy Group, and all of our research is out there.

Talli Sperry: That’s great. So just going to and our Retail Investor site, that’ll allow you to explore a lot of topics. And I think if you put Fran’s name in there, you’ll certainly see quite a few come up. So thank you.

All right, so we’ve got Ren from Issaquah, Washington, who’s asking Bryan to please discuss the asset allocation formula. So how do you think about your clients, Bryan?

Bryan Lewis: Sure. So I don’t think there’s a magic formula. It is very unique for each client. So you could have clients at the same age that have very different asset allocations.

One of the common ones that I do hear is you should take 100, subtract your age, and that’s the percentage that you should have in stocks. So, for example, a simple way of putting it is: an 80-year-old investor would have 20% stocks, 80% bonds. And often time that’s flawed. It’s usually either too conservative or too aggressive. There’s an investor questionnaire that clients can use on the Vanguard website as a starting point, but I think it depends on your goals, your risk tolerance, and your time horizon for the money. And, ultimately, looking at the asset allocation is by far one of the most important decisions you will make with the portfolio.

So we follow a top-down approach, meaning we start with your asset allocation decision, which is your percentage of stocks, bonds, and cash. We’ll start looking then at the sub-asset classes, which would, again, be the international U.S., how much large-, mid-, and small-size company exposure to have, and then, lastly, we’ll start looking at actually the investments that will make up that balanced portfolio.

And based on some of the research we’ve done, is the portfolio movement and the percentage when you look at truly what it is driven by; is it the asset allocation or is it actually the security selection or the even timing of the market? A lot of the portfolio movement over time is actually correlated with the asset allocation. Very little of, you know, the portfolio return, has to do with the timing of the market as well as the security selection that you choose.

Talli Sperry: I like how customized the approach you’re both talking about is. It’s really based on our investors’ goals, what they want to accomplish, and that becomes our starting point. So it’s very customized, isn’t it?

Bryan Lewis: Exactly. For example, I have clients who are in their 80s and 90s who have a higher percentage in stocks than some of my younger investors and that’s because they’ve transitioned from using the portfolio. Now they have more than enough to support their lifestyle so now they’re focused on growing the portfolio for their heirs. So it very much depends on the client need.

Talli Sperry: Super fun. All right. So, Fran, we have an interesting question for you. And this is from Steve from San Diego, California, who’s asking, “What does PAS [Personal Advisor Services] offer to a knowledgeable, experienced Vanguard client?” Now I know you are the biggest fan of PAS. Why? You are clearly a knowledgeable, experienced Vanguard client.

Fran Kinniry: Yes. I said earlier, and I’ll say it again, that we see no correlation to knowledge, sophistication, and actually studying. So wanting to know everything about the investment markets may or may not make you a good investor. And we see this time and time again when you go out and look at some of the top professions—and I’m not going to say what they are—but some of the top professions where you would have some folks that have some of the highest IQs and that really study this turn out to be actually not great investors.

The reason why I think that happens is because you almost have to have this very contrarian mindset. And so people who do research for a living you see patterns, you look at research, you expect it to last and you expect it to continue. And so if you use 5-star funds or you use what is the best Vanguard fund over the last 10 years, you would expect these patterns to continue.

It takes a whole other level of personality to go stay in a 1-star hotel. Think about that. Am I going to go eat in a 1-star restaurant? But the markets actually mean revert through time without a clock that tells you—mean revert, I’m sorry. So a mean revert, that’s where the 5-star restaurant next year becomes the 1-star and the 1-star restaurant becomes the 5-star.

Talli Sperry: So, we have to have restraint.

Fran Kinniry: So, we are so engrained to using consumer reports or the past as an indicator of the future because it works almost everywhere.

Someone asked about our research. So one of the research papers we did, we looked at all different varieties of medicine, education, TripAdvisor. And what you see is unbelievable persistence, meaning the best colleges don’t become the worst; the worst don’t become the best. Restaurants, doctor, top docs.

In the capital markets if you look at emerging markets, or REITs, and what their 10-year return was ending X, it’s unlikely that they’re still going to be the best 10-year return, 10 years from now. So it takes such a different mindset to actually go do the opposite of everything you’ve been trained to do. So, actually, the novice or the unengaged or the unsophisticated who’s not studying this. And I don’t mean that in a derogatory way. I mean just someone who is not paying attention.

Talli Sperry: It’s not their career. Yes.

Fran Kinniry: They can actually do a little bit better because they put the money in and they forget about it. The people who study it and actually really try to do well, our experience has been that they do themselves some harm there. And it’s mostly because of what we talk about, persistence into the future does not last.

Talli Sperry: So knowledge doesn’t always equal great impact when it comes to investing.

Fran Kinniry: Exactly.

Bryan Lewis: Yes, and I think with Personal Advisor Services, you’re going to be aligned with a senior financial advisor who works within our Flagship Select® group and you are aligned with somebody who has a CFP® or a Certified Financial Planner™ certification. So there’s a lot of experience that comes along with that. And I mentioned earlier being more forward thinking, meaning there’s other areas of opportunities that we need to be planning for, that you may not actually be thinking about.

So you think of, all right, maybe I’m in my mid-50s, how should I be preparing for eventually gifting to my family or estate planning? Or as you transition closer to Social Security, how are you going to handle claiming Social Security and maybe impacting your Medicare premium?

So, there’s a lot of different components to it and that would be the benefit of partnering with the advisors, that expertise.

Talli Sperry: I think as a nice segue, we’ve got Raj asking, “How would a Vanguard advisor coach a client toward positive investment behavior?” So how do you do it, Bryan?

Bryan Lewis: Yes, I think it comes with just multiple conversations and talking through with the client. So, it’s important. I need to know what their goals and objectives are, but I think it’s keeping the client in the loop, contacting them throughout the year. Clients can contact me directly. So, for example, if something comes out in the news and they’re concerned about their portfolio, they can contact me directly and we can just really continue that conversation. But I think it’s just over time the discipline. And people generally are at Vanguard for a reason, the kind of do-it-yourself investors. But it’s taking it to that next level and just being a bit more proactive in the planning process versus more reactive.

Talli Sperry: I think that makes sense. Again, it’s back to that comprehensive approach to wealth management and that it’s really a relationship that’s based on our investor. It’s not just a canned principle.

Bryan Lewis: Exactly.

Talli Sperry: That’s awesome. Good. So we’ve got Bruce from Texas who’s asking, “Does Vanguard plan to offer one-stop shopping for financial advice?” Fran.

Fran Kinniry: Well I would say Personal Advisor Services that we have now is one-stop shopping, right?

Talli Sperry: I would agree.

Fran Kinniry: So, you can have all of your assets that are here at Vanguard and also consolidate the assets. Because the other big advantage of advice in general that we haven’t really talked about is—we hear from a lot of families, “I want to kind of get all of my records or all of my financial stuff under one umbrella because through time and through the years, it ends up looking like my garage, like things all over the place.” And at some point, it’s a good idea to kind of consolidate because if you’re running one portfolio or asset management per proprietor X, Y, Z versus another at A, B, C, they may be actually doing opposite things. So, I would say the one-stop shop is Personal Advisor Services, and it would meet all of your needs for what that investor is looking for.

Talli Sperry: That’s great. So, I do want to move through some of our questions here that are presubmitted. Please keep submitting those live questions. So we’ve got Raj from Scottsdale, Arizona, who’s asking us to discuss the new tax laws and their impact on investors.

Bryan, this has been an interesting year for you as an advisor. What have you seen?

Bryan Lewis: And I’m sure we could probably talk the whole hour about this one alone, but there are a number of opportunities that are presenting themselves, and this is where I think you have to be a bit more proactive and really see how this could impact you. So some of the changes were temporary and some are more permanent. And I’ll explain that in a few minutes, but some of the big ones that we see that are impacting most investors are the marginal tax brackets.

So most people find themselves in a lower tax bracket now and often I’m asked, “Well, how does that impact me?” So for investors that were maybe previously in a higher bracket, it may present opportunities to revisit your saving strategy. So previously maybe you were doing a 401(k), which was pre-tax, so you get the deduction, maybe a traditional IRA. Now it may present opportunities to, if you’re eligible, to have a Roth IRA or a Roth 401(k) if your employer offers it, and just look at how your saving strategy may change.

That also holds true, for example, high-net-worth investors generally are in a higher bracket as far as a tax bracket. Maybe they are previously using tax-exempt or muni bonds. So maybe that actually presents opportunities to look at taxable bonds if they’re now in a lower bracket, obviously, being mindful of the tax implications if you make any changes.

One of the bigger changes too, based off that, would be Roth conversion. So a Roth conversion, an example would be if you have $100,000 traditional IRA and you start shifting money over to a Roth IRA, that’s considered a Roth conversion. So every dollar that you move over to the Roth IRA would be taxable. So if you find yourself, again, in a lower tax bracket, it could present an opportunity to do Roth conversions.

And under the old law with Roth conversions, you were actually able to undo that Roth conversion. It was called recharacterization of a Roth conversion. So, with the new law, you’re actually not able to do that any longer. It’s a one-way street so you have to make sure it makes sense based on your situation to do that.

The one point with the tax brackets is they are scheduled to sunset at the end of tax year 2025, meaning at the beginning of, so January 1,2026, unless things change, they’re going to revert back to what they were previously as far as the tax bracket. So that could be a window of opportunity for investors to start thinking about various strategies to take advantage of that.

Additionally, you look at the standard deduction for a lot of people from an income tax perspective almost doubled. So, for example, an individual taxpayer it’s $12,000. If you file jointly, it’s $24,000. And you may ask, “How does that impact me?” Well, if you’re charitably inclined and you’re giving to various charities, well, a lot of people may not actually be able to deduct that unless you have in excess of the standard deduction. So that could be a strategy actually to group your charitable gifts maybe to every other year or every few years to take advantage of those itemized deductions.

And then just one last point on the taxes is the state and local taxes are now capped at $10,000 so I have a lot of investors who are in high-tax states who are going to be really impacted by that. So how does that impact them? I think a qualified tax advisor certainly could be somebody that you can work with to look at that.

And the last point would be estate planning. So, the federal estate exclusion amount increased to 11.2 million per person. And that was a dramatic change for a lot of people. So maybe do a more advanced planning right now because that is also scheduled to sunset at the end of 2025. So taking advantage of that, maybe doing more gifting while you’re alive versus upon your death.

Talli Sperry: Sounds like taxes are one of those key places we need to think about now and the future at the same time.

Fran Kinniry: Exactly.

Talli Sperry: I want to sneak in one question really quickly, and this was a presubmitted question. This was from John, who said he’s amassed a sizeable IRA balance, one that would push him into the highest tax bracket. And he’s asked, “Would it be advisable to turn it into a backdoor Roth IRA?”

Bryan Lewis: Yes, and a clarified piece, too, with the backdoor Roth IRA. So that would be for somebody who’s trying to go into a Roth IRA, but they earn too much. So the strategy would be to go into say a traditional IRA, make a nondeductible contribution, meaning you’re not able to claim that as a deduction on your tax return, and then you shift the dollars through a Roth conversion into a Roth IRA. I think the premise of the question is around if you have a sizeable IRA, should you be more proactive in getting ahead of that before you turn age 70½ when you have those mandatory distributions out of an IRA?

So if you find yourself in a lower tax bracket now versus later, that could present opportunities to do maybe partial Roth conversions knowing that these are going to be taxed as ordinary income. And as you look ahead, as an advisor, I preach a lot about diversification amongst stocks, bonds, international versus U.S., but there’s also a benefit of tax diversification as well.

So what I mean by that is you have pre-tax money, you have after-tax money, and then you have tax-free money. And that just allows investors more flexibility, for example, in retirement in picking and choosing assets to manage their taxes a bit better.

Talli Sperry: Okay, great. So I’m going to do one of my favorite webcast things, and that’s I’m going to put you guys through a lightning round. So short, quick answers, but make them as comprehensive as possible so we can get through your questions.

So, this is Hormose from Virginia Beach, Virginia, who’s asking Fran, “With lagging markets should we still invest internationally?”

Fran Kinniry: Yes, I say diversification is like broccoli for kids. We know it’s good for you, but it really doesn’t taste that good. So, diversification, the question is U.S. and international look very different now. The U.S. is really outperforming international. And so we get the question, “Should we still have international?” And the answer is yes. It’s the reason why. It’s strange, a couple years ago we were getting the commentary that the world’s so global, everything’s going to look alike. The U.S. and the international are going to go up and down together. This is a clear reason why you want international diversification. You have two assets that have similar returns in the past, expected similar returns in the future with very different patterns. So the last ten years the U.S. has dominated, but the prior ten years non-U.S. dominated, and that is the reason for diversification. So it’s broccoli for kids.

Talli Sperry: Great. Broccoli for kids. All right, Bryan, this lightning is for you. So this is Scott from Dartmouth, Massachusetts, who’s asking, “How should I think about passing on wealth to my heirs?”

Bryan Lewis: Yes. So that can get pretty complicated, but a lot of people don’t think about this until it’s too late. But I think, ultimately, first and foremost, if you’re married, both spouses need to sit down and have a conversation about what you want your legacy plan to be. Do you want to leave money to your heirs, to charities, but really have a dialogue? And I do find a lot of spouses have different opinions on that. But, ultimately, I think you have to be on the same page and that could strike questions and concerns around leaving a significant amount of money to my children all at once. I’m worried about divorce, if they get divorced, keeping the money in the family.

Talli Sperry: It can change the way we invest based on those decisions.

Bryan Lewis: It absolutely can. Yes. So that could be opportunities to do more advanced planning through trust planning

But I think at the end of the day, if you have young children, maybe if you’re giving them an allowance to maybe tell them and teach them how to allocate a percentage towards savings versus spending versus maybe giving some of that money away. Or if you have older children, getting them more involved. Maybe giving them money while they’re alive just to teach them some of the fundamentals I think is critical. And a lot of the times you can do that maybe through family meetings, and just having that dialogue I think is key.

Talli Sperry: Okay, that’s great. So since you mentioned wealth management, I’m going to ask you this from Vic from Abilene, Texas, is saying, “What kind of advisor do you recommend for estate planning?” Estate planning attorneys, tax lawyers, etc., what do you recommend, Bryan?

Bryan Lewis: Yes. So my wife accuses me of being frugal, but I think when you look at when it comes to estate planning, there’s a time and a place to spend money and usually it’s with estate planning. You need a qualified estate attorney. So we do not recommend clients going on the web using a template or using somebody that maybe does this as a side job. You need somebody who’s qualified, who does this specifically. Particularly if your assets are at least $5 million or more, somebody who has that background when it comes to advanced estate planning I think is critical.

Talli Sperry: Great. So expertise matters quite a bit.

Bryan Lewis: Yes.

Talli Sperry: Okay, good. Fran and Bryan, I’m going to ask you what have we not talked about that you would like us to hear tonight and like us to think through? So, Fran, we’ll start with you.

Fran Kinniry: I think what we haven’t really talked about is maybe where the markets are at. A lot of what we do is market related and so we’re very, very happy that we came out of 2008 to be in one of the greatest bull markets of all time. But I think also, at the same time, we talked about what people did in ’08, ’09 as one of our poll questions. I would just caution everyone equally at the top. And I’m not saying that we’re at a top. We could be here ten years later and still be higher.

Talli Sperry: Sure.

Fran Kinniry: Just make sure you have the right asset allocation. Don’t forget about 2000 to ’02 when the stock market dropped 45%. Don’t forget about ’08, ’09 where it dropped 55%. Yes, it looks like interest rates are going up, but bonds have been the one clear diversifier to equity risk. High-quality, fixed income has tended to be the best diversifier when equities have a sell off.

So, I wouldn’t want anyone to leave thinking we think that there’s a bubble or the market’s going to sell off, but the market has always had a volatility to it, so within the next couple years, it would not surprise us at all to see a decline in the market. And I would say that in any webcast I was doing in any of the 20 years I’ve been here. So just make sure you have your asset allocation right even today where we’re at record highs.

Talli Sperry: I think it gets back to your point earlier in the webcast where you said, “Don’t let our joy get away from us and cause us to misstep.” So I think that’s the same great point. Bryan.

Bryan Lewis: Yes, I think that was well said. And I think a lot of the times it’s related to the markets you have that dialogue. But I mean there’s other elements, and I think a lot of people get tied to the management of just the investment portfolio. But I think it’s crucial that investors just continue to think about the other opportunities around tax planning and the estate planning piece just to take advantage of some of this.

Like I said, a lot of this stuff is actually scheduled to sunset, so it could be a temporary window. So being a bit more proactive I think is crucial.

Talli Sperry: Yes, I think that is crucial as we think through those layers. Great. Well, thank you both very much. Your expertise is very insightful. And I know I have a lot to think about.

So we have covered a lot of important material tonight. Thank you for being with us and for sharing your expertise.

Fran Kinniry: Sure.

Talli Sperry: And thank you members of the Vanguard community and those who may be new to our webcast for joining us tonight as well.

If you’d be gracious enough to share just a few more seconds of your time, we’d be grateful if you’d select the red Survey widget. It’s the second from the right at the bottom of your screen. We truly do value your feedback on tonight’s webcast, and we do welcome your suggestions for future topics you’d like us to cover.  And in the next few weeks we’ll send you an email with a link to view a replay of tonight’s webcast as well as links to some of the highlights of tonight’s discussion. And we’ll also include transcripts for your convenience.

And be sure to check out our new podcast series, The Planner and The Geek, featuring Vanguard’s own Maria Bruno and Joel Dickson. So, if you go on the first link on the green Resource List widget, you can listen to our most recent episode, which should highlight some things we covered tonight.

We’re so glad you spent your evening with us, and we sincerely hope you benefited from the program. We’d encourage you to continue the conversation with the Vanguard community on our social channels and on Twitter by going to @vanguard_group.

On behalf of our panelists and all of us here at Vanguard, thank you and good night.


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