As traditional pension plan programs have declined, the past two decades also have brought increased incentives to help investors fund their own retirement accounts, including higher annual contribution limits for all investors and extra catch-up allowances for those who are nearing retirement and may be behind on their financial goals.
Tax laws have really changed over the last 20 years. Overall, many tax rates have dropped significantly, but in recent years they have trended back upward. Long-term capital gains rate (for assets held more than a year) were high, and then low, and then inched back upward slightly, as has the tax rates for qualified dividends. The highest tax bracket for marginal tax rates (plain old income taxes) was 39.6% in 1996. After a drop in between, it’s back to the same 39.6% today.
No doubt, more changes will come. Suffice it to say that it’s been interesting to remain up to date with current tax laws, ensuring we incorporate them into our clients’ financial planning and asset allocation programs.
Time and Technology
Perhaps the biggest changes have come to technology, where 20 years may as well be 200. In 1996, the Internet was just starting up, after (rumor has it) Al Gore invented it. Online services for running an advisory practice were cave-man primitive compared to today’s tools. Desktop computers were practically desk-sized; iPhones and apps weren’t even words yet, let alone real creations.
These days, just about every program is available in the cloud, with a big push for far-reaching, cross-platform integration. We advisors can run our businesses and serve our clients from virtually anywhere in the world. Investors can likewise stay in touch with us and manage their personal finances while on the go, wherever they go.
On the flip side, technology has brought instant access to, well, almost everything – 24 x 7, times a trillion. This is handy if you’re checking the weather or calling for a ride-share service, but the information overload makes it much harder for investors to avoid overreacting to the deluge of fleeting news. In markets made even more efficient by that same technology, it’s easy to forget this timeless truth: Even today (especially today), by the time you see any news, it’s already been incorporated into market pricing.
The Science of Investing
One of my favorite reflections is our nearly 20-year relationship with fund manager Dimensional Fund Advisors. Since I first attended a Dimensional conference back in 1997, I’ve enjoyed watching the firm’s academically supported research and practical applications evolve.
I still remember that first conference. With my strong math and science background, I felt an instant connection with their evidence-based approach to participating in capital markets. Since then, they’ve added to their original fund line-up of “building block” component funds by adding tax-managed versions of the same, as well as regular and tax-managed versions of “pre-fabricated” core and global funds, to make it even easier to capture and preserve desired market dimensions.
Here’s one of my favorite Dimensional videos, “Getting the Right Answer, Not Defending the Wrong One,” describing their evidence-based culture.
Developments at Diversified
With respect to my own firm’s culture, continuing education has long been a big part of all that we do. To maintain my CFP® certification, I am required to engage in at least 30 hours of continuing education every two years. I usually exceed that, by a lot. I love to learn new ways to help clients invest more efficiently, manage their taxes more effectively, and plan for their retirement or other life goals more successfully.
In 2003, we started developing an in-house asset allocation program to help us keep client portfolios in balance. Besides enjoying the exercise (for my brain, anyway), I was disappointed by some of the limitations of conventional programs, so we decided we would build our own. Our program allowed us to import data from client accounts and look at proposed trades. It also let us manage the individual asset classes within Dimensional’s global funds, to better pursue our portfolio rebalancing and tax-management goals.
At the time, this functionality was groundbreaking, and even today, few conventional asset allocation programs offer the ability to look through a fund into its individual components the way ours does. We also have updated the software over time to:
• Look for tax-loss harvesting opportunities.
• Help us employ tax-efficient asset location (so, for example, we try to place tax-inefficient holdings in tax-favored accounts).
• Monitor account cash levels.
• Help us track the asset classes within any new funds we may include in clients’ portfolios. This helps us ensure that the funds we select for implementing our model portfolios accurately reflect the asset class targets we’ve defined.
I consider that last one to be one of the program’s greatest strengths, advancing “What You See Is What You Get” investing.
Whew, I could go on, but if you’ve made it this far, you deserve a break. Suffice it to say that my little 1996, bedroom-office firm has become all I hoped for and more over the years. I also hope I’ve mentored a few other financial professionals. I’ve had a number of student employees, followed by a part-time employee. Today, David Day is my full-time client relationship manager from our shared office executive space in downtown Boulder. Plus I leverage a number of virtual assistants for operations, technology, and more.
In the meantime, our two kids, Matt and Dylan, are wrapping up 9th and 7th grade, respectively. They are better than me in every sport. My wife manages the house and keeps track of the boys’ schedules – miraculously, without even a custom software program to do so. She also tells me when it’s time to stop working, and where I should go at that time. Sometimes, I even heed her wise advice.
Here’s to another twenty years of the same!
Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail firstname.lastname@example.org.
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