A Strong Economy and Smart Tax Moves: Best of Barron’s Advisor Q&A


We hope that you have enjoyed the holidays and prospered in 2023. December marks a milestone for our Advisor Q&A: its fifth anniversary. Since we launched this weekly feature in late 2018, we have had the opportunity to go deep with outstanding advisors and leaders at businesses across the industry—from one-person practices to the biggest Wall Street firms. We’re privileged to have had this opportunity and hope these interviews have been of value to readers. As we prepare to start another journey around the sun, we thought we’d share some highlights from recent columns. Here’s to a happy and healthy new year.  

Stephanie Link, chief investment strategist, Hightower Advisors, Chicago.

Why has the U.S. economy performed so much better than expected this year, even as the Fed has raised rates? The reason is simply that we have a lot of stimulus still in the system. Over 2 1/2 or three years during Covid, we injected into the economy the equivalent of 60% of U.S. GDP through monetary and fiscal policy. To put that into context, in the Great Financial Crisis, the fiscal and monetary policy put in place was equivalent to 5% of U.S. GDP. So there’s just been an enormous amount of liquidity, and liquidity takes a long time to get into the system. On top of that, the Inflation Reduction Act just gave us $2 trillion in terms of new stimulus for infrastructure. And that’s been a nice offset to the higher-interest-rate environment. I’m not saying we’re going to come out of this still growing at 4.9% like we did in the third quarter. In fact, the fourth-quarter growth is running at about 2%. But I think the economy has enough momentum to handle higher rates.

What’s the pivotal economic indicator to keep an eye on here? The job market is really the key to everything because it has been so strong. Why are jobs important? They’re the reason the consumer, which is 70% of the economy, has hung in. It’s definitely been more tied to services than goods, but I don’t care. It’s still an important number, and services consumption is 75% of overall consumption. Is the consumer going to eventually slow down? Sure. But watch that job number. There are huge tailwinds within manufacturing, specifically in aviation/aerospace and the onshoring theme, which I think is a 10-year theme. It’s all predicated on the money coming from the Inflation Reduction Act. The price of gasoline is also interesting to watch: It’s down 40 cents year over year. That would mean there’s $54 billion of potential consumption that could be spent just from that savings.

And then at the same time, inflation is starting to pull back. We’re making progress on CPI [consumer price index], on PCE [personal-consumption expenditures], on unit labor costs…so I think the Fed is done raising. Inflation is higher than they want it to be, but I think we’re making big, big progress. Rates will stay higher for longer; that’s what the Fed wants. But I don’t think they’ll appreciate more from here. As a result, I think equities can do well, especially into the end of the year. And especially since earnings have come in better than expected: Eighty-two percent of companies that have reported have beaten expectations. Profits are on the way up—they’re not going gangbuster, but they are being revised higher.

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How are you feeling about 60/40 or 70/30 portfolios given today’s higher bond yields? For the past 10 years, with the zero-interest-rate policy, there was no alternative [to equities]. Clearly that has changed. We’re seeing that with our advisors and what their clients are asking. If you can hold four- or five-year paper and get 5%, maybe even more, that’s a real alternative. That being said, you don’t want to forget about equities, because the long-term total return average for the S&P 500 is 7.7%. If you’re holding on to fixed income, I think you have opportunity cost.  

Daniel Wilson, private wealth advisor, Skyeburst Wealth Management (Ameriprise), Auburndale, Mass.

In client portfolios, where have you been moving money to and from in recent months? We just did some rebalancing recently where we’re equally weighted in value versus growth. What’s kind of neat to talk to our retirement and preretirement clients about is cash. We hadn’t talked to clients about cash really since 2008; it has been 15 years of no return. Over the past 12 months, we’ve been having conversations around money market accounts and CDs for our clients who are more conservative. It has been nice for them to have safety of principal, to see that things are not fluctuating. I actually think normalized monetary policy is a good thing. There’s something to be said for retirees and preretirees taking on less risk to get more income.

CDs’ and money markets’ attractive yields pose an ethical test for advisors who claim to put their clients’ interests first, don’t they? Because they don’t generate fees. At the end of the day, you have to do what’s in the best interest of your client. I always tell my advisors to only recommend what you’d recommend to your mother.

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Sarah Moore, president, Donaldson Capital Management, Evansville, Ind.

Give me one or two keys to successfully managing people. One of our cultural philosophies is what we call “we over me.” It’s the mind-set of considering how all the decisions you make in your day-to-day functions impact everyone working toward an end result. That’s easy to say to somebody who’s an owner here. But if you’re on our trading team, or you’re new to the company, what motive do you have to put the betterment of the company above your individual development or goals? That’s where I think compensation models matter. We share 10% of our top-line revenue with everyone in the company every year through our revenue-share incentive program. Aligning compensation with doing the right thing creates a lot of loyalty.

I also think everyone understands that “we” are only as strong as the weakest “me.” So there’s a culture of accountability and individual development that comes along with that as well. It’s not just blindly plugging into the DCM ship. It’s personalized development plans and strong management. We have incredible employee retention. I think that’s due to our care as human beings, a strong compensation model, and work that matters: connecting all of our team to the actual end result of what we do for clients.

You’ve had a really successful career and you’re not yet 40. What have the keys been? I always try to make decisions that open more doors than they close. I surrounded myself with mentors who brought out the best in me, and I believed them when they gave me feedback, and I applied it. And those two things are lessons that I learned from watching my entrepreneurial family run their business. My father always tried to look ahead and position his company and the people who worked for him to be able to grab opportunities when it came up. And he surrounded himself with people who brought out the best in him and put him around tables that mattered.

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Virgil Kahl, president, Spring Ridge Financial Group, Wyomissing, Pa.

What issues are your clients most concerned about right now? I think everybody remembers what their account balance was at the beginning of 2022, and some people just want to know, “When am I going to get back to that number?” In addition to wondering when the markets are going to stabilize, national debt is on everybody’s mind. Everybody knows that tax rates are likely to change after the Tax Cuts and Jobs Act of 2017 sunsets at the end of 2025. Everybody’s probably going to get at least a 3% increase in their taxes.

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Everybody wants the next generation to be more prosperous than the one before. But most of my clients are concerned that the future is going to be more difficult, not easier. As far as the market goes, everybody was taught to diversify and have more fixed income as you get older. People are looking at what happened to the income markets last year and saying, “Well I tried to be safe, and it didn’t work out so well.”

It’s a fair complaint. What are you telling them? Post-2008, we for the most part had a zero-interest-rate environment before last year. That was not normal. What we’re getting back to now is more normal, where you can actually earn money on your savings. If you invest in the bond market now, you’re buying at discounts to par at high interest rates. And going forward, once the bond markets stabilize, the stock market will also stabilize. Both markets tend to keep repricing themselves as interest rates change, and it’s not going to last forever.

Are you saying that it’s safe to go back into a 60/40 portfolio? Last year we went through, “Oh, 60/40 is dead.” Well, I think the 60/40 allocation is probably going to wake up.

You mentioned that you expect an increase in tax rates. How are you preparing clients? It is important for financial advisors to show clients what their expected tax rates will be over the balance of their lives. Since the Tax Cut and Jobs Act sunsets at the end of 2025, many people will see an increase in their effective tax rate even if their income stays the same. Therefore, people have the tax years of 2023, 2024, and 2025 to “fill up” their tax brackets by converting some of their IRA and/or 401(k) balances to a Roth IRA, to take advantage of potentially the lowest tax rates for the rest of our lives. 

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We’re also advising people on their estates. Right now the estate tax exclusion is over $12.9 million per person, but it’s probably going to go back down to where it was. Nobody knows for sure, but let’s say it goes back down to $6 million. People who don’t need all the money that they have need to come up with a plan to make sure that they take advantage of the high estate exclusion limits before the end of 2025, by funding trusts or executing gifting strategies to minimize the size of their taxable estates before the limits decrease. If you already know where you want your money to go after your death, you can set up a plan to get it to those loved ones or charities while you are alive.   

The other thing that’s not talked about a whole lot is standard deductions. Because they went up a lot with the Tax Cuts and Jobs Act, most people don’t itemize anymore. If the standard deduction doesn’t stay where it’s at, people will have to meet with their accountants. Things that they used to be able to deduct, they might be able to deduct again.

Jordan Mayer, financial advisor, J.P. Morgan Wealth Management, New York.

What are your private clients concerned about these days? Most people today are concerned about the economics of high inflation, about higher valuations in the market. They’re concerned about the geopolitical situation and stability in the world. On the planning side, a lot of people are concerned about potential tax law changes, especially with the sunsetting of the estate-tax exemption coming up in a couple of years. Higher tax rates, especially here in the New York area, are another topic of conversation.

What are you telling your clients when they bring up the sunsetting of the current tax regime? That we expect that the lifetime exemption is going to go down considerably, and that we need to have a collaborative conversation with their estate-planning counsel, because we do like to quarterback those situations. And they probably need to think about using that lifetime exemption to the extent that they can set up trusts for family members. And we tell them to really think about their wealth transfer strategy and what they want their legacy to be.

In other words, don’t put off planning for 2026, even though it seems far away right now. Yes. One of the things we hear from attorneys all the time is to be early to the game. They remind us that the last time this type of change was expected, in 2012, they didn’t get to everybody just because of the amount of volume that was in their offices.

What is your sentiment about the economy? We think there are two potential outcomes ahead. One is that we have a soft landing, and that’s obviously the preferred outcome. However, this market is betting that inflation will only decrease. If there are any surprises to the upside with inflation, you could certainly have a lot of damage. So we watch the verbiage that’s coming out of the Fed very closely. And we will watch valuations and be cautious when things get pricey.

Write to advisor.editors@barrons.com



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