Practice Makes Perfect: Planning for 2025

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RECORDED EPISODE:

GREG HALL: Greetings! Welcome to another edition of Accrued Interest, PIMCO's podcast, focused on helping financial advisors navigate markets and do better with their clients. My name's Greg Hall. I head PIMCO's Wealth Management business in the United States. Really excited about today's episode. Broadcasting today from our headquarters in Newport Beach, California, where we're hosting a large number of RIAs here in the office, talking about markets and interest rates and politics and policy and helping them think through all the implications of what's going on in the world today.

Hopefully helping them do better on behalf of their clients. But because we're all gathered together here at our headquarters, I have the incredible good fortune of being joined by two of my favorite people at PIMCO. First of all, and in no particular order, John Nersesian; John heads the Advisor Education Division within the Wealth Management group here at PIMCO.

He has 40 years of investment industry experience.

JOHN NERSESIAN: Thanks for making me sound old, Greg! I really appreciate it.

GREG HALL: You know, it's, I just, I wanted to credentialize you for the audience. It wasn't personal. John's a huge crowd favorite for us in the wealth business. He travels all around the country doing something that I think is really important for us as a business and as partners to you as financial advisors, which is, he really focuses in on practice management, on adding the tools and the capabilities to your toolkit so that you can not only provide your clients with great investment advice, but help them do all the things in their lives and around the edges that actually can really dictate outcomes. And we're gonna get into a lot of that, the meat of that topic as we talk to John over the course of today.

I was gonna list out some of John's credentials. I frankly got lost in the acronym. So we're gonna leave that to the side. But suffice it to say that he has been recognized by a number of leading organizations as knowing what he's talking about. Also at the table with us today is Mary Hoppe. Mary has been an account manager with PIMCO for a long time. She's a senior vice president. She serves the Boston market for us. She's a member of our private client group. And she covers advisors who are affiliated with banks and broker platforms, but also independent advisors. And she's here for our conference and having a good time with her clients, and she was able to join us and reflect their views as part of this conversation. Welcome, Mary!

MARY HOPPE: Thank you! Thank you, Greg! It's a pleasure!

GREG HALL: Thanks for being here. So, the first topic I wanted to kind of get into, and then I wanna step aside a little bit, because you guys, you've got such experience in this and you, you've seen so much of it. But one of the themes of today's conference and as we've talked over the last couple of days getting ready for this podcast, is just how much the role of the financial advisor has changed. Looking back, even just a couple of decades. And, and so give me, don't let me presume anything. Give me your thoughts on that. And, and maybe John, we can start with you, but Mary, you know, get in there 'cause you know the space so well..

JOHN NERSESIAN: The evolution of advice. So, when I started my career at Merrill, gosh, this was 40 plus years ago. Back then, the job of the advisor was very linear. We're gonna help clients determine their goals and allocate portfolio assets.

And that was the assumption in terms of what an advisor did. Stop and think about the complexity of wealth today, how the typical client has so many financial decisions to make, and how it's so confusing to them in many particular areas. I'm a big believer that at the end of the day, that investor has a much better chance of achieving a successful outcome if they've got a competent partner alongside for the ride. I used to think, Greg, that when I was an advisor, that having money would make life easy. Right? More money means, I don't know, more luxury, more flexibility, more security.

But having more money comes with more responsibility. How do I grow it? How do I protect it? How do I distribute it? And I think for some of those important decisions, you need a competent advisor along for the ride to help you make the important financial decisions.

And it's not just about having more money. I think sometimes we make that mistake assuming that the job of the advisor is to increase a net worth statement. When I work with an advisor and they help me make these decisions, and they help me navigate my way through the complexity of wealth, it provides me with a mental peace of mind to enjoy my financial success. I can do the things in this world that are important to me. I can spend time with the people that I love and I care about. I think a lot of advisors maybe miss that, the real personal impact they have on the lives of their clients, not just their wallets or their pocketbooks.

MARY HOPPE: It's a really good point, John. When I first started in this business, the advisor was the access point to the capital markets. And the value they brought was capital markets expertise.  But as the years went on, and also they were there to help people figure out how to save for retirement.  And as time has gone on with the advent of online brokerages and self-serve and indexing, the advisor's job changed, it changed from transactional and access to the capital markets to now planning to get to a specific outcome. Getting your kids to school. Saving for that wedding and of course, retirement. But along the way comes so much more complexity, not just complexity of the wealth picture, but complexity of the advisor's business.

GREG HALL: How difficult is it for advisors to keep up with, as the breadth of that job description has increased. Right. These things, they tend to domino on each other, right?. You know, so you, all of a sudden you've gotta be an expert in so many areas. So I'm curious, Mary, I mean, it must be exhausting to try and stay on top of it.

MARY HOPPE: Well, speaking on behalf of the advisors who I work with, you're right. They, the demands on their time are absolutely incredible. Because not only are they still responsible for the capital markets decisions and these planning decisions, they have to grow their teams to meet those demands. They have to be much more connected to the other professionals who surround their clients because they need to be connected to the estate planning attorneys and the CPAs. And then there's this fiduciary component that they're responsible for.

GREG HALL: Talk about that. Talk about that. That's important.

MARY HOPPE: Yeah, the advisor, you know, is a fiduciary at the end of the day. And the requirements around that, the regulatory requirements,

GREG HALL: The standard of care, their obligation to think of the best interest of the client.

MARY HOPPE: Right. Right. Right. And that's always been there for good advisors who take that responsibility. But now it's codified in law and there's, there's things they need to do on a daily basis to make sure they're compliant with all those fiduciary regulations. And it can be very overwhelming.

GREG HALL: It’s a good segue for a question I forgot to ask you, John, 'cause we, we've been talking about the changing role of the financial advisor. The increasing complexity of the financial advisor, the financial advisor who has gone from capital markets and, you know, brokerage.

Very investment oriented. Or only investment oriented. And that's still, of course, key function o f the financial advisor. But now it's tax and estate planning, it's handling generational wealth and family governance, how to talk to the kids about the money they may be inheriting, it's life coach. There's a lot of handholding, I think that goes on, you know,

JOHN NERSESIAN: Behavioral science monitor.

GREG HALL: How, Yeah, How not to be your own worst enemy for some of these clients. So with all that as a backdrop, John, talk to us about what you do.

JOHN NERSESIAN: Okay, sure. So, I like  your verbiage, by the way providing these capabilities, not instead of investment guidance, but in addition to.  And I think, you know, for many people, we lose sight of the things that we can control and focus maybe too much on the things we can't. Capital markets, I'm gonna do my very best to allocate assets in a way that is sensible and consistent with my personal circumstances, but I can't really control those outcomes.

There are certain outcomes, though, I can control. I can control costs, I can control taxes. And maybe one of the most important things that an advisor can control are their client's emotions and their behaviors. I think many advisors are waking up to that reality or maybe that opportunity to work alongside the end investor to help them make better decisions along the way. And that segues into kind of what we do, Greg. I mean, you're a PIMCO veteran. This firm is managing capital.

But we believe that our responsibility goes beyond just that core function. We wanna provide advisors with great investment tools to meet the needs of their clients, but we owe them more. We owe them that responsibility of helping them learn and become better and develop the skills required, so they in turn can provide better advice to their end client. And that's why PIMCO's made the decision to invest in the group that I happen to lead. It's our mandate to create thought leaders.

GREG HALL: What is it, what's a day in the life of John Nersesian?

JOHN NERSESIAN: How about lots of airplanes and hotel rooms?

GREG HALL: Yeah, lots of airplanes and hotel rooms. That's right.

JOHN NERSESIAN: It's not nearly as glamorous as it seems.

GREG HALL: I see the T&Es, I, you know, I want you to spend more, get out there and see people.

JOHN NERSESIAN: Thank you, by the way, for approving all of those. I appreciate that!

GREG HALL: I do what I can. Yeah. But talk to us about a typical 24 hours.

JOHN NERSESIAN: Yeah. So the most visible part of it, Greg, is, you know, on stage at a conference or doing, for example, a big webinar that we did last year for 50,000 financial advisors. That's the typical engagement the team that I am part of. We are typically in front of advisors trying to impart the knowledge, the competency, the best practices that we've gleaned to help them do a better job with their clients. But what is maybe less visible is all the time and the energy that we spend behind the scenes. I gotta admit to you, I'm not the smartest guy in the room.

And if I'm gonna have something of value to share with it, a sophisticated advisor, I've gotta learn myself. And that's the part of the job, Greg, that I actually really, really like. I love going home at night and building a new muscle that I hadn't used before, stretching my capabilities, doing something that I didn't think I was able to accomplish, so that in turn, I can use it to help others. What we do for a living focuses on a very simple four letter word. It's all about help.  That end investor goes to a great financial advisor like those listening to us today because they know that that advisor can help them make better decisions  and achieve better outcomes. And we try to help advisors by giving them the insights and the knowledge and the capability and support, so they in turn can do a better job with their end.

GREG HALL:  And the world moves quickly. Right. And it's always changing and staying on top of everything that's going on.

JOHN NERSESIAN: Could you imagine going to your job every day, Greg, and doing the same thing in and out? I mean, how boring would that be? What level of satisfaction would you glean from, you know, that kind of activity?

GREG HALL: It's late December at this point, John, or early December. Like, I wouldn't mind a little bit of variability right now. Like, I don't mind a little, but no, you're absolutely right. I mean, the beauty of being in the investment business is a constantly changing environment. And I think the beauty of what you do is navigating, you know, a tax landscape or legislative landscape, or, you know, new thoughts about behavioral science that always changing, always requires to be on our game. I just wanna make sure, Mary, can you vouch for this guy? Is he out seeing your clients? Is he running around?

MARY HOPPE: Absolutely. And John, you brought up the best word, which is this word 'help'. As the account manager who interfaces with these advisors, that's all I wanna do is be the best advisor to the advisor. And it's really about understanding their businesses very, very well. Outside of the things PIMCO brings to the table in terms of economic outlook and products and fixed income solutions.

I see what the advisor is dealing with all day long. And these demands on their time and the table stakes getting higher and higher and higher in terms of their technical skill. So I love the ability to bring John in when I see those needs.

GREG HALL: So let's kind of get into the meat of the conversation, which is well actually, I, you've brought us down that path already. You're running around the country. You're talking to advisors.  It's the end of the year. What are you talking to  about?

JOHN NERSESIAN: So end of the year creates an opportunity, right? And so one of the reasons that an end investor hires an advisor is to make sure that they take advantage of every financial opportunity before them. Client's busy, clients in airplanes, the clients with their family, the clients preparing for the holidays. They don't necessarily have the experience or maybe the time to attend to all these issues. And so, in some ways, the role of the advisor is really mistake prevention.

Make sure that I take advantage of all the opportunities that are suitable for me, and that I don't let something slip through the cracks. So we're having a lot of conversations around year end planning, as an example, one minor example of the broader work that we do. How do I think about my charitable giving towards the end of the year? Should I be giving appreciated property or cash? Should I be bunching my gift? Am I better off giving this year or delaying my gift until next year?

GREG HALL: Well, look, I don't wanna break your, that's a really bunching, what does that, what do you mean by that?

JOHN NERSESIAN: So bunching. Thank you for clarifying. Bunching is this idea that instead of giving smaller amounts on a regular basis, I might give a larger amount in a single year for maximum tax benefit. Now we all understand how that works.

GREG HALL: I don't.

JOHN NERSESIAN: Okay, well, I'll help you. There are a couple of itemized deductions that you can take on your tax return. You can write off your salt taxes, that's capped at 10. You can write off your mortgage interest if you happen to have one, but that's capped at a million dollars. If you bought the property before 12, 15, 17, it's 750 if you bought it after that date, okay. You get to write off your healthcare expenses.

But Greg, being a healthy guy, it's gotta exceed 7.5% of your adjusted gross income. You don't get a deduction there. The big one that might move the needle for some people is the charitable gift. And I'm doing it not just for tax reason, but I'm doing it because, I feel this responsibility to help others who are less fortunate. The question is, how are you doing it? Are you giving reactively because you were approached by your favorite charity? Or are you giving intentionally with a methodology that produces not only a benefit to the charity, but a greater financial benefit to the donor? That's exactly what we're talking about when it comes to bunching.

GREG HALL: That's interesting! So, and if I understand you correctly, the notion, the timing and the way in which you give the same amount of money to the charity of your choice actually has a bearing on your ultimate tax savings.

JOHN NERSESIAN: Absolutely! You were paying attention a little bit earlier today when I had that slide up.

GREG HALL:  Yeah, yeah. I'm using that of course, just to get us into this conversation. But I think it's really fascinating for people listening, 'cause that wasn't immediately obvious to me. And, I do give charitably and that's a, it's important to me, but I wouldn't have thought about the example that you use.

JOHN NERSESIAN: And a lot of people don't, Greg. I mean, once again, it's not necessarily top of mind. I think we're probably more focused on how do I create and preserve my wealth as opposed to how do I distribute it? But at some point in a client's life, and I don't know when that is, Mary, is it, you know, when I reach a certain net worth level, is it when I'm 70 years old and I begin to think a little bit more about legacy?  I've already checked the box. I've sent my kids to college, I bought my homes, I've secured my retirement. The question is, what else do I want to do that is meaningful to me? How do I think about these charitable activities?

MARY HOPPE: You know, advisors are the ones that usually initiate that thought into client's heads when they can tell a client confidently, you're at the point where, you're set. You know all the scenario analysis I have done tells me that we can have some extended bear markets and you're still gonna be okay. Have you thought more about what you really wanna do in life? So advisors have this now opportunity to take their clients to self-actualization. Like, what do we really wanna do with this wealth? And that's when the charitable conversations become fun.

GREG HALL: What else is on the year end, must-do checklist for you.

JOHN NERSESIAN: Alright, so let's talk about capital gain and loss recognition. Sure. I mean, I kind of know how that works, right? We're all very fortunate. Bull market. We've probably got a lot of capital gains. Whether we realize them intentionally by selling assets, we're maybe distributions from different funds that we hold. And so the question is, should I think about offsetting them with capital losses? Short against, short, long against long. Put the two together but the amount that I get to use as a credit or as a deduction against my earned income is capped at three grand.

GREG HALL: Right. But on the checklist, yeah. Going through that, making sure good portfolio hygiene, look for losses, look for ways that you can harvest those.

JOHN NERSESIAN: How about rebalancing? We combine that with tax loss harvesting, right? Yeah. Rebalancing forces the investor to do what is emotionally difficult.  Wait a minute. You want me to dispose of those assets that have done well? Yeah, I kind of like those. And you want me to redeploy it into the ones that didn't do so well? That's kind of counterintuitive.

GREG HALL: And you've seen the rise of more and more advanced tools to do this as well, which I think has been a really welcome addition to the arsenal. We have it within our product suite. We see it from peers of ours in the industry, have a lot of respect for what some folks are doing around, you know, automated tax loss harvesting, and custom models and things like that. So it's really interesting the tools that are available to an advisor and to their clients today to take advantage of the opportunities you're describing. Yeah. We're trying to work them into our product suite. But it, and also trying to make sure that we can deliver them to investors who may not have huge balances as part of the products, but democratizing access to those types of tools, making sure that advisors who advise those clients, you know, still have access to some of those as well.

JOHN NERSESIAN: Those tools are important because advisors do want help. They want support. They, they're managing larger practices. To Mary's point, she works with these very large practices on a day-to-day basis and stop and think about the job that they have now accepted Mary. So when I got into the business, 1981, I got into it. 'cause I wanted to manage money. Right. I really liked capital markets. It was something that turned me on. I enjoyed that and I thought that was gonna be the core function. Stop and think about what an advisor does today. They are certainly involved in the investment management process, but they're managing teams. They're managing businesses, they're managing other people. 

MARY HOPPE: And it's a higher calling, like, you know, most advisors when they really sit down and think about it, they got into the business because they like the capital markets. But now they're a family counselor, they're a psychologist, they're a financial doctor. They change people's lives, you know, and if they really sit down and think about it is a very, very important job.

GREG HALL: That's a lovely way of putting it. It really is. I'm being entirely higher calling. It is a higher calling financial doctor. I mean, that's so apt. So John for 2025, what are the critical areas that you're asking advisors to really bone up on, you know, right now and, and get comfortable with?

JOHN NERSESIAN: Yeah. So a couple of things looking forward. Number one and it was great that you had Libby on, I believe recently during last...

GREG HALL: Libby was, yeah, Libby was the last episode.

JOHN NERSESIAN: Okay. Perfect timing. 'cause Libby, of course is this...

GREG HALL: This is Libby Cantrill our head of public policy here at PIMCO. Definitely check that episode out if you're listening to this, it's a great episode if I say so myself. And she's absolutely fantastic around all of the policy implications of the election and, what is likely to happen, what is unlikely to happen under the Trump administration that is upcoming. But a terrific, terrific conversation and really nice segue actually into this topic.

JOHN NERSESIAN: Sure. So subject to change, of course, because the ink isn't dry, there's more negotiation to be had. It looks like many of the cuts that were enacted under the Trump tax cut and jobs act, otherwise known as TCJA, that they will likely be extended. And Greg, I gotta tell you, I can't believe this. I'm sitting here today and we're looking at an estate tax exemption of 13.6 million per individual. That's $27 million that a family can protect from any sort of wealth transfer tax. It looks like that number will be retained and in fact increased due to inflation. So we're looking at lower rates 39.6 down to 37%. We're looking at the retention of capital gains at 20, let's not forget our two Affordable Care Act taxes of 0.9 and 3.8. It looks like many of the provisions that were put in place under TCJA will be extended.

And I think that's good news for most investors. The one area where we might see some sort of legislative change might be on the salt cap deduction, right? Sure. So as we all know, state and local taxes are deductible currently up to 10,000 bucks. You think they're going up. It looks that way. Libby seems to believe that's something that might see some sort of legislative relief that you could see. Maybe not a complete elimination of the cap, but maybe an increase to something larger than the $10,000 that we're looking at today. Sure, sure. And that would certainly help individuals who live in states like California and New York, Oregon, you know, Connecticut, et cetera, where they have high state income tax rates, paying significant dollars, and not receiving an associated deduction for them.

GREG HALL: Okay. So, okay, so that's on the tax run. Anything else in, in 2025 that we're thinking about?

JOHN NERSESIAN: Can I pick on something that we discussed last year, but I think is just as relevant this year?

GREG HALL: I don't think I'm gonna be able to stop you.

JOHN NERSESIAN: You're probably right about that. So our friend Jerome Schneider does an unbelievable job in making the case as to why not all cash.

GREG HALL: Jerome being our portfolio manager for short term strategies and enhanced cash here at PIMCO. And an eloquent speaker and somebody who spends a lot of time in front of a microphone on CNBC and other news outlets, and you can catch him there and hear what he has to say about markets.

JOHN NERSESIAN: Incredibly bright guy. And we're so fortunate to be able to take advantage of the different strategies that he runs for us. But Jerome was talking about this idea that investors are most likely overweight cash. Now listen, I understand that there is a reason to hold some cash. I hold it to meet short term liabilities. I hold cash if I wanna be a little bit more tactical with my investment activities I hold it because I know I've got a tuition bill to TCU next quarter and I wanna make sure that the money's available to me.

But I think the question that Jerome raises and that we've been working on as well is how much cash is appropriate.  Are investors paying a price by maintaining too much cash, Greg? It's kind of interesting. A couple of years ago when rates were like, one, investors were scrambling, how do I get a better return on my capital? They were looking for ways to enhance their yield and to lock in higher rates. Today rates are much higher and the investors seems reluctant to do anything about it. They're just complacent in sitting with maybe too much cash in their portfolios. 

GREG HALL: Well, I, maybe, maybe I would put a slightly different spin on that. I think until very recently, very strong argument for both advisors and their clients to overweight cash with an inverted yield curve. Right, with the front end of the yield curve paying a yield that's higher than further out on the curve. I think it's, it, you can understand why people get comfortable with that allocation.

What's really interesting is one is that we had an inverted yield curve as long as we did, but only a couple of weeks ago that relationship finally started to break down. And with the fed cutting rates, the front end came in right lower than where the aggregate, the bond index was actually yielding for the first time in a couple of years.

I would argue that you're right that there's a much stronger case to migrate out of cash and out the yield curve to pick up yield.

But I think the other thing that hopefully isn't lost on financial advisors is as equity markets have performed really well in the wake of the election and risk assets generally have performed really well, many advisors are telling us they expect that that will continue and so it should be a good environment for risk assets. Well, how do you maintain balance in your portfolio?

One way of doing that is of course to add fixed income exposure as your equity exposure is naturally increasing, so that you're keeping that relationship, the, you get the yield of the fixed income investments, in the event that there's an interruption to the animal spirits and you see a little bit of a downturn and rates where the Fed actually has quite a lot of room now to potentially take action and rates could come down and then you pick up the total return in your fixed income portfolio.

And it's been, it's been a good long while since all of those things have been true that the Fed has had room to cut. That you had some term premium in the yield curve relative to the front end. So I think that makes it a really, really exciting moment.

MARY HOPPE: And then the fixed income side, adding to it doesn't necessarily penalize you. Because in that environment you just described pro-growth, good rate environment, low volatility, fixed income can still deliver equity like returns, if the Fed just drops rates a little bit and the economy stays put. And I think that's the, that is what Jerome is trying to say when he says move out of cash because cash doesn't give you that benefit of price appreciation when rates come down. And back to your point about behavioral finance and the financial advisor managing client behavior, to urge a client to just step outta cash, one or two baby steps improves their yield and sets them up to realize some price appreciation without necessarily going way out there in the yield curve. Yeah. You don't have to stick your neck out very far.

JOHN NERSESIAN: So bringing this back to the advisor, which is what today's episode is all about, I love the points. One of the things that an advisor contributes to the equation is what discipline, right? I get caught up in the emotion of markets, I see my friends making a lot of money by buying certain assets. I lose sight of what I'm trying to accomplish and the plan that I developed to accomplish these goals, one of the great things that an advisor delivers is discipline, is being an advocate for that client to make sure that they don't wind up making the wrong move at the wrong time because of the emotionalism of investing.

GREG HALL:  Yeah. And I, you know, it's funny 'cause it makes me think of all the work that we do around behavioral finance. Yeah. And all of the introspection that we impose on ourselves, asking ourselves what emotions are at play in this decision? What bias did I bring to the table today that is influencing my decision and how can I stay objective, keep to my plan, alter my plan if the facts change, but not if my emotions change. And so that's a whole topic in and of itself. 

We should reconvene with a number of the PhDs who work with us on behavioral finance and behavioral science and have a whole a fulsome conversation on that topic alone. 

JOHN NERSESIAN: I wrote an article on that last year on behavioral finance, why it affects client decision making, why they tend to underperform because of these biases and maybe most importantly, what an advisor can do in terms of best practices to identify and to mitigate those negative occurrences.

MARY HOPPE: What are some of the things you suggested? 

JOHN NERSESIAN: Well, they're pretty commonplace, right? So number one is being disciplined. Number two is maintaining a long-term perspective. Number three is maintaining some cash at the front end to immunize known liabilities.  These are kind of tried and true behaviors that can maybe help the investor avoid the temptations often.

MARY HOPPE: Do you find that advisors doing like quarterly check-ins to do that sort of function? You know, this is my discipline check-in. Is it time to rebalance? Like going through a client checklist every...

JOHN NERSESIAN: You know, I think constant engagement with the client is important, but it's gotta be done on their terms. And so I'll give you an example. You and I are clients of Greg's and Greg has a quarterly methodology where he meets with us.

Mary's really busy and Mary's like, Greg, you're bugging me. Stay away from me. The reason I hired you is so I didn't have to do this stuff. Right? And every quarter you're calling me, John's a market junkie. John wants to hear from Greg once a week. And so I guess what I'm suggesting to you is yes, checking in with the client is important, but let's do so in terms that kind of fit their agenda and their objectives.

MARY HOPPE: Good point! Very good point!

GREG HALL: Yeah. So this has been great. This has been great. We will definitely do this again. I wanna have you both back continue the conversation, continue a different conversation but we gotta wrap it up. Okay. So thank you! Thank you for being here. Thank you everybody for listening to this edition of Accrued Interest.

Accrued interest is part of PIMCO Advisor Forum, a platform we launched in September of this year, dedicated exclusively to helping financial advisors, achieve their goals and help their clients achieve their financial wellbeing. 

We hope that you found some value in it. We hope that it's prompted you to go out and have some constructive conversations with your clients over this holiday season.

We wanna wish you the very happiest of holidays and best of luck in 2025. When we come back in January, we'll be with Dan Ivascyn, the Group CIO here at PIMCO, and we'll be talking about our investment outlook for 2025. So don't miss that when it comes out. Thank you for your attention and for listening and we'll see you soon.