Wealth Logic founder shares his insights

February 19, 2014

 
Allan Roth 

We recently interviewed financial advisor Allan Roth. What follows is a snapshot of the wide-ranging discussion.

Allan Roth is a CPA and CFP® professional who spent more than two decades in corporate finance and accounting firms before founding Wealth Logic, LLC, a decade ago. His fee-for-service model is unusual—and highly successful. He writes a blog for CBS MoneyWatch and has written a book, inspired by his son, titled How a Second Grader Beats Wall Street (Wiley, 2009).

A snapshot of Roth's philosophy: "Beating the market is not the place to add value. Focusing on whether or not to take a lump-sum pension, when to take Social Security, how to set up asset allocation and location, how to avoid the alternative minimum tax—these are the ways I try to add value."

'Richest guy in the graveyard'

Roth said the number one question he gets from clients is how to generate income from their portfolio. He responds with coaching on the portfolio's role: "Money is stored energy that lets you determine what you want to do with the rest of your life," he said. In other words, the portfolio's purpose isn't to produce income, but to be consumed to fuel your life. "The goal isn't to be the richest guy in the graveyard." He said it's a tough message for people who have been saving for decades to suddenly be told it's okay to spend it down.

The biggest mistake he finds investors make is chasing risky sources of income—whether emerging markets bonds, master limited partnerships, or utilities—partly because of the fear of tapping principal. He said the appetite for these investments could be abetted by advisors who may build extra risk into the fixed income side of the portfolio to cover fees.

He coaches clients to use fixed income investments purely for their shock-absorption value and use stocks to take risks. "Companies returned 5% cash in 2012 in dividends and through stock buybacks, so stocks provide income as well as growth," he said. "Leave the fixed income side to do its job. I don't even agree with splitting a bond allocation 50-50 between investment-grade corporate and total bond," preferring a market-weighted allocation for bonds.

Own the market. Period.

Roth noted that most advisors have gotten recent bubbles wrong; for instance, being too heavily exposed to stocks in 2007 and moving too heavily to cash in early 2009, missing the recovery. "Advisors are human, too," he said. He advocates simple, low-cost equity portfolios with market-weight exposures—only a total stock and a total international stock index fund, if possible. "Indexing works whether the market is going up, down, or sideways." He also sometimes believes in taking less risk than many investment profiles suggest. "Vanguard's profile says I should have 70% in stocks, but I'm at 44%," he said. "As (author) Bill Bernstein says: 'When you've won the game, stop playing.'"

On the fixed income side, he is more attuned to risk than capturing the market. Rather than invest in bonds, he favors longer-term, bank-insured certificates of deposit that charge minimal early-withdrawal penalties. While bonds face price declines if rates increase, his clients receive intermediate-term yields with the opportunity, for a small price, to enter the bond market if rates increase.

A fee-for-service model

Roth's fee is not based on assets but on time. "It's the doctor model—you come back when you need help," he said. "That model is not right for most advisors." The model works for him as someone who is already financially secure.

His motto: "Investing is simple, taxes aren't." Because he uses the fewest, simplest index funds to provide market exposure, his work with wealthy clients and small foundations focuses on simplifying the unique complexities each faces. This can entail meetings over several years as positions are unwound, hedge funds are redeemed, and businesses sold. He has even helped clients reach settlements with financial companies whose sales practices he has challenged.

He said small foundations are "terribly abused" and come to him seeking help with benchmarking and developing an investment policy statement. This can result in moving many actively managed investments into index funds. By contrast, some clients are once-and-done. "Once I've developed a plan, set up the tax location, and set rules for going forward, I don't need to see someone again unless there are additional questions."

Roth on Roths

One area he walks clients through is the Roth versus traditional IRA and the Roth 401(k) versus traditional 401(k). The ability to convert from a pre-tax traditional IRA to a post-tax Roth IRA—and recharacterize back to where you started—opens all kinds of opportunities for managing risk around future tax rates and managing losses and gains, given the amount of time allowed to decide whether to recharacterize.

"I've been a CPA for more than 30 years, and tax efficiency is incredibly important," he said. Perhaps surprisingly, he is not a fan of municipal bonds, which he describes as overused. He has repeatedly seen clients put into muni bonds that have not delivered. For example, a portfolio of individual municipal bonds nominally yielding 4% might actually yield only 1% for the investor after accounting for the premium paid on the bonds in an often illiquid market and a management fee.

Notes:

  • Allan Roth is not affiliated with Vanguard, and Vanguard does not make any representation regarding his views.
  • All investing is subject to risk, including the possible loss of the money you invest. This information does not constitute legal or tax advice. We recommend that you consult a tax or financial advisor about your individual situation.
 

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