A Wealth Maximization Account is the backbone of The Perpetual Wealth Strategy™
I want to welcome you to the final episode, where we are doing a deep dive into the Hierarchy of Wealth. I hope after this episode, you will have a more comprehensive understanding of how to structure your current investments to better form your financial foundation and ultimately, whether market fluctuations in the future as well as achieve your goals with more certainty. My guest is a seasoned wealth strategist. He’s been with Paradigm Life but he has an extensive background in financial services and understands Tier 4 investments at a very high level. He has helped me to understand them not from my vantage point, from the client’s vantage point, from your vantage point, how you have been trained, taught, and conditioned to invest and to position your assets in a certain way. Chad is an expert, and I know you are going to benefit from this show. It’s a great way to end this series.
Everyone, thank you for joining this show. It is our final in talking about the Hierarchy of Wealth and we’re going to be talking about Tier 4. I have my good friend and a wealth strategist, very seasoned financial professional, Chad Hanson is on with me. Chad, how are you, my friend?
Thanks for having me on. It’s going to be a good discussion.
Chad, it’d be good to review your history that you’ve been in financial services for a long time. What made you aware of when it comes to specifically the tier 4 type of asset that it has the most risk above the other tiers that have already been discussed?
As far as the background goes, I started in this industry in 1999. I started out as a stockbroker, registered investment advisor, registered fiduciary, retirement planning counselor, estate planning counselor, group benefits specialist, employee benefits consultant, life and health insurance agent, property and casualty insurance agent, real estate investor, entrepreneur, and business owner. Clients in 48 out of the 50 states that does or so internationally as well. I spiel all that out to say I’ve been around the block a few times. I don’t know that I’ve seen it all and done at all financially but close. We’re specifically talking about tier 4. That’s where my foundation in this business began. A stockbroker on Wall Street thrown into the fire. I’ll tell you it’s a lot of fun but it’s something that has to be done very cautiously.
You have to have an extra measure of diligence when you’re dealing with tier 4 assets. Unfortunately, that’s not the way that we are taught. You’d agree with this, Patrick. You go to school and they tell you, “Go invest in stocks, bonds, and ETFs. Why not throw in some options, futures, and commodities?” Nobody knows what that means but they go to their broker, ask for that, and that’s what they get. They’re starting with that Hierarchy of Wealth upside down. They’re starting at the tip instead of establishing the base and then moving up. It gets a lot of people in trouble. In my history in this business, I started in ‘99. If you think about what was going on in ‘99, it was the end of the ‘90s, the market was rallying and going crazy.
Tail end dot-com, you could throw a dart at The Wall Street Journal and make 30%. It didn’t matter what you invest in. Everything was going up double digits. There was the WorldCom and the Enron debacles and all of the dot-coms going under. The market tanked and caught everybody by surprise. That was my intro into this world. A couple of years in and the world collapses. We licked our wounds, we went back to our modern portfolio theory, redesigned, reallocated, and everything. I went and sought out the best advice. The best portfolio managers. We spread everything out as far as we could. Do our best job at diversification. A couple of years later, 9/11 hit. We worked over again and it was completely out of our control.
Starting at the tip instead of establishing the base gets a lot of people in trouble. Click To Tweet
No matter how good of a job we did, we could not stop the bleeding. We could not stop the hemorrhaging of wealth from our client’s portfolios. It didn’t matter if they were in stocks, bonds, ETFs, or anything else. They were losing money. That was a hard lesson to learn early in my career. It started me on the path to where we are now. We’ve seen a bunch of things since then like that in 2008 to 2009 real estate crisis and the COVID-19 situation we’re in. You have to have a good solid foundation and you have to work your way up that Hierarchy of Wealth intentionally. You can’t haphazardly throw a dart at The Wall Street Journal anymore and hope to make it big. It didn’t work.
I’m assuming you’ve seen a lot of the evolution of technology, systems, the use of options, hedging, and insurance. It’s gotten a lot more sophisticated but at the same time, the principle of trying to predict the future is still very difficult because of human nature and humanity. Things happening, Black Swan Events, and life happening where you can’t always predict everything. Even though there’s room in a place for investments that have a degree of risk, you essentially have a sequence in which you establish your wealth and assets so that when these types of events, COVID-19 is another example where they throw you off-kilter. It doesn’t impact everything because if it impacted everything, now it goes even further impacting emotions and state of being, which makes it even more difficult to rebound.
There’s a catchphrase from one of the big companies out there. I forget who it was but they always said, “You can’t predict, but you can prepare.” I think that was MassMutual. They’re right to some degree. If you’re using the wrong tools, it doesn’t matter how prepared you think you are, you’re still going to take a shellacking. You can’t predict what’s going to happen. In these Black Swan Events come around, who knows what? General factors in your life, a job loss, divorce, and business failure, things happen that are going to change your plans and your plans have to be flexible. They have to have that liquidity built-in and some guarantees.
That’s not what Wall Street focuses on. That’s not what these tier 4 assets are designed to do. These tier 4 assets are designed to take a chance and make it big on something that you’re comfortable with and familiar with but knowing that there’s a chance of loss. You’ve already taken care of tier 1. You’ve got your Wealth Maximization Account set up, you have this amazing machine working for you, you’ve grown into tier 2 and tier 3, and now you still have a little excess. I would call that your play money. For example, I have an Options Trading Account. I still trade options and it’s my play money account. It’s fun. It’s not something I would do for a client.
It’s something I know, I’m comfortable with, I’m familiar with but it’s not where I’m betting my future. It’s not my serious retirement money. This is my fun money. You got to keep that in mind and have a place for it. The way I do options is putting in a hedge. I’m using covered calls, a call to put simultaneously. If the market goes up, you can lock in some gains. If the market goes down, you can cut it off and not have losses but it takes a lot of experience and money to be able to do that well. The average person can’t do that. I have a lot of clients that say, “Who would you recommend? I go to to-do options.” I generally say, “I don’t.” You’d have to have so much money to make it worth it on a portfolio that the average individual can’t do it.
Part of their portfolio is that but there’s a lot of other pieces of their portfolio, especially big hedge funds where there’s a lot of stability within there. There is a percentage that is used for those asymmetric risk-reward type of investments.
That’s the key. The big hedge funds, big insurance companies, even fixed index annuities are often run with options. The insurance companies have billions of dollars and they can easily buy options on all their holdings in position. Thousands of positions at the same time where the average individual could never dream of doing that, at least not to that scale. If you want to participate in some of those things, there may be better ways to do it than using your own money and trying to do it yourself. Look at an options hedge fund or an options trading platform like Andy Tanner‘s or look at the fixed index annuity company that’s doing that.
Let me bring something up that I’ve thought about a lot because there are pieces of us as a human being that desires uncertainty, whether that’s in the form of playing sports, going to the movies, or going on vacation. There are aspects of that in finance where there’s this intrigued associated with a shiny object and the potential to have that asymmetric risk-reward where you bet a little bit get a big gain. We don’t say that there’s no room for that but we also, in a sense, don’t advocate not doing it because there’s a piece, I would say, of you that benefits from that. When you have a foundation of certainty, especially if you have the other three tiers taken care of, it puts you in a position where you not only are able to identify opportunities but you’re able to have a meaningful learning and education because the emotion of not being able to feed your family or pay your mortgage, it doesn’t exist. This is more of money, as you said, play money, it’s risk money where you can have some learning experiences and get the wiggles of your uncertainty out.
I love what you said, learning experiences. That is a great thing. It’s hard to know the difference between a mutual fund or an ETF unless you’ve done it. It’s hard to take it in and understand how they work and what they can do for you without playing with it. You can read about it, but until you’ve done it yourself, it doesn’t click. That’s where that is great. That comes from tier 2. Tier 2 is educating yourself, investing in yourself, and building up your capital. That’s where you start to learn and research some of these things that you want to try when you get to tier 4. I’d say that’s where that lies if we go back to mutual funds for a minute, Patrick. Most people in America say they are comfortable investing in mutual funds because that’s all they know. That’s where their 401(k)’s are invested. That’s where the IRAs are invested. That’s where their parents set up their accounts for them. That’s where they are. Most people don’t understand what mutual funds do, how they’re designed, and how they’re managed either.
They’ve evolved over the years but at the same time, the mentality of people hasn’t evolved with it.
That’s everyone go-to. They’re saying, “I’ve got this 401(k) with 25 options and they’re all mutual funds. I’ll pick the ones that are the best performers and go.” That’s a recipe for disaster because they’re very fee intensive. Your average mutual fund is very expensive. Even a no-load, people say, “I can go to Vanguard and get no-load funds.” The definition of no-load is you can’t have more than a quarter percent in annual charges and fees. You’re still getting charged. It’s not just as much as some of the others maybe. You have to look at pay-for-performance. Is this no-load fund performing better because these reduced fees than these other ones? That’s not always the case. You have to be careful where you’re investing and how you’re investing. Look at the style, if you’re familiar with the Morningstar Style Box, most people pick 3 or 4 funds, and they’re all large-cap growth funds.
They’ve tripled or quadrupled their exposure to one tiny little market area without knowing it. They’ve got a large-cap growth fund, they’ve got an S&P 500 funds. They’ve got all these funds and they’re all in the same area. They think they’re diversified but they’re not. People need to make sure that they’re truly getting diversification. We can help guide some of those. I do have clients that send me their allocations and say, “What do you think about this?” I tell them, “You’re all right here.” Sometimes I give them some guidance on how to do change that but as we said, most people are assuming that that’s where they’re going to be safe. That’s where their money has the best diversification and the best management but they’re setting themselves up for failure because they have these expenses.
They’re not managed well in general. Mutual funds generally lag the market. They don’t beat the market. Most of them are lagging. The market itself is lagging the S&P 500. We have got all these people that are putting their faith in some random fund manager somewhere that is not even performing as good as the market is performing. They’re paying extra fees and expenses to do so. It’s a disaster in the backend. The difference between that and an ETF, if you’re not familiar with ETFs, mutual funds trade once per day, 4:00 PM Eastern Time. It’s the end of the market day. Bad news could hit in the morning. People could be trading all day long on that bad news.
By the time of your fund trades at the end of the day, it’s too late. You’ve sucked in the losses or whatever. If there’s great news at the end of the day, people are taking advantage of that and capitalizing on that growth. That’s where the evolution of the ETF came in. The ETF is an exchange-traded fund and that trades throughout the day like a stock. You could buy it or sell it instantly. Two minutes later make another trade. It’s a little easier way to micromanage your account. If that’s not your forte, don’t try to do it yourself. Get somebody who knows how to do that.
One of the things that you could speak to is as you set up Wealth Maximization Account and you do it in a way that optimizes a cash value, if that’s the piece that is being played, that’s the objective, there are other objectives business planning or estate planning. If it’s purely for a savings play and you look at the return, it gets, as you factor in taxes and fees, even if it’s a simple no-load or no expense ETF, the marginal difference is not that much, but yet the amount of risks that it’s taken to get that potentially marginal increase in return is astronomical.
Stagnation is death. When the body stops working, the mind deteriorates and your physical body doesn't perform as it did. Click To Tweet
We’ll post the DALBAR report that we get. It usually comes out once a year. Now, they’re putting it out quarterly that talks about the average investor and what returns they’re getting. For the first quarter of 2020, it was negative 20%-something. You factor out the last twenty years, which I believe is the longest they go. It’s only at 6% for these indexes. You look at that being a return that is a little bit higher than what the insurance companies will yield with a properly designed Wealth Maximization Account but still the amount of risk that’s taken. The singular use of that type of asset is you make up for that with something that has much less risk, a much higher degree of certainty and removes that risk you’re taking to get a slight improvement in the return.
You have to factor in the fees, expenses, ticket charges, trade charges, and everything else associated with it. That 6% average you’re talking about drops to 2% or 3%. In general, our mutual funds worth it, I’d say absolutely not. If you have a very strong opinion towards one sector or one area of the market, and you want to take a bet there, fine do it whether it’s this area or that area. If you feel strongly about one particular area, invest there, don’t throw your money blindly in mutual funds and hope to hit it back because you won’t. That’s the point with anything in tier 4. Once you’ve got everything else set up, then it’s about what else do you want to try?
What else do you want to explore? You’ve already got your Wealth Maximization Account set up. You’ve already invested in yourself. You’ve got some intentional investments like oil and gas in your tier 3 investments for some tax breaks. Now you’re saying, “I’ve got this little extra money and I’ve always wanted to do this. I’ve always wanted to invest in racehorses or seed money for startup businesses. I’ve always wanted to try options.” That’s what tier 4 is all about. Let’s do it. You could take a loan from your policies, get a low cost of capital there to invest elsewhere, and take the difference.
Pocket the earnings from there after paying off your policy loans like you might do with real estate. Your cashflow from the real estate pays back the policy loans and then you go do it again. You do the same system. Tier 4 works the same way. You can use your policy cash values to do that and to invest intentionally in a couple of specific sectors or areas of interest and have fun with it. I’d say that’s your fun piece. It’s not your bread money, food money, or mortgage money, this is your fun money. That’s where you can have fun.
As we wrap up the whole conversation about all four tiers of the Hierarchy of Wealth, in the end, I would say the most important thing I see as the value we give to clients is understanding the end from the beginning. It’s understanding what results you want, what it takes to get there, and getting there with the highest degree of certainty. Invariably, the biggest opportunities most people have is figuring out how to get paid more for doing meaningful work. That’s one of those things where along the way, the typical financial planning went sideways, is continuing to advocate this retiring at 60 or 65 and having enough money there to last for the rest of your life where that’s no longer feasible. I’m assuming it’s feasible for some, but the savings rates have to be upwards of 30%, 40%, 50% or the lifestyle that they live in retirement has to be significantly less than the lifestyle they live.
That’s where advocating the importance of continuing to do meaningful work. With COVID and what we’re experiencing as a society is that people want to work and because they’re not getting to do meaningful work, it stifles their ability to have sanity in a sense. I look at how things are evolving and most likely never going to go back to how work was once, being able to do remote work, contracting, and so forth. It provides a tremendous opportunity as you get into tier 2 and tier 3. Getting into tier 2 and tier 3 requires some education but there are some fundamental characteristics there that provide a layer of security and certainty.
Getting into tier 4, even though that tier is there, it doesn’t mean that you have to be there. I have a little bit of money and some crypto things but a few thousand dollars. It’s nothing much it’s something I want to pay attention to. It’s not something I’m training on daily basis. It’s wanting to be intrigued, but then also not taking your eye off the main prize which is to use your best asset, whether it’s educating yourself regarding the different investments that are out there. It’s discovering ways in which you can get paid more for what you love doing.
I want to key on something you said there, and you’ve said this a few times in the past, but stagnation is death. Even if you have enough money to retire and you can do the traditional retirement, why would you? When the body stops working, it deteriorates. The mind deteriorates and your physical body doesn’t perform like it did. The traditional retirement isn’t something we seek or advocate. That’s when you reinvent yourself. Tier 4 for a lot of people is simply saying, “That’s when I shifted gears in retirement and start to explore other avenues.” That can be your passion, your focus, or your new life. It could be, “I’m going to be the crypto master. This is great.” Make that your passion in retirement and go after it. Make it your new passion and your new way to earn an income. Don’t stop working altogether.
There are hundreds, probably thousands of other opportunities that are out there around the world. You hit the nail on the head. What people dream about in their future and what retirement is, is doing meaningful things. It’s interesting where I look at work is something that can be meaningful. It doesn’t have to be something you want to stop. I believe that course can start way earlier than 60 years old or 50 years old. It can start at the beginning of your career. You may not get there for 10 to 15 years, but at least you can identify what the end result is. It’s not a stone-age type of principle, which is the retirement idea. Chad, you’ve been awesome. This has been fun. Any last words that you’d like to share before we sign off and wrap up our four-part series on the Hierarchy of Wealth?
I’d say study that a Hierarchy of Wealth chart. Take a look at the assets that are listed there. Wrap your brain around each piece and what you can do with each one. Rather than saying, “Check the box.” Try to be intentional about what you’re doing, try to think how you would do certain things, and what might intrigue you. Make a little list of goals of what you want to accomplish and then let us help you. We’re here as wealth strategists. We’re not here to help you set up a policy and kick you to the curb. You can call us, email us, text us any time, and we’re happy to help you out, even if it’s just to run a quick idea by us. That’s exactly what we’re here for. Lean on us. With all of us working here, we’ve got hundreds or maybe even thousands of years of experience. We’ve got plenty of experience so you don’t have to do it alone.
The team we have here has done an incredible job at putting resources on the webpage. Check out ParadigmLife.net. We have a lot of resources associated with these different episodes. Chad, I appreciate it. Thank you for sharing your wisdom. I look forward to being able to do another episode in the future with you.
I can’t believe that we have already wrapped up our second season. Thank you guys for reading, for your support, as well as trusting Paradigm Life with your financial education. As always, if you have questions or you want to have a consultation with one of our wealth strategists, everything is complimentary and we’re here to serve and guide you. We will see you in season three.
A Wealth Maximization Account is the backbone of The Perpetual Wealth Strategy™