Brendan Freeman:
Welcome to the First Business Bank podcast. I'm Brendan Freeman, President of Private Wealth for First Business Bank. Today, we're going to talk about DIY, do it yourself. Does it make sense for investing? And further, does it make sense for estate planning? With me in this discussion, we've invited Nancy Johnshoy, portfolio manager and market strategist, as well, Christine Waldschmidt, trust advisor. Let's take a moment and have them introduce themselves.
Nancy Johnshoy:
I'll first, Brendan. I'm Nancy Johnshoy. I'm a Senior Vice President with First Business Bank Private Wealth, and I work directly with clients to manage their investment assets. I'm part of the investment team here at First Business, and I all also do a fair bit of our communication, both written and in person, regarding our investment strategy and outlook.
Brendan Freeman:
You do a great job, Nancy. Thank you. Christine.
Christine Waldschmidt:
I'm Christine Waldschmidt. I'm an attorney and trust advisor in our Kansas City market. I have a background in estate planning and trust administration, among other things.
Brendan Freeman:
Wonderful. Well, I'm so glad you're both with me today. Let's jump right into the conversation. Let's talk about DIY. When does it make sense, and when might it be appropriate for individuals to think about doing it yourself? Let's start from an investment perspective with Nancy.
Nancy Johnshoy:
Brendan, one of the areas I feel like it makes sense for do it yourself and is really set up to facilitate that is with individuals' 401(k)s because the 401(k) industry has done a really nice job, I think of providing the basic tools and resources for plan participants to make good longterm decisions. Of course in your retirement account, taxes aren't an issue, so you don't have to worry about that level of complexity, and your goals are usually pretty straightforward, maximizing the value of your plan, targeting your retirement date. So I think that most 401(k) platforms also provide a basic tool for investors to see if they're on track to meet their goals for retirement, based on how much they're contributing and the way their portfolios are invested. So that's that area where it really does make sense, and the tools and resources are there.
Brendan Freeman:
You're right. There are a lot of calculators out there that individuals can take advantage of and plug in different scenarios and say what if. How about from a estate planning perspective, Christine? When would it make sense for individuals to think about estate planning on their own and this DIY approach?
Christine Waldschmidt:
I think estate planning is a little trickier. There's so much complexity and so many legal aspects, and not to be flip, but truly if you are an estate planning attorney, I think you are well suited to DIY. Beyond that though, if there's a situation where there are really very few or no assets to deal with, you can probably try to do some DIY and figure out some simple ways to transfer assets. Honestly, if you do not care what happens when you're gone, if you do not have beneficiaries you're trying to provide for. That's not most people though. So I think DIY is rarely the best option with estate planning.
Brendan Freeman:
So in terms of this, is this like a handwritten will, that kind of thing, when there maybe might not be much to account for and might not be much to transfer? So maybe it makes sense. You used to hear about that kind of thing, but is that what we're talking about?
Christine Waldschmidt:
Well, holographic wills are probably more a thing of the past and can be challenging to probate. The thing about whether or not someone has a will and the probate process, probate is what happens if you own assets in your individual name at the time of your death. If you have a will, that will will be probated. The court will look at the terms of the will and the property will be distributed according to those terms. If you don't have a will, the state has made one for you, their intestacy statutes. And those intestacy statutes typically provide for disposition in a way that most people would choose. They provide, if you're married and have children, that half goes to the spouse, half goes to the children, typically. They're state laws, so they differ state to state.
Christine Waldschmidt:
Many people from a DIY standpoint, feel that they can accomplish their estate planning goals by how they title their assets. There are some things you can do with titling and joint tenancy with right of survivorship and also with transfer on death designations. Utilized properly, these can be effective tools, particularly if you have a very simple situation, such as a surviving spouse with one child left and they know that everything is just going to that child. They might do transfer on death designations to that child, and it's an adult child that is competent, things might transfer in a pretty straightforward manner.
Brendan Freeman:
Okay. So admittedly there's situations, if it's fairly simple, if it's pretty straightforward, where it might make sense, especially from an estate planning perspective. Nancy, as you mentioned, on the 401(k) side, there's just a lot of great tools that are available. Okay. That all makes sense. What about, let's talk about the opposite. We love talking about when things might go wrong and situations where there's a downside. What can we learn from some of the mistakes of DIYers from the past and what are some of the pitfalls, I guess, of DIY, particularly in terms of estate planning, Christine? You gave some good examples of how it might work, but what are some of the pitfalls and where can you go wrong from an estate planning perspective?
Christine Waldschmidt:
There are many ways you can go wrong. With joint tenancy-
Brendan Freeman:
Okay. Don't get you started here.
Christine Waldschmidt:
... many people might think, you know what? I'm just going to put my child on this account. We'll be joint tenants. They can pay bills if I'm not able to, and then everything will go to them when I'm gone. It might work out that way, but the thing you have to remember when you put someone on an account in joint tenancy, that is a present gift. So if you have a large estate, you may need to think about gift tax ramifications, but if not, you have the issue that you've transferred ownership. So those assets are now subject to that child's creditors, possibly a bad acting spouse, a divorce situation. You've exposed those assets to liabilities that may be really beyond your control.
Christine Waldschmidt:
The transfer on death designation certainly prevents some of that because the ownership does not transfer until death. One of the biggest problems I've seen with people doing their estate planning via transfer on death designation is if they have more than one child and they have grandchildren, in a situation where you have two children named as transfer on death beneficiaries, and one predeceases, their children may be cut out completely. So there are some real dangers there that people don't necessarily think of about.
Nancy Johnshoy:
Can I ask a question? Because I think that even when people have had professional help putting their estate plan together, it seems to me that where they're sometimes left on their own to DIY is to follow through with the retitling of their assets. And a lot of times, don't we see that people have not done that and that major assets like a house are not titled appropriately?
Christine Waldschmidt:
I see that all the time. And it is very sad, particularly when people have spent thousands of dollars on estate planning and they've got this beautiful trust created. The thing you've got to remember about a trust, a trust only governs assets that are in the trust. So if the trust is not funded, if you don't transfer ownership of the assets into the trust, the trust becomes just an empty piece of paper. Now typically with a trust, people will have as a backstop, a pour-over will, and this is a will that can be probated that says anything I forgot to put in the trust, go ahead and put it in the trust. It pours the probate assets into the trust.
Christine Waldschmidt:
Well, this is a bit of a stop gap, and it does get you to the trust and the disposition you wanted under the trust. You've now put your whole family through the expense and the time of probate, which is what you were trying to avoid by having a trust. And many people, it is the desire, thinking that they will save money. They don't want to pay the attorney additional money at an hourly rate, perhaps to help them see through the funding of the trust, and then it just doesn't happen. And it ultimately can cost the family thousands in legal fees, going through probate.
Brendan Freeman:
Not to mention headache and concern and that kind of thing. So you really need to think through the different scenarios and play it out. Thank you, Christine. There's a lot more to that, I'm sure. Nancy, how about where things might go wrong from an investment perspective? What are some of the pitfalls of the DIY approach from an investment perspective?
Nancy Johnshoy:
Yeah. Brendan, I think the number one thing that we see when people are making their own decisions is that they try to time the market. Many times investors let emotional decisions cause them to either have too much risk or too little risk in their portfolio. It's fairly common too, for investors to chase last year's big returns or cocktail party ideas, and a lot of times they don't realize that the environment that made those attractive returns possible no longer exists. So I mean, from my personal experience of 38 years, I can say that investment management is a pretty full time occupation. It takes a lot of time to remain well informed and make solid investment decisions, and busy professionals really just don't have that kind of time to stay on top of the market in a way that allow them to make good decisions all the time.
Brendan Freeman:
Yeah, they might not have the time. They might not have the training really to know what to look for. Right?
Nancy Johnshoy:
That's right.
Brendan Freeman:
Can you give me some examples? You mentioned many years of experience that you've been doing this and working with clients. Can you give examples of where it's gone wrong?
Nancy Johnshoy:
Well, I can give you a great example, looking at historical returns and what happens if you make a misstep and you're out of the market for just some of the good days. I'll give a little bit of math here. You're looking at a period ... I've done some work around this. Let's take January of 1995 through the end of January of 2022, so a little over 26 years, or about 6,800 trading days. So the market over that period of time, and by the market, I just mean the S&P 500, has generated an average annual return of 8.8%. So, you're in the market. You're not in and out. You make an 8.8% average annual return. If you missed just the best five days in that 26 years, over 6,800 trading sessions, your average return drops from 8.8% a year to only 7% a year.
Nancy Johnshoy:
To give you the dollars behind that, $100,000 for 26 years at 8.8% becomes 896, almost $900,000 at 8.8%. A 7% return would yield a portfolio worth $580,000.
Brendan Freeman:
Wow.
Nancy Johnshoy:
So $316,000 less because you missed just five days. That's because a lot of the really good days and the really bad days come in clusters. I looked at this, and out of those 50 best and worst days, eight of the best days and eight of the worst days were within a seven week period right around the pandemic. So if you made a decision after the market dropped to step out, very likely you would've missed those strong rebound days that made a big difference. If you missed 25 of the best days in all those 26 years, your return drops to only 2.8% a year.
Brendan Freeman:
Wow.
Nancy Johnshoy:
So not to say that returns can't be enhanced by correctly interpreting changes in environment, and either adding, adjusting your risk in the portfolio, that certainly is highly beneficial and part of what we do in our investment management process, but sometimes buying at the right times feels a little bit like running into a burning building.
Brendan Freeman:
You have to have that discipline, that knowledge, that fortitude to keep the longterm approach. And a lot of times individuals, do it yourselfers don't have that. Wow. I mean, those are some incredible numbers. I mean, real money there at stake, so having that guidance along the way, I'm sure has really helped a lot of our clients. It's a scary situation when you think about those real dollars lost. Christine, how about from your perspective, thinking back on estate planning here and examples of where it went wrong? Anything come to mind there?
Christine Waldschmidt:
The most common example of things that go wrong, and it's because it's a very common situation. Again, when someone has more than one child, so they're siblings, and they feel that they can save money by doing a DIY, and we're just going to put one child on the account as a joint tenant, and they will take care of paying bills. They will take care of final expenses. And then when everything's settled, they'll divvy the assets among the siblings evenly. That doesn't always happen. And it's unfortunate, but death can bring out the worst in some families. It's so sad to see people that are already going through a grieving process, and then because things were left in a bit of an unsettled manner or a trust everybody to figure it out and do the right thing, then you end up seeing this really unfortunate conflict among siblings at a time when they should be able to come together in their grief and not have to worry about the money. So unfortunately, that's probably the most common thing I've seen.
Brendan Freeman:
They can bring out the worst of people, which was probably not the intent of the original parents or grantors. Well, great discussions. Gives us a perspective of the pitfalls and that kind of thing. I'm curious, is it all or nothing? I mean, are there hybrid situations where it might make sense to do a little bit of do it yourself and a little bit of advice? Are there computer based options? You hear about some of these, particularly I guess, on the investment side of things. Nancy, for cost conscious individuals that are maybe looking to save some dollars, are there ways to save money here? What are your thoughts? I mean, are there options?
Nancy Johnshoy:
Brendan, there are a lot of options out there today for investors, and certainly not every one needs a professional investment management firm. If you're one of those folks who has a very straightforward situation or you're comfortable doing it yourself, there are a lot of low cost providers, robo providers, discount brokerage firms, more full service brokerage firms for people who are comfortable making their own decisions. But what I find is a lot of times people focus on cost and on having the lowest fee without really, A, understanding necessarily what the total picture of their fees are or what they're getting for that fee.
Nancy Johnshoy:
I'll use First Business as an example. We have a wealth management team of professionals. So if it's important to you to work with a team that knows you, knows your family, understands your goals and what you're trying to achieve, that you can pick up the phone and call us, or that we'll pick up the phone and call you, that's important to you, then that's something that a professional wealth management firm provides. And we have on our teams, a trust advisor, like Christine, who is very fully versed in estate planning techniques and can help you understand if your estate currently does exactly what you think it's going to do and meets your objectives in terms of passing wealth along to your heirs, help with a financial plan to make sure that you understand what your future goals are and what it's going to take from an investment management standpoint to get there and meet those goals.
Nancy Johnshoy:
We have wealth advisors who can help you with anything that you need, from the borrowing or depository side and the personal side of your equation. So we really bring so much more to the table, and really for a fee that I have found to be very highly competitive with almost any other option.
Brendan Freeman:
Yeah. Yeah. Well, I know we do. That makes a lot of sense, and there are ways to even save money within an investment management approach in terms of the underlying investments that you choose and that kind of thing. Christine, I've been thinking about this throughout our discussion. You hear about LegalZoom and different online options and things like that. How about for those cost conscious potential estate planning do it yourselfers? Are there ways out there, particularly if you're feeling like your situation's not overly complex, that you can try to get it done, or what's your thought there?
Christine Waldschmidt:
Well, I think that there are certain people that may be able to go online and buy forms and carefully read those forms and hopefully understand what all the terms and provisions mean and fill them out and execute them, but most people are not experts to really understand what all the terms mean. There's just such a huge margin for error and there's so much at stake. I think what people truly do not realize is the idea that they could save a few hundred or a few thousand dollars upfront by trying to figure out how to do this themselves, they may very well end up costing their family thousands and thousands of dollars after the fact cleaning up the mess.
Christine Waldschmidt:
So it's not worth the risk, in my opinion, again, unless if you're an estate planning attorney and you're comfortable drafting your own documents. Those are pretty limited situations though. So, I see a lot of danger because people will spend $500 on these LegalZoom documents, print, fill in a few blanks, sign, and they truly believe they have completed their estate planning. There's a lot of danger there, I think.
Brendan Freeman:
Sure. Well, oftentimes it's not everyone's favorite topic, talking about planning for your death or your passing. I definitely hear you that it's just worth really giving it thoughtful time, really trying to do it the right way. Last question for both of you, and really starting with Christine, what resources are out there for our listeners that are tuning in today? If they're unsure, what advice would you give them as to who to talk to and where to go from here, Christine?
Christine Waldschmidt:
Well from an estate planning standpoint, I think it's always important to get good referrals for estate planning attorneys. So if you have friends or family members that have had a good experience using an attorney or a particular firm for estate planning, I think getting a referral is always a good place to start. I would absolutely recommend going to your bank trust department. First Business Bank Private Wealth, one of the things we do is connect our clients with estate planning attorneys, and these are attorneys that we've worked with and known for years, some of them decades, and we're familiar with their levels of expertise, their particular skill sets.
Christine Waldschmidt:
We can really match up the client with the right attorney. Not everyone needs a $600 an hour guru that can do the best and brightest and ahead of the curve charitable gift tax planning, estate tax planning, trusts. But if you do need that, you want to know who to go to. Some people need just a more basic service, and we know how to match the client and the attorney up. So I feel like we are a very good source for that referral.
Brendan Freeman:
That's great. Yeah, I think it is about having trust and making sure that you're connected with someone that can really help you in your situation. And if you're unsure, going to friends, family, trust company, First Business Bank. It's good advice. So how about on the investment side, Nancy? I mean, if you're unsure, what resources are out there? Obviously, First Business Bank could help in this way, but what other thoughts might you have there?
Nancy Johnshoy:
Well, I mean, there's a ton of information out there. I think one important thing is to get your information from a wide range of sources. Sometimes if you're only looking at one particular source, just like watching one news station, you're maybe going to get a little bit of a lopsided view. So, get your news from a variety of different sources. I would say, I think First Business has done a good job at our website, firstbusiness.bank, with podcasts like this, with podcasts on retirement planning, information for business owners, just a wide variety of topics that are informational. Our quarterly market review is on our website under the resources tab, as well as comments about things like market volatility and inflation. So I think we've done a good job. I think a lot of organizations work very hard to provide timely information and good solid information for decision making for clients.
Brendan Freeman:
What a wonderful way to cap it off. Thank you. Great insight from both of you ladies. I want to thank you, Nancy Johnshoy, Christine Waldschmidt for being part of this conversation today. For our audience that participated and listened with us today, hope you found this helpful and informative. As Nancy had just mentioned, if you're looking for more information from us, please visit firstbusiness.bank, a ton of great information out there. We encourage you, if you're a business owner, if you're an investor, if a topic like this seems relevant to you, please look into those resources. We invite you to experience the advantage at First Business Bank. And if there's any way that we can help you, any of our team members, please reach out to us. Thank you for listening.