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Webcast replay: Manage your portfolio for life's "what ifs"

September 09, 2013

Replay and transcript from a recent Vanguard webcast

You've worked hard to build and manage your wealth based on your values and long-term objectives. But if you don't have a wealth succession plan, it will be difficult to ensure your wishes are carried out in the future. In this live webcast aired July 18, 2013, Alisa Shin of Vanguard Asset Management Services™ and Al Weikel from Vanguard Flagship Select Services™ explain what a wealth succession plan is, why it's important, and how you can go about creating one.

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Amy Chain: Good afternoon, everyone. Thanks for joining us for this live webcast. Whether you're watching us on the East Coast, the West Coast, or somewhere in between, from your computer, your tablet, or even your smartphone, we're happy to have you with us today. I'm Amy Chain, and today we'll discuss how you, as a self-directed investor, can plan ahead for the management of your wealth in the event that you are no longer able to manage it yourself.

Many of you have already submitted questions asking "What is a transition plan, and why do I have to worry about this now?" Well, we'll get to these questions and more during today's webcast, to help you ensure that your intentions for the wealth you've built are carried out no matter what life brings.

We're fortunate to have two transition planning experts with us today who can provide the necessary context for this crucial topic. Alisa Shin, a senior wealth planner with Vanguard Asset Management Services and Al Weikel, a senior manager with Vanguard Flagship Select Services. Alisa and Al, thanks for being here today.

Alisa Shin and Al Weikel: Thanks for having us.

Amy ChainAmy Chain: Okay. Audience, on the right-hand side of your screen, you'll see our first poll question appear, and that question is, "Are you concerned that someday you'll have to transition oversight of your portfolio?" Your options are "yes," "no," or "I've never thought about it." So go ahead and weigh in now. And if you can't see the polling question, go ahead and check your browser zoom setting and just make sure it's set at 100%.

While we're waiting for the audience to weigh in, Alisa I'd like to come to you. We got a question—lots of folks have submitted a question ahead of time—and I'm hoping you'll spend a couple of minutes answering that for us, and that question is, "What the heck is a transition plan?"

Alisa ShinAlisa Shin: We get that question a lot. "Transition plan" might not be quite the right phrase for some people. It sounds a little intimidating. For some clients, they can relate to it more as a "succession plan." It's really that part of your plan—of your overall wealth plan—that really focuses on what things do you need to do before something happens to ensure that your overall wealth plan is successful? When I talk about wealth plan, I don't mean just estate planning, I don't mean just your investment planning, or your retirement planning. A wealth plan to me, to people at Vanguard, is your entire plan, and your plan has different pieces to your puzzle, so to speak. You have an estate plan puzzle piece, you have an investment plan piece, education savings, life insurance, all these different pieces make up your wealth plan, and you want it to work well together.

Once you have that in place, what a lot of clients forget to think through is, how is this actually going to play out? What's the practicality of this? That's really what we want clients to focus on. It's not just what happens at your death, what happens when you become incapacitated, it's about how do you make sure that your goals and objectives are reached, and that your family still gets along, and people understand what it is that they're supposed to do after you're gone.

Amy Chain: So this is taking a holistic view at everything you've got.

Alisa Shin: Correct.

Amy Chain: Doing more than just designating beneficiaries, that’s making sure, to your point, to make sure that everybody knows what the plan is when the time comes.

Alisa Shin: That's right. That's right.

Amy Chain: That's great. Well, let's see if our audience has weighed in quite yet, and it looks like overwhelmingly, our audience is concerned today. We have over 1300 folks, 62% that said yes, they are concerned that someday they will have to transition the oversight of their wealth. What do we think? Is this surprising?

Alisa Shin: That's good to hear because a lot of people don't like to think about it. It's hard to think about, so it's good to hear.

Amy Chain: Anything to add, Al?

Al Weikel: No, I agree. It's good to hear that people are thinking about it. It isn't something that typically is thought about a lot, so the fact that it's on people's minds and they tuned in today, I think that's great.

Amy Chain: Good. Good. You're not off the hook; I'm coming right back to you.

Al Weikel: Okay.

Amy Chain: But first, viewers we have another question for you. If you could take a look at your screen on the right-hand side, you should see our second polling question which is, "Which of the following best describes your situation?: I haven't thought about a succession plan; I've thought about a succession plan, but I do not have one yet; or, I have a succession plan." So while we wait for the audience to weigh in, Al, I'd like to bounce a question your way. This question came in ahead of time from Karen in Carmel, Indiana. Karen, thank you for the question. That question is, "Why the heck does this webcast sound so urgent?"

Albert WeikelAl Weikel: Well it's a good question, and it's so urgent because this kind of planning and these conversations typically start too late. Alisa sort of alluded to it where nobody likes to talk about planning for incapacity or potentially someday passing away. The high probability is at some point, incapacity could come on suddenly, and all of us, at some point, are going to have to pass our wealth on. With that said, we hope that you use this as an opportunity to think about a plan, and we'll talk about a lot of things today, to start that plan and/or if you have a plan, revise that existing plan going forward.

Amy Chain: Sounds like many things in life. It's never too soon to have a plan, right—never too soon to start thinking about it. In terms of our audience weighing in, I'm not sure if we've given them enough time, but so far it looks like the majority are saying that they've thought about a succession plan but do not have one. We have about 43%. So what do we think there? People thinking about it but don't have one.

Alisa Shin: Well it's hard to figure out what to do, and that's really what we're hoping to bring to the audience today. It's to help give you ideas about what parts, what things you need in your succession plan, how to put one together. So I think that's okay. I think that's great that they've tuned in for this.

Amy Chain: What's interesting I think about this is results—so obviously you two can't see what I can see, but I can see that about a quarter of the folks haven't even thought about it, and the numbers have just disappeared. It's actually pretty evenly distributed. The majority looks like they have thought about it but don't have one, but everybody's kind of a different place on this continuum. So I think we'll probably have a lot of different types of questions to help all these folks today.

Alisa Shin: Absolutely.

Al Weikel: Yeah, and I would just add quickly, it's different for everybody, so I'm not surprised to see a dispersion in answers like that, but we'll talk about best practices and we'll talk about some things that other clients are doing, so we'll learn from lots of people's experiences today.

Amy Chain: That's great. Now before we jump in, we actually have a live question that probably will answer a question for a lot of folks. Alisa, you talked a little bit about what is a transition plan. The question that's come in from Robert is, "What is a succession plan?" So maybe we just need to clarify a little bit what the differences are between an estate plan or a succession plan or any other type of plan.

Alisa Shin: Right, a succession plan, unfortunately there's no one recipe for it. It means different things for different people depending upon what your circumstances are, how knowledgeable your beneficiaries are, how involved your beneficiaries have been in terms of your wealth investments, in terms of making financial decisions, tax-planning decisions, and so forth. But the crux of a succession plan to me is really in three parts. One is to take a step back, think about what your wealth planning goals and objectives are. Take a look at what you already have, what your current wealth plan is and see whether or not your wealth plan is actually accomplishing those goals and objectives, or at least have set up the framework so those goals and objectives can be achieved.

The other part of looking at your plan is taking a step back and saying, alright, I have this plan created. I have all these trusts that I've created for my kids. I have a power of attorney. I have an LLC. I have a life insurance policy.

But if something should happen to me, will my children, will my spouse be able to take care of this and carry on with it, or have I set up something that's a little bit too complex for them? Is there a way for me to make it more simple for them, whether it's to maybe undo certain things that are not needed anymore, or finding the right advisors to help the family move forward?

Amy Chain: It sounds like the answer is what are all the components of my total wealth. What makes up all the pieces of that puzzle, and if something were to happen to me, what happens to all of these pieces and who can everyone depend on to help make sure that my intentions are carried forward?

Alisa Shin: That's right.

Al Weikel: That's right.

Alisa Shin: I would say the other two parts of it is one, communication. There's no right or wrong answer; every family has different comfort levels in terms of what they communicate to the family. We have found there are clients that we work with that the more open communication you have, the better chance of success your plan has. So that might not necessarily mean disclosing how much wealth you have, but talking to them about why you've chosen certain individuals to carry out certain roles, why you haven't chosen others, why you made some decisions about creating certain trusts or not creating trusts, and having those conversations. What's the purpose of your wealth? What's the family value around that, and what's your hope to happen to that?

Amy Chain: And who's going to help us execute on X, Y, and Z as time moves forward.

Alisa Shin: That's exactly it. That's right.

Amy Chain: We have another live question that's sort of a clarifying question. This one comes from Janine, and that question is, "How does this interface with one's will or trust?" I sounds like that's one of the pieces of the puzzle.

Alisa Shin: That's right. That's one of the pieces of the puzzle. Your will or your revocable trust will have an important component of your succession plan, but those documents have what should happen to your assets, to your wealth. It should have guidelines as to how that wealth should be distributed if it's being held in trust, and who you're entrusting to carry out your wishes—your trustees and your executors.

But the other component of your succession plan actually comes outside the document, and that is, to the extent that it's necessary, to memorialize what your intentions are. If you want to give some guidelines to your trustee as to when the money should be used and when it shouldn't be. I tend to think even though it's not a legally binding document, it's easier to have a separate letter. By doing so, you have the freedom to change it from time to time and don't always have to go back to your lawyer to amend your document.

The other part of that is making sure that you have things organized to some degree so that when something happens to you, your family knows where your accounts are, who your advisors are, what your life insurance policies are—all that important information and where to find it. If people actually go to, and if they search under, I think it would be "Personal Inventory," they should be able to—they'll find a PDF where we've created a document that will start you in terms of organizing all your important information.

Amy Chain: That sounds like a good starting place, somewhere to go to start this today.

Alisa Shin: Absolutely.

Amy Chain: And that actually leads nicely into a question that we got from John from Seattle. John, thanks for your question. John asks—and Al, I'd like to send this one your way—"What if my spouse has to take over management suddenly? What support will she have from Vanguard?" So it sounds like, here's what you can do today, and what can you do to help prepare your loved ones for when the time comes?

Al Weikel: Sure. I mean, specifically to answer that question, if something was to happen suddenly like that, and what can Vanguard do. I mean, call Vanguard, call your rep, or call into Vanguard directly. The associates here are trained to handle those specific situations, so you'll be in good hands. In fact, we have a team that works behind the scenes called Wealth Transfer Services that specializes in just those matters. So your rep and/or in conjunction with the Wealth Transfer Services group, can work together to take care of any needs that you have.

They certainly can take care of any administrative needs that you'd have like titling changes or transfers, things like that. They can also help guide you and get you the right guidance or advice because at Vanguard, we have CFP® professionals that would be available for one-time financial planning advice, if something was to happen like that, and/or we have a fee-only asset management service that may be appropriate as well. Call in and your reps are well-trained to handle that.

Amy Chain: Great, Thanks for answering that one. Here's a question that comes in from Susan in New Jersey. Susan says, "If you have the documents in place, what is the importance of beneficiary designations. Isn't that redundant?"

Alisa Shin: Yeah. A lot of times that's sometimes overlooked. People think if they go to a lawyer, they get their revocable trust or their will drafted, they sign it and they're done. Another big component of putting your wealth plan together, making sure it works, is making sure that your beneficiary designations of your IRAs, your life insurance policies, your annuities are coordinated with your overall estate plan. So there are several ways that assets pass at someone's passing.

If you have assets that are in your sole name, that would pass pursuant to the terms of your will. If you have assets titled in a revocable trust, that would then pass pursuant to the terms of your revocable trust. Assets like IRAs, retirement accounts, annuities, life insurance, they actually pass by contract. So your beneficiary designation's a very important component. If you want it to follow your basic estate plan, then you would typically designate your revocable trust or you would give it to a particular trust under your will, okay.

But if you leave those blank, then the contract will dictate who should get that asset. At Vanguard, for instance, the default is the spouse, otherwise the estate. For something like a retirement account, if it ends up in the estate, there could be adverse tax consequences in terms of the stretch-out nature of that IRA. So it's really important to make sure your IRA beneficiary designations are up-to-date and that your attorneys are aware of it so they can make sure that it's coordinated with your overall estate plan. So they work hand in hand together.

Amy Chain: So I think what I hear you saying is start with your beneficiaries. Make sure that you've got beneficiaries designated for all of your accounts. Then take that broader, total puzzle view and make sure that the beneficiaries you have designated fit with the bigger plan you have in place.

Alisa Shin: Absolutely.

Amy Chain: Good, thank you. Let's see, let's go to Larry from Washington. Alisa, I'm going to send this one your way as well. "When should you consider transitioning management of your portfolio to a professional?"

Alisa Shin: Unfortunately, much of what I've already said, there's no one right answer. It depends on who your beneficiaries are, what level of knowledge they have, where you are in your life. My general rule of thumb, though, is if you think that your family will need professional help after you've passed, they're not going to be able to handle the investments, for instance, by themselves, I always tend to think it's better to start an investment advisor relationship sooner than later, for several reasons.

Even though you can still manage it yourself—you're self-directed, you know what you're doing, you're thinking through all the market analysis that kind of thing—by starting an investment management relationship early, one, you get a chance to test drive that investment management relationship to make sure it's doing what you want it to do, that they're going to operate the way that you want, that you agree with the methodology and the service level. Two, your investment advisor, your financial advisor has a chance to get to know you, understand from your perspective what your wishes are, what your philosophy is so that when something happens to you, that financial advisor will be in a better position to help your family transition. It's already going to be an incredibly emotional time for your family. This is just something that your investment advisor relationship can help ease that burden.

"For a spouse that's uninterested and you have a hard time getting them interested, create that sense of urgency, right? Ask, 'What would you do with this portfolio? What would you do if something happened to me today?' Generally, that answer turns out to be 'I don't know,' and 'I don't know' is not a great answer. It's not a great answer for $50,000, it's not a great answer for $500,000, it's not a great answer for $50 million."

Amy Chain: That speaks to the urgency, right? Start now because investment relationships aren't formed overnight. They take time to build trust and get to know each other.

Alisa Shin: Clients don't have to turn over all of their wealth to manage, just give a portion of it just to test drive it.

Amy Chain: And I think we've even talked in the past about there's nothing wrong with checking with a few different people.

Alisa Shin: That's exactly right.

Amy Chain: It's like dating. Date your wealth planner, right?

Alisa Shin: That's right.

Amy Chain: Well, don't actually date your wealth planner, but you know what I'm saying. We have another live question that came in. We're jumping around a little bit, but I love all these live questions. "I have multiple accounts with multiple financial institutions. If something would happen to me, is there a way to sync all accounts together so if something should happen to me, my family can access the information easily? I don't have a financial advisor." What do we think? Should I reread that? That was a little wordy. In a nutshell, I've got lots of accounts at different institutions, is there a way that I can sync all of those up in the absence of a financial advisor so that it's easier on my family if something were to happen?

Alisa Shin: Do you want to go first?

Al Weikel: Sure. A lot of people would keep a document, even their own spreadsheet, that consolidates all of their different accounts and the different providers that they have. To Alisa's earlier point about that personal financial inventory, even their accountant, their lawyers, anything that's applicable to their situation as far as finances and things that they have going on. We have some clients that will actually consolidate on, you can put in outside assets. So some people will try to consolidate in that way just to get it in one place. Best practice is to write it down and do what Alisa said, which is really get it all in one place now and so it's understandable for your heirs.

Amy Chain: That makes a lot of sense.

Alisa Shin: Yeah. I think the only thing I would add is you can certainly organize it that way. Obviously another option is for you to start the consolidation now. If it makes sense to move assets to one place, I think you could go do that over time in a smart way. If you don't do that, I think it's important to have the conversation with your beneficiaries or with your executor or trustee so they understand where those are and what you want them to do. Like your hope is that they would consolidate at one place so it's easier to manage, so that's that part of that open communication to let people know what you hope they do so they know.

Amy Chain: It's the succession planning that we're talking about.

Alisa Shin: That's right.

Amy Chain: This is why it's important to have a plan.

Al Weikel: That's exactly right.

Amy Chain: Okay, Al, I'd like to send a question your way. This question comes from Jacob and Jacob asks, "What is the best approach to transition the management of a portfolio to the surviving spouse, who has little or no knowledge or interest in managing the portfolio?"

Al Weikel: Well, that's not uncommon at all. In fact, a lot of times at Vanguard, we find that—we were sort of founded on self-directed investors and the other spouse tends to not be as investment savvy, and to your point and this question, a lot of times really doesn't care about investments. I would say a couple of things here. One is financial planning and financial education is best done over time, especially if it's not something you're interested in.

For some people, it's like a different language. We live and breathe it every day so it can be fairly straightforward, but for a lot of people—I even think about my parents with their statements,—it's a different language to them, dividends and interest and all the different things on there. So start to involve them in conversations. So when we do guidance and advice conversations, we will highly recommend that the spouse that isn't as financially savvy attend those meetings, and at least listen in and hear it over time.

Amy Chain: What's the right kind of conversation to start with? Where's square one for starting this, bringing the spouse in?

Al Weikel: Well, the ultimate questions to know are costs, right? What are the costs? What's the asset allocation? How do these investments fit into your overall plan? So you've got to start with the basics of what are these different categories of investments—stocks, bonds, cash, mutual funds—what are the markets, so basic education like that. You want to make sure at the very least, after some of these subsequent conversations, they know the right questions to ask, like I mentioned cost, asset allocation, some of those fundamental basics.

Amy Chain: The parts of the equation that you can control, right?

Al Weikel: Yeah, and I would add this. If you want, for a spouse that's uninterested and you have a hard time getting them interested, create that sense of urgency, right? Ask, “What would you do with this portfolio? What would you do if something happened to me today?” Generally, that answer turns out to be “I don't know,” and “I don't know” is not a great answer. It's not a great answer for $50,000, it's not a great answer for $500,000, it's not a great answer for $50 million. So it's important to sort of start that planning.

If you've started a relationship with an advisor, like Alisa mentioned, a third party may be a great way to help educate that other spouse. Sometimes, coming from a different person, it's a little bit easier to start that learning process. Then lastly—this is a little bit obscure—but we've have some clients actually use philanthropy. So if clients are philanthropically inclined, they'll start something like a donor- advised fund where the spouse is interested in giving. They'll start that investment and just by doing that, they'll have to watch the investments and pick the investments and learn what's going on there to try to grow that money to be able to give to a cause that they feel strongly about. So it's a way to use philanthropy and an interest that they have to then sort of get to have to understand the investments, as well, during that process.

Amy Chain: Those are great pointers, thank you. Alisa, if I could come to you with a question, back to transition planning and all of its many components. Mark from Honolulu, Hawaii—oh, I wish we were in Honolulu today with you Mark. "How do you mesh a transition plan with an estate plan?" Take the piece and make it part of the puzzle.

Alisa Shin: That's right. Really for me, it's more systematic. As we talked about a little bit before, it's making sure you have your basic estate plan because I think at the end of the day, your succession planning, your goals and your objectives, your estate plan's what really going to help be the foundation from there, and you kind of build building blocks from there. Make sure your estate plan is up to date, make sure there's flexibility involved in that plan so that your family can change your plan, essentially, if circumstances warrant it to be done so.

Make sure you have the right complexity/simplicity level. There's always a balance between the two. You have to decide at some point. We have many clients who say, you know what, I know I could save X thousands of dollars in taxes if I did this estate planning technique, but the complexity I'm going to bring to my family might not be worth it. Let's do other things that's more simple. That's a valid point. Everyone's going to have a different answer to that question. To really look at that foundational plan and then figure out what you need to do, given your family's circumstances, to have the type of conversations to make sure that that plan will be carried out the way that you want it to be, your investments will be handled the way you want it to be after you're no longer able to do it. So what are the hard questions you need to ask yourself and your family and your beneficiaries?

Amy Chain: Now we've talked about the component pieces a little bit. Alisa, I'd like to stay with you and send a question your way that came in ahead of time. This came from Merrill in Landenberg, Pennsylvania, just around the corner, as a matter of fact. "Do you have any advice on selecting a trustee if there is no appropriate family member?” I bring this question up now because, as I said, we've talked about the pieces of an estate plan. Can you talk a little bit about the people involved?

Alisa Shin: Sure. Maybe before I answer the question of how to select it, it might be helpful just to talk a little bit about what a trustee is supposed to do. So a trustee is the individual or individuals, if you have multiple trustees, or a, what I call a corporate trustee, typically, a bank or trust company, who is going to be charged with really three main things. One is to manage the investments, your investments, after you've gone. Two, make decisions as to when assets should be distributed to your beneficiaries and under what circumstances. Now your trust document's going to give them the map, so to speak, the guide, as to what they can use it for and what they can't, but still there's a trustee makes that final decision whether or not the money should actually leave the trust and be given to the beneficiary.

And then the third part is the administrative duties that a trustee has. A trustee is responsible for bookkeeping the trust assets so that they can always accurately report the income in the principal trust, what's happened to the money, as well as the tax reporting. The trust itself will likely have to file its own income tax return, so the trustee's charged with doing that.

So the question always comes, "Who should be my trustee?" People think that their beneficiaries can't do it. What I usually say to them is take one step back, and think about who your beneficiaries are, who your family members are. My rule of thumb is those individuals don't need to be smart enough to know how to do all of what I just said, but they do need to be smart enough to know when to ask for help and where to go get that help. What I mean is they don't need to understand how to manage the investments. They can always go and hire an investment advisor to take care of that portion for them. They can hire an accountant to fill out the 1041s, the income tax returns; they don't need to do it themselves.

For a lot of clients, it makes sense for the beneficiary to be the sole trustee, but for clients who have concerns about how that beneficiary might spend money, or if they have asset-protection concerns, they might have a co-trustee, someone independent. If they have a beneficiary who is not yet savvy in some of these things but they think they could be, a lot of times they'll have that beneficiary be co-trustee with an independent trustee, like a bank or trust company. I think a good bank or trust company would help train, so to speak, the individual co-trustee, help them understand the investments, help them understand budgeting, that kind of stuff so that they can make informed decisions.

Amy Chain: Good. Thank you for answering Merrill's question. Al, I have a clarifying question that I'd like to send your way. Janet would like to know what a donor-advised fund is and how it's set up. You talked a little bit about how that can be a way to bring your family members into some of your financial lives.

Al Weikel: Sure. A donor-advised fund is its own charitable entity, if you will, its own 501(c)(3). You make a donation to the donor-advised fund and then get an income tax deduction. Then the funds within that donor-advised fund actually accumulate tax free because it's now within that charitable entity. Then you can choose where you want those distributions to go to. The distributions do have to go another qualified 501(c)(3), another qualified charity, but it's a great tool because it can accumulate tax-free, like I mentioned, and then you decide where it goes. You can decide not to distribute in some years and let it continue to build, so potentially give a higher gift down the road. So they're great vehicles that people can use for their charitable giving and charitable planning.

Amy Chain: Thank you. Okay, Alisa, for you. Tom wants to know how does one know whom to trust to do it right? Every firm sounds the same. Al, feel free to jump in if you have anything to add.

Alisa Shin: Yeah, we'll probably tag team on this one. That's a great question. I think it's all about doing due diligence and asking hard questions. Don't just talk about "what's your investment performance" because that's all in the past. You don't know what’s going to be in the future. Ask questions about what the costs are to hire this investment advisor? Are there any additional fees for that initial cost, like are there transactional fees behind your trades? Are there fees to close an account, to open an account? What are the other fees that's not apparent on the statement?

Talk to them about what kind of a relationship you'll have with that financial advisor. Is this financial advisor going to be able to work with your other advisors? At Vanguard, we really believe that you should choose things holistically, and the best result tends to be when all of your advisors can get along and work together so that every step makes sense and is in concert with your overall wealth plan. Talk to the advisor about whether or not they'll listen to what your thoughts are and help you understand why they might advise something different, or will they change their advice, or are they just going to implement whatever they want to implement? How discretionary really is discretionary in that type of relationship?

To be honest with you, there are recipes for gut instinct. When you meet them, meet them in person. Talk with them several times. Make sure that you can relate to them on a personal level. If you cannot tell your investment advisor, you know what, I really do have concerns about how my daughter spends money, or the husband that she's married to, he tends to spend lots of money, that person's going to have a very hard time getting you to the place that you need to be at the end of the day.

Amy Chain: So we're back to dating.

Alisa Shin: Exactly.

Amy Chain: Shop around, meet lots of folks, and then ultimately go with the one that you feel the most connected to.

Alisa Shin: Right.

Al Weikel: I would just add—I would—I think you hit all the points great. I would just bounce it up a little bit. I think you said in the question there every firm sounds the same. Well, every firm isn't the same and this maybe is a little biased, but some firms are owned by shareholders where there's dual masters to serve. Some firms are owned by families. It can be like Vanguard's, mutually owned. We're owned by the shareholders. So our job is to do what's in the client's best interest all the time, and we have a luxury of doing that because of our mutual ownership structure. So I would say not all firms are the same.

Amy Chain: It’s an important point to add. Al, while I've got your attention, I'm going to send another question your way. Jeremiah from Oakland, California, would like to know how best to transition from a largely managed portfolio to a simpler, index portfolio over the next couple of years? So before we get into how best to do it, maybe you could talk to us a little bit about why somebody might consider doing something like that.

Al Weikel: Well, okay, so to answer that conceptually first then, I think it makes a lot of sense. I mean, consolidation and simplification makes a lot of sense, and obviously for heirs and for the surviving spouse, a simpler portfolio is going to be much easier to handle than a more complex portfolio. We have many clients, and I've seen it a lot of ways where clients have transitioned over time, where they have three, four, five funds that are extremely low cost, well-diversified, and tax efficient. You know what? Everybody understands that. Where we've had other clients that I've worked with where they've collected mutual funds, well-performing funds over time, they have lots of different brokerage holdings. They could have 100 different mutual funds and lots of different brokerage holdings, which is very difficult for the family to understand, I would argue even for the savvy investor to understand.

Amy Chain: So it may not even be an actively managed to index discussion, more simply—a simplification-type discussion.

Al Weikel: Exactly, exactly.

Amy Chain: Yeah, do you really need all these funds.

Al Weikel: Yeah, and if you're going from a complex portfolio or managed portfolio to a simple portfolio, there is a lot to look out for, and I don't want to get too granular there, but you have to look out for, for instance, your asset allocation. That's what's going to dictate your rate of return and the volatility of the portfolio. So as you're moving those portfolios or you're moving toward the simpler portfolio, you've got to watch that you’re not taking your risk out of—making it too risky or less risky depending on if you’re selling equities or bonds.

You have to look at taxes, right? So do you have appreciated securities? Are you going to sell those for a capital gain? Or do you have some losses to offset those gains? People will do tax-loss-harvesting. If you have highly appreciated securities, some people will use those for gifting to charity as you move that portfolio. That's where something like the donor-advised fund, again, comes in again. Step up in basis, so potentially estate tax implications where your basis gets stepped up when you pass away, so you'd want to sort of—there's a lot to look out for there, so I guess my best guidance would be to consult with a professional if you are going to move that portfolio, especially large portfolios and complex portfolios because there's a lot to think about in that transition.

Amy Chain: That was helpful. I'm going to stay with you for one more question here, Al, because I know that we've talked about this in the past. This is a live question that came in from Karen in New Jersey, and Karen says, "What advice do you have for bringing your children into the conversation and letting them in on just how much money you have? We have children who are 19, 15, and 11, all smart enough to someday understand our finances, but we don't want them to grow up feeling entitled because we worked hard and amassed a comfortable amount of wealth." We've done a webcast in the past where you outlined for the viewers some really interesting ways and different ways to bring the family into the fold. Maybe you could talk a little bit about that?

Al Weikel: Sure, absolutely. Well, I'm a huge proponent of starting those conversations earlier than later. I think communication is one of the absolute keys to success, so starting those conversations earlier than later is definitely a best practice, even for a younger individual. There's different age-appropriate things and age-appropriate discussions you can have. So for an 11 year old, it's maybe talking to them about just investments in general. You don't have to necessarily disclose the numbers, but kids are smart enough to see how you're living, what type of house you live in, what type of vacations that you're going on. So if you pretend it doesn't exist, that can sometimes lead to a level of mistrust, so you want to have more communication about that.

You also want to judge your kids and their level of readiness for this financial information. So for the 19 year old, for instance, if they are going to college and doing well and having a job there, and they're very responsible, and they don't spend frivolously, well, perhaps they've earned a little bit more information than not by obviously showing those behaviors that would say that you can trust them with this information. So I would say start the communication earlier. I say keep the communication age-appropriate, and trust that that communication and that bond and that trust will be a benefit in the long run.

Amy Chain: One idea I remember you suggesting last time was sort of as a family, coming up with a cause or a goal or something and working towards it. Donor-advised funds are one way to think about it, but if you bring your kids into the fold, think of a cause that you can all believe in and buy into. You can start teaching them some of the practices that you want to impart without showing them the bottom-line number.

Al Weikel: Absolutely, I mean, lots of benefits there. They can be looking into the charities, right? So doing due diligence, I mean, a great exercise for young kids to do. They can be, like I mentioned, with getting the other spouse involved working with the investment account. Have them choose. Give them each, say $250, to give to a cause. Then have $500 that they all need to agree on, so you start to build teamwork within the family, and then inherently with a good cause like that and with philanthropy, boy, is that a great bond between parents and kids that tends to last a lifetime.

Amy Chain: And it's a good way to see how ready they are, right?

Al Weikel: Absolutely.

Amy Chain: Good. Okay, let's see, Alisa, I feel like I need to send a question your way. Let's go to a question that John from Kentucky, sent in ahead of time. John says, "My wife and I have three young adult children and it's likely that my wife will outlive me by several years, if not decades. What's the best way to make sure my portfolio—my retirement, investment, real estate, and insurance products—are used to take care of them?"  Big question, important question.

Al Weikel: You saved up the big one for Alisa.

Alisa Shin: So probably the obvious answer is it starts with your estate, your basic estate plan; your will, your revocable trust. I think you said this gentleman was from California. Is that correct?

Amy Chain: Kentucky.

Alisa Shin: Kentucky, okay, so Kentucky is not a community property state, so it's not necessarily so that they would have a revocable trust. They might, but having a basic plan put in place that says what should happen to the money, and this is where I really would encourage him to think through what his goals and objectives are, think objectively about what concerns he has about his kids, about his wife, or are there no concerns whatsoever? Kind of getting to the other question in terms of how to get your—keep your kids motivated. You don't want to "dis-empower" them, so to speak. If those are concerns, you want to be very particular about how you design a trust.

A lot of times, people say every trust looks the same; it's boilerplate language. It actually really isn't. A trust can be customized, although I'll caution people not to be too customized. The more customization you do, the more expensive it's going to be. The other part is if you customize it too much, you want to make sure—well, if you customize it, you want to make sure that it's something that someone could administer and understand and implement, but a trust can be designed almost in any way as long as it's not against public policy, and it can be designed as flexible or as restrictive as you would like. So really work with your attorney, with you other advisors to think through what components you need in your trust to get you to your end goal.

The next part is thinking about who is going to take care of those trust assets. Should your wife do it and be sole beneficiary of the trust? Should there be someone completely independent? Should the kids be involved depending upon their ages? There's no right or wrong answer. It's really based on those kids and the relationship with the parents and they're—how busy they are, to be honest with you, to some degree.

The last part is kind of alluding to what Al was saying, going back to that. It's communication. It's the education. It is making sure that they understand how to how to budget, how to live within a budget. Make sure they have some base understanding about investments. They don't need to know how to do it, but they have to be smart enough to be able to question their investment advisors to make sure they're getting the service that they need.

For clients who aren't philanthropically inclined, there’s other things you can do to help your kids get there. I mean, we've had some clients who have said for their kids in college, they come home and work. They might say for every dollar that you earn, I'll match that, and I want you to call Vanguard, open an account, and my representative's going to work with you to think through how you want it invested, and you make your decisions, and you see what happens. Usually it's not a huge amount of money, and so for a lot of clients, it's a good—almost like a test. It might not be a purposeful test, maybe it is, but you see . . .

Amy Chain: A warm-up, perhaps.

Alisa Shin: A warm-up, exactly, to see what your child does, what the beneficiary does, and that's going to then help you decide what your overall plan should look like. If they go off and just start spending the money, they don't open that account, that might tell you something about their maturity level, but if they save it, they don't touch it, well maybe you don't need to be as restrictive as you might have thought you needed to be.

Amy Chain: So if I could summarize for John, his next steps are, number one, figure out what it is that you want your assets to do for your family. Number two, figure out who it is that's going to help you execute on that, and number three, communicate. Make sure that everybody involved understands what the plan is when the time comes.

Alisa Shin: Exactly, communicate and educate.

Amy Chain: Communicate and educate. We have another live question that I'm going to toss out to both of you that ties into this. So if you have a plan—you have your succession plan—and it specifies an asset allocation, will Vanguard provide a rebalance report yearly to my trust trustee? So if you have a plan, you've got somebody helping you execute on it, what kind of services can Vanguard provide to help make sure it's executed appropriately?

Alisa Shin: You want to take it or you want me to?

Al Weikel: Yeah, I can start. Depending on which segment you're in, like I mentioned, there's access to CFP professionals that on a consultative basis, on a one-off basis, on a yearly basis, for that matter, could review the portfolio and look at it. Now, granted, with trust this could be a trickier topic as far as a trust and a fiduciary responsibility, but if it's just—if it's delegated as just an investment manager for the trustee, it could be looked at. If you're part of an ongoing asset management service, we definitely have the capabilities there to provide that service, again, specifically as an ongoing investment manager for trustee. So I think there are a lot of different options there. Be best to talk to a rep and figure that out.

Alisa Shin: Yeah, I would just add just to clarify in terms of what services we could give that trustee, it's really twofold. One, as Al said, there's an investment manager for trustee service that's an ongoing relationship where the trustee is making the decisions about distributions, taking care of the administrative things, but they're simply delegating to Vanguard the investment responsibilities, so we would make recommendations, give advice as to what the asset allocation should be. We would monitor the portfolio and we will rebalance.

Amy Chain: So this was good. Let's talk a little bit about these types of relationships that you can have with a planner, and it actually gets to a question that Juan from Milwaukee has asked, and that is, "What is the difference between a fee-only and a fee-based management arrangement? Can you help explain the term "revenue-sharing" and the distribution of fees?" So let's just level-set. Who can help you with this? How does this work? What are the different types of payment arrangements that exist out there?

Al Weikel: Yeah, so let me take that and address the question specifically because it kind of gets to your dating comments. Who's going to pick up the tab here? What are the expenses? Fee-only is just what it says. It's a fee-only service that's usually based on assets under management. Fee-based is a little trickier. Fee-based was devised by brokers and includes a fee, usually for assets under management, plus other expenses like commissions. So you have to be careful there because you look at fee-based and it could look like a lower fee than fee-only, but you have to be very careful to look at what are those other charges— commissions, like I mentioned, brokerage fees—that you may be charged, as well. So fee-only is what it is. Fee-based, you better look deep.

Revenue-sharing is—that's when a company is actually compensated for using another company's product, and that is a specific financial incentive for that company to use those products, and that's an important point. It may not be a bad thing, but it is an incentive for that company to use another company's products. That generally is not an extra fee that's charged to the client.

Then you mentioned distribution fees. That's another fee where generally, distribution fees are referred to as 12b-1 fees, and those are that are used for the selling and distribution of investments, so like brokerage commissions or sales commissions, those are also—sort of fall under the category of advertising fees, fees for printing and mailing prospectuses, fees for printing and mailing sales literature, things like that. The 12b-1 fee is usually an additional part of the expense ratio.

Amy Chain: So that's embedded in the cost of the investment versus something that the advisor is charging.

Al Weikel: That's exactly right, and the expense ratio comes off of assets and earnings. So again, to really understand the components of the expense ratio, and costs matter that much, so to make sure you understand these different fees. So it's a bit confusing; fee-only, fee-based, revenue-sharing, distribution fees. Know your costs because costs matter.

Amy Chain: So let's break that down a little bit again. So we've got the—if you're hiring an advisor, you have to look at how they're being compensated, both from you and from others. Are they receiving compensation from fund distributors or security distributors to sell their products? You also have to look at the cost of the investments that you're making with them. So it's the expense ratios and any other fees associated with commissions or buying and selling from that particular advisor. Is that right?

Al Weikel: That's correct, absolutely.

Amy Chain: There's multiple levels of fees that need to be considered.

Al Weikel: Yep.

Amy Chain: Let's keep with that fee theme here. Ralph from Tucson, Arizona, where I’m sure it's very warm today—Ralph, I hope you're in a nice air-conditioned room. "Seems to me," Ralph says, "that the fees for Vanguard or anyone else to manage a well-balanced portfolio are relatively high if the majority of the funds are in low-cost stock index funds and low-return bond funds. What's the benefit to justify the cost?"

Al Weikel: That's a great question, Ralph.

Amy Chain: Let's break that down. There's a few things to talk about in there, I think.

Al Weikel: Yeah, there is, there is, because we would say that simple can be the absolute right things for clients. It does not have to be complicated. Like I mentioned earlier, keep it low-cost, keep it diversified, keep it tax-efficient with even a few funds. That can make a lot of sense. To Ralph's point, what am I paying for then? Well, it's a great question. In fact, Monday on a very well-known investment website, there was actually an article out there where the writer did a piece based on an internal Vanguard white paper from our Investment Strategy Group called, "Advisor's alpha," and it talks about really just what Ralph is getting at here, and the point is that the advisor really does have a lot of value, even if that portfolio seems fairly simple.

So for instance, there's incredible value to the relationship, and if you really find a competent, trusted advisor, there's a lot of value to that. The advisor can really serve as a behavioral coach. I mean, that's one of the major things that an advisor can do for you. What I mean by behavioral coach is, even for a savvy investor, if the market's extremely volatile, what we see a lot of times when we look at cash flows is when the market's down, people tend to sell. When the market then starts to do well again, they buy.

Well, what did they do? They just did the opposite of what you really should do. They just sold low and bought high. Well, an advisor can help you with some discipline there. It can help you not react to that volatility in the market.

Same thing with rebalancing. We talked about asset allocation being very, very important. If you're supposed to be 50% stocks and 50% bonds, and equities have done well, and you're now 60% stocks and 40% bonds, you may be saying to yourself, "I kind of like that. I had all that return on equities." Well, guess what? The right thing is to get back to the 50% stocks, 50% bonds, which was your allocation. That's based on your risk propensity. That's the volatility that you're really going to be comfortable with. So you could be overexposed to risk, so again, that advisor can help you be disciplined in those situations.

Lastly, a lot of times, advisors will do lots of other things like income tax planning, prospective income tax planning, estate planning, different things like that that can really add tremendous value. So I would say if you get a trusted, competent advisor, that is money well-spent.

Amy Chain: That was a great sound bite, thank you. We are nearing the end of our time together, but I think we probably have time for one more question, so Alisa, if you could weigh in for us, this question comes from David in Norton, Ohio. David, thanks for your question. David asks, "If you know that your beneficiaries can't handle your portfolio when you die, who should you use as an executor?" So again, here we are, executor versus trustee. Let's talk about roles and responsibilities and then summarize once again how to go about finding that person.

Al Weikel: It's a good thing we have Alisa here today.

Alisa Shin: So an executor is a little bit different than a trustee. A trustee is really the person who's in it for the long haul, so to speak. An executor only has roles and responsibility for a finite period of time, typically anywhere from 6 to 24 months on average depending upon the complexity of the estate. Your executor is simply charged with, when you pass away, to figure out where all of your assets are, marshal them, pull them all together, pay your last debts and expenses, file your last income tax returns, manage those investments until it's finally distributed out, and ultimately distribute out those assets pursuant to the terms of your wishes, to the terms of your will, and then lastly to do the tax-related things that come with your estate, which is your estate tax returns, any state, estate, or inheritance tax returns, that kind of thing. Typically that takes anywhere from 6 to 24 months on average.

So again, much like a trustee, your beneficiary doesn't need to know how to do this all themselves. They can hire an attorney or an attorney and accountant who can take care of the vast majority of this. The more you have the attorney or the accountant do, the more expensive it will be. So often times, we'll have clients say you know what? I need my attorney to prepare the legal paperwork that needs to be prepared. I need them to prepare the estate tax return, the income tax return, what have you, but I could actually contact Vanguard. I can contact my local bank. I can contact all these different people, get the money into one account, the estate account, and take care of that.

I don't need to pay for a paralegal or for an attorney to do that. I can take care of appraising the house. I can take care of appraising the, what I call tangible personal property—your furniture, your artwork, jewelry, if there's anything valuable.

So again, your executor doesn't need to know how to do everything, but they do need to know—be smart enough to know when to get help and where to go and get that help. If you don't have any family members that can do it, I would encourage people to look at close family friends, close advisors, possibly, accountants, attorneys. Sometimes they're willing to serve it, as well as banks and trust companies also have executor services, but that obviously usually comes with a higher fee than what a family or friend might carry out.

Amy Chain: It sounds like we're sort of back to where we started, which is plan for that now. Start those conversations today so when the time comes, you're ready.

Alisa Shin: Absolutely.

Amy Chain: Yeah, well, that's bringing us to just about the end of our hour so before we sign off, anything you two would like to add?

Alisa Shin: I think just to sum it up, I would say start with your plan. Take a step back, think about what your goals and objectives are, and make sure your plan is in place. Look at the complexity of it versus the simplicity of it. Make sure you have flexibility built in your plans that your family can change even after something happens to you.

The second part is to communicate. Communicate, communicate, communicate with your family. Have a conversation about what you're doing, why you’re doing it. Ask the hard questions. Ask yourself the hard questions because for many families, what they want is their kids to still have a relationship after they're gone, so you want to have as much conversation about your decisions as you can up front.

The last part, which is part and parcel of the communication is education. It's preparing your heirs. We've seen too many cases where children don't understand how much wealth their family has and all of a sudden, they have this large inheritance and they just don't know what to do with it. They're almost afraid to use it or do anything with it because they're afraid that they're going to make that wrong decision, they're not going to do what Mom and Dad want, so that ties back into the communication.

Amy Chain: Al?

Al Weikel: Yeah, I think again, Alisa said it well. I would just—I would reiterate those five keys to success. Start early; we talked about that a lot today. Have a clear vision for what you want to do and how you want to do it. Communication, right? Communication and trust—and trust is the other big word there—communication and trust really are the key to success. Have that plan and have clear timetables and perhaps I would add that. Make sure you hold yourself to those timetables. If you're going to transition but you think you can still manage the portfolio, don't. Get that relationship with the advisor and start those relationships based on the plan that you laid out. I think that's important.

Then lastly, like Alisa mentioned, prepare your heirs. Take the time to do that, take the time to educate. So I think we had talked about a lot today. I think we had a great conversation. I would say make it a priority and take action.

Amy Chain: That's great. On that note, we'll wrap it up. I want to say thanks to all of you for staying with us today. Before we let you go, though, we'd like you to respond to a survey. It should appear on the right side of your screen before you close your browser. If you can't see the survey, check your browser's zoom settings. Make sure they're set at 100%, and also, stay tuned. In a couple of weeks, you'll get an e-mail from us with a link to some highlights from today's webcast along with a transcript. And from all of us here at Vanguard, thanks for tuning in and we'll see you next time.


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