10/20 Stocks Case Study
- wmsotx
- Oct 22, 2022
- 3 min read
We had our very first case study of the semester this past Thursday as we welcomed back Kirsten Spacek to talk through hypothetical client scenarios with stock investments. Read on below for a recap, including a copy of the case studies we looked at:
Speaker and Company Background
Kirsten worked at Merrill Lynch before deciding that big banks weren’t for her
Began working for Baird after graduating
Worked in rotational program that had her living in Milwaukee for 6 months
Baird usually has full control of investments that it makes into client accounts
If clients want to invest, they normally use brokerage accounts
Case #1: Annie
Max out 401(k) because it is free money
Begin contributions to Roth IRA provided you are not phased out by income
Talk to Annie about 529s since she has a young child
Buy what you know
If you want to buy a single stock, that’s okay, but make sure you understand the investment you are getting into
Diversification is important for people who don’t know what they are doing
Suggest index funds and ETFs
For S&P 500 ETF vs. S&P 500 Index Fund, ETF will probably be cheaper since the Index Fund will actively trade and rebalance
Annie is in her accumulation phase - this phase goes until you retire
This is the ideal type of client that young wealth managers would like to pursue
Harder for younger wealth managers to get older, high net worth clients
Unfortunately, not enough young people like Annie talk to financial advisors at this stage of their lives
Case Study #2: Sylvia
401(k)s and Traditional IRAs have required minimum distributions (RMDs) at age 72
All this money is taxable - counted as earned income
Your Social Security income can be taxed as earned income if you make a lot of money from your other sources of retirement income
For Sylvia, she might want to pull from her Roth first that way her earned income beginning at age 72 is not higher (compared to taxes applied on both, Roth money + 401(k) money, beginning at age 72)
If you have a very large 401(k), it could help to start depleting it soon
Idea should be that you do not want to pay any taxes in retirement since you do not have any income to pay it off
More that you can pay taxes while earning income, you should
Instead of an RMD, you could opt for a Qualified Charitable Exemption (QCE) - you don’t get any of the money, but you don’t have to pay taxes if you are forced to take distributions
Some clients that don’t need the money from their RMDs will pay taxes and then reinvest the money
Roth rollover - there are income phase outs for contributing to Roth IRA, but it is perfectly legal for anyone to contribute to a Traditional IRA, pay taxes and rollover into a Roth IRA
There have been many attempts to remove this from the tax code
US has 3 tax systems - Income Tax System, Gift Tax System, Estate Tax System
CPWA is a good credential if you want to work with high net worth individuals and do estate planning
Better for Sylvia to get out of her tech and single stock investments now since those are the most vulnerable to market downturns
You can technically pull from your 401(k) and IRA before age 59 ½ for things like buying a first home or financing kids’ education
Not an advised strategy
Baird tells clients to borrow first
Roth IRAs have a 5 year clock once you start taking distributions
Case Study #3: Nolan
To time the market perfectly, you have to be right twice
Baird uses Dollar Cost Averaging to avoid worrying about whether they are entering the market at the right time
You can be more defensive at particular periods of time in the market if you need to
Ex. Concentrating more in value or dividend investments
As an advisor, people come to you for an objective, 3rd party view that takes their own emotions out of the picture
Most clients that want to do something like what Nolan wants to do might use a brokerage account
If you have lots of stock from the company you work for, one option might be to hedge or to stay away from the sector your company is in
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